Q If the project’s initial investment is of 100 crores and NPV of the same is ₹10 lakhs, will you go for the project or not? Suppose I am getting 6% bank interest if I keep the amount in FD. Should I still accept the project or not?
A. The answer will be yes, because the return is higher than the weighted average cost of capital. It doesn’t matter if it is low. I’m still earning positive returns. The assumption is that there is no Capital Rationing.
We will go for the project even if there is bank interest to be earned because the weighted average cost of capital will be higher than bank interest rate. So our ₹10 Lakh NPV is the excess return beyond Cost of Capital. If our Ko was 12%, we are earning say 12.01%
Either we can compare our nominal cash flows or discounted cash flows. So compare 12.01% vs 6% or calculate the NPV of the bank FD (which will be negative)
So in both the scenarios, the result will be positive that this project should be accepted .
