Page 172 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes = 2 years 11 months

P I. = 1.064

P.V. of cash inflow
=
P.V. of cash outflow i.e. Cost of theproject
Hence, PV of Cash inflows = 1.064 × 1,14,200 = 1,21,508.8
NPV = 1,21,508.8 – 1,14,200 = 7,309
Current Present Value factor at Company’s Cost of Capital

PV of Cash inflows
=
Annual Cost Saving

1,21,509
= = 3.0377
40,000
From the present value table corresponding to 4 years the discount/interest is 12%
i.e., Cost of capital = 12%.

Example: Following are the data on a capital project with equal annual cash savings
evaluated by the management of S company —
Project
Cost 1,01,400
Payback 5.07 years

Annual Cost Saving ?
Useful life ?
Cost of Capital ?
NPV - ?

IRR 19 per cent
PI 1.14
Salvage Value 0
Required: Find the missing values.

Solution:
1. Annual Cost Saving = Cost of Project/Payback period
= 1,01,400/5.07 = 20,000
2. At IRR rate of discount (i.e. 19%)
Cost of the project = PV of cash inflows
= 1,01,400
Hence, Cumulative Present Value at 19%
1,01,400
= = 5.07
20,000

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