Page 139 - DMGT207_MANAGEMENT_OF_FINANCES
P. 139
Management of Finances
Notes
Payback period = = =
= 2 years 11 months
P I. = 1.064
==
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
=
= 3.0377
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
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
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