The following data relating to a project are provided by the Management of G Ltd.: Annual saving: ₹4,20,000 Useful life: 4 years Profitability Index: 1.04291 Internal Rate of Return: 14% Salvage Value: Nil Assume that th

CS Professional · Valuations & Business Modelling · PYQS · December 2020
The following data relating to a project are provided by the Management of G Ltd.: Annual saving: ₹4,20,000 Useful life: 4 years Profitability Index: 1.04291 Internal Rate of Return: 14% Salvage Value: Nil Assume that the only outflow is at the beginning of year 1. Find (i) Net Present Value (to the nearest rupee) and (ii) Cost of Capital (as a % up to one decimal point) Table Showing Present Value of ₹1 at different discount rates: (You are required to use PV factors only up to three decimals as shown below) End of Year Rate 14% 13% 12% 11% 1 0.877 0.885 0.893 0.901 2 0.769 0.783 0.797 0.812 3 0.675 0.693 0.712 0.731 4 0.592 0.613 0.636 0.659 Total 2.913 2.974 3.038 3.103

Answer & Explanation:

PV of cash inflows at 14% = cost of project Cost of project = PV of ₹4,20,000 for 4 years at 14% = 4,20,000 x 2.913 = ₹12,23,460 (i) NPV: PI = PV of cash inflow/PV of Initial cash outflow = 1.04291 Hence, PV of cash inflow = initial cash outflow (cost of project) x 1.04291 = 12,23,460 x 1.04291 = ₹12,75,959 NPV = PVCIF - Cash Outflow = 12,75,959 - 12,23,460 = ₹52,499 (ii) Cost of Capital: PV of Cash Inflows at cost of Capital(r) for 4 years = 12,75,959 PV Factor for 4 years = 12,75,959 / 4,20,000 = 3.038 which is at 12%. Hence, Cost of Capital = 12% .

Topics: Capital Budgeting

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