The following are the data on capital expenditure of a project being evaluated by Management of Vivaan Limited: Particulars Annual cost savings ₹40,00,000 Useful life 4 years Internal Rate of Return 15% Profitability Ind
CS Professional · Financial, Treasury and Forex Management · PYQS · June 2017
The following are the data on capital expenditure of a project being evaluated by Management of Vivaan Limited: Particulars Annual cost savings ₹40,00,000 Useful life 4 years Internal Rate of Return 15% Profitability Index 1.064 From the above information find out the following by assuming that salvage value is zero: (i) Cost of project
Answer & Explanation:
At Internal rate of return (IRR), the sum of cash inflows is equal to the cost of project. Therefore at IRR, 15%, the discount factor for cumulative present value of cash inflows for 4 years is 2.8550 (from PVAF table at 15% for 4 years). Hence present value of cash inflows (cost savings) would be: 2.8550 * ₹40,00,000 = ₹1,14,20,000 Therefore, cost of project is ₹1,14,20,000
Topics: Financial Management
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