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: (iii) Cost of capital
Answer & Explanation:
Cost of capital Profitability Index = Present value of cash inflows / cash outflows 1.064 = Present value of cash inflows / 1,14,20,000 Present value of cash inflows = 1.064 * 1,14,20,000 = ₹1,21,50,880 Therefore, 40,00,000 * cumulative discount factor = 1,21,50,880 Cumulative discount factor = 1,21,50,880 / 40,00,000 = 3.038 Considering the table of present value of an annuity of Rupee one at discount rate of 12%, the cumulative discount factor for 4 years is 3.0373. Hence the cost of capital is 12%.
Topics: Financial Management
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