1 Year Labour Cost Saving Material Cost Saving Total Savings 1000 X (1.1) = 1,100 400 X (1.05) = 420 1.520 1000 X (1.1)2 = 1,210 400 X (1.05)2 = 441 1,651 3 1000 X (1.1) 3= 1,331 400 X (1.05) 3-463 1,794 1000 X (1.1)4 = 1,464 400 X (1.05) 4= 486 1.950 5 1000 X (1.1) 5=1,610 400 X (1.05) 5= 510 2,120 Present Value of Total Savings Less: Initial Cash Outflow Net Present Value (Negative) DCF Present @ 15% Value 0.870 1,322 0.756 1.248 0.658 1,180 0.572 1.115 2. 4 0.497 1,054 5,919 7.000 (1.081) Analysis: Since the present value of cost of project exceeds the present value of savings it is not suggested to purchase the machine Illustration 8: D Limited, has under review a project involving the outlay of Rs. 55,000 and expected to yield the following net cash savings in current terms: Year 3 Rs. 10,000 20,000 30,000 5.000 The company's cost of capital, incorporating a requirement for growth in dividends to keep pace with cost inflation is 20%, and 46 this is used for the purpose of investment appraisal. On the above basis the divisional manager involved has recommended rejection of the proposal Having regard to your own forecast that the rate of inflation is likely to be 15% in year 1 and 10%, in each of the following years, you are asked to comment fully on his recommendation (Discounting figures at 20% are 0.833, 0.694, 0.579 and 0.482 respectively for year 1 to year 4.)