1. Significance of Cost of Capital
Helps in determining
Cost of Capital helps in optimal mix of debt Helps in evaluating the
determining the and equity in a project financial performance
acceptance criterion of and thus the optimal of top management
a new project. capital structure
Estimate of Cost of
It helps in getting an
Capital helps in
expected rate of return
formulating the
enough to satisfy all
Dividend policy and
the capital providers.
Working capital policy

2. Factor determining the acceptance or
rejection of the project.
Net Present Value

3. Net Present Value
• NPV is net of total present values of all cash flows in the existing project –
initial investment.
• NPV = Present value of inflow – Present value of outflow
• NPV of the project = sum of the {CFt/(1+r)t} - initial investment
CFt = cash flow at the end of year t
t = no. of years
r = discount rate
• A positive NPV is a compensation representing the higher return due to
increased time and higher risk.
• A negative NPV shows that the actual return is lower than the expected
cost of capital.
• Valuation of a firm = Total NPV of all the projects and prospective projects.
• Accept project if NPV is positive and reject if negative

4. • Net Cash Flow = Net profit after tax + Amortization + Depreciation
• Net cash flow = NPAT + Amortization
• 13822149 + 363002 = 14185151
• Hence NPV= Cash Flow / (1 + r)^t – initial investment (taken 0 in this case)
• r = 16.28 %, t= 1, hence NPV = 14185151/ (1.1628) = 121991327,27
• Which is a positive NPV, reflecting that the that current strategy to
upgrade technology and invest in advertising, will give higher returns
and a high present value.
• These two strategies will add to the company’s Future Cash Flows.