Professional Documents
Culture Documents
A)
Year
0
1
2
3
4
5
P.B.P.
B)
PROJECT A
Cash flow Cumulative
cash flow
-20000
-20000
8000
-12000
8000
-4000
8000
4000
8000
12000
8000
20000
2YEARS AND 6 MONTHS
Year
0
1
2
3
4
5
PROJECT B
Cash flow Cumulative
cash flow
-20000
-20000
12000
-8000
6000
-20000
4000
2000
10000
12000
10000
22000
2YEARS AND 6 MONTHS
PROJECT B
Cash flow Depreciaton P.B.T.
Taxation P.A.T.
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
1
12000
4000
8000
4000
4000
2
6000
4000
2000
1000
1000
3
4000
4000
0
0
0
4
10000
4000
6000
3000
3000
5
10000
4000
6000
3000
3000
Total
11000
Average profit
2200
Average investment
10000
A.R.R.
22
Year
C)
Year
PROJECT A
Cash flow Depreciaton P.B.T.
Taxation P.A.T.
N.C.F.
P.V.I.F.
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
@ 20%
0
-20000
-20000
1
1
8000
4000
4000
2000
2000
6000
0.833
2
3
4
5
8000
8000
8000
8000
Total
Hence, IRR
Year
0
1
2
3
4
5
Total
4000
4000
4000
4000
4000
4000
4000
4000
2000
2000
2000
2000
2000
2000
2000
2000
10000
6000
6000
6000
6000
0.694
0.579
0.482
0.402
15.71%
PROJECT B
Cash flow Depreciaton P.B.T.
Taxation P.A.T.
N.C.F.
P.V.I.F.
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
@ 20%
-20000
-20000
1
12000
4000
8000
4000
4000
8000
0.833
6000
4000
2000
1000
1000
5000
0.694
4000
4000
0
0
0
4000
0.579
10000
4000
6000
3000
3000
7000
0.482
10000
4000
6000
3000
3000
7000
0.402
11000
Hence, IRR
Decision: Select machine B
17.22%
P.V.
P.V.I.F.
P.V.
@ 20%
@ 10%
@ 10%
-20000
1
-20000
4998
0.909
5454
4164
3474
2892
2412
-2060
0.826
0.751
0.683
0.621
4956
4506
4098
3726
2740
P.V.
P.V.I.F.
P.V.
@ 20%
@ 10%
@ 10%
-20000
1
-20000
6664
0.909
7272
3470
0.826
4130
2316
0.751
3004
3374
0.683
4781
2814
0.621
4347
-1362
3534
Solution 2
Let us work out the present value of net running cost(after considering the tax benefit), add to it present value of investment.
The machine which gives the lowest sum should be selected. We will use annuity factor.
Machine A:
Running cash expense
Add: depreciation
Total expense
Less: Tax savings @ 50%
Net costs
Less: Depreciation
Net Cash flow
Rs. (p.a.)
32000
1000
42000
21000
21000
10000
11000
11000 x 6.1446
= Rs. 67590.6
Rs. 67590.6 + 100000
=Rs.167590.6
Total P.V.
Machine B:
Running cash expense
Add: depreciation
Total expense
Less: Tax savings @ 50%
Net costs
Less: Depreciation
Net Cash flow
Rs. (p.a.)
20000
15000
35000
17500
17500
15000
2500
2500 x 6.1446
= Rs. 15361.5
Rs. 15361.5 + 150000
=Rs.165361.5
Total P.V.
Solution 3
Techtronics Limited
Calculation of N.P.V.
Particulars \ Year
1. Capacity utilisation %
2. Production units
3. Contriubution per unit in Rs.
4. Capital expenditure Rs. In lakh
5. Working capital
6. Additional investment for W.C.
7. WDV of asset
8. Depreciation @ 33.33%
9. Annual Fixed Costs
10. Contribution Rs. (2x3)
11. PBT (10-8-9)
12. Tax rate @ 50%
13. PAT (11-12)
14. Operating cash flow (13+8)
15. Terminal cash flow
a. Fixed asset @ 10%
b. Working capital
16. Net cash flow (4+5+6+14+15)
17. P.V. I.F. @ 15%
18. Present Value (16x17)
19. NPV (sum of 18)
33.5
4020000
80
(Rs. In lakh)
3
66.23
90
100
100
7947600 10800000 12000000 12000000
80
80
80
80
-600
-150
600
600
200
240
322
-118
-59
-59
141
400
133
360
636
142
71
71
205
-100
267
89
480
864
295
148
148
236
-750
1
-750
143
141
0.869
122
205
0.756
155
136
0.657
90
178
59
480
960
421
210
210
270
119
40
480
960
440
220
220
260
270
0.571
154
260
0.497
129
(Rs. In lakh)
6
100
12000000
80
79
26
480
960
454
227
227
253
60
250
563
0.432
243
SOLUTION 4
M N Company
Proposals
II
I
50000
100000
30000
60000
20000
40000
200000
300000
220000
340000
22000
34000
70000
95000
48000
61000
480000
610000
------------15000
480000
595000
48000
59500
310000
480000
48000x100 59500x100
310000
480000
= 15.48% = 12.4%
Buildings
Less: Disposable value
Plant & Installation less scrap value
Depriciation at 10% on the above
Annual Pre-depriciation Profits
Net Profit after depriciation
Total Profit for 10 years
Less: Sales Promotion in 2nd year
Average Annual Profit:
Investment i.e., Buildings, plant Installation & Working Capital
Return on Investment = Net Profit x 100%
Investment
Proposal I :
Present value of 10 years cah flow
For 8%
Present Value of:
Plant Scrap Value
Buldings Disposable Value
Working Capital
(Getting back at the end of 10 years)
Rs.
70,000 x 6.709
10000
30000
50000
90000 x 0.463
Total present Value
Less: Investment 3,10,000 x 1.00
N.P.V.
=
=
Proposal II:
Year
1
2
3
4
5
6
7
8
9
10
Cash Flow
95000
95000
95000
95000
95000
95000
95000
95000
95000
95000
x
x
x
x
x
x
x
x
x
x
Rs.
469630
P.V. factor at 8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
=
=
=
=
=
=
=
=
=
=
Present Value
87970
68560
75430
69825
64695
59850
55385
51300
47500
43985
41670
511300
310000
201300
=
=
=
64820
689320
480000
209320
SOLUTION 5
A.
B.
Particulars\years
a, Initial investment
b. Salvage value
c. Current assets
d. Additional investment
e. Recovery of salvage value
f. Cash before tax
g. Depreciation on original investment (axa(i))
h. Depreciation on additional investment (dxa(ii))
i. Profit before tax (f-g-h)
j. Taxation @ 40 %
k. P.A.T. (i-j)
l. Operating cash flow (k+g+h)
m. Net cash flow (a+b+c+d+e+l)
n. P.V.I.F. @ 20%
o. P.V. of cash flow (mxn)
Net Present Value = sum of o
Depreciation calculation:
i. Company using sum of years digit method : 10 years
Year
1
2
3
4
Ratio
10/55
9/55
8/55
7/55
ii. For SYD method : 5 years
Year
1
2
3
4
Ratio
5/15
4/15
3/15
2/15
Calculation of cash flow:
0
1
2
3
4
-250000
-50000
-300000
1
-300000
-326.909
100000
45455
100000
40909
100000
36364
100000
31818
54545
21818
32727
78182
78182
0.833
65125
59091
23636
35455
76364
76364
0.694
52996
63636
25455
38182
74545
74545
0.579
43162
68182
27273
40909
72727
72727
0.482
35055
5
6/55
6
5/55
7
4/55
8
3/55
9
2/55
10
1/55
5
1/15
5
10
30000
-60000
100000
27273
72727
29091
43636
70909
10909
0.402
4385
100000
22727
20000
57273
22909
34364
77091
77091
0.335
25825
100000
18182
16000
65818
26327
39491
73673
73673
0.279
20555
100000
13636
12000
74364
29745
44618
70255
70255
0.233
16369
100000
9091
8000
82909
33164
49745
66836
66836
0.194
12966
50000
100000
4545
4000
91455
36582
54873
63418
143418
0.162
23234
55
SOLUTION 6
Particulars \ Year
1. Cost price
2. Market price of present machine
3. Workers Training
4. Machine inestment needed (1+2+3)
5. Working capital needed
6. Savings in running expenses
7. Depreciation SL Method
8. Investment allowance
9. P.B.T. (6-7-8)
10. Taxation @ 50% (50%x 9)
11. P.A.T. (9-10)
12. Operating cash flow(11+8+7)
13. Terminal flow
i. of machine
ii. Of working capital
14. Net cash flow (4+5+12+13(i)+13(ii))
15. PVIF @ 20%
16. PV (14X15)
17. NPV (sum of 16)
-21.65
1.00
-21.65
1.96
13.125
0.833
10.933
3.750
0.694
2.603
3.750
0.579
2.171
3.750
0.482
1.808
5.000
2.500
2.500
1.250
1.250
3.750
3.750
0.402
1.508
(Rs. In lakhs)
7
8
10
5.000
2.500
5.000
2.500
5.000
2.500
5.000
2.500
5.000
2.500
2.500
1.250
1.250
3.750
2.500
1.250
1.250
3.750
2.500
1.250
1.250
3.750
2.500
1.250
1.250
3.750
2.500
1.250
1.250
3.750
3.750
0.194
0.728
0.100
0.350
4.200
0.162
0.680
3.750
0.335
1.256
3.750
0.279
1.046
3.750
0.233
0.874
Solution 7
(Rs. Lakhs)
35.00
9.00
26.00
12.00
7.00
5.00
2.50
2.50
10.27
35.00
17.50
17.50
15.61
1.00
0.506
26.386
0.386
SOLUTION 8
BS Electronics
9,00,000
6,75,000
5,06,250
3,79,687
2,84,765
(Rs.)
Depreciation at 25% p.a. on
W.D.V.
2,25,000
1,68,750
1,26,563
94,922
71,191
(Rs.)
13,56,941
9,00,000
4,56,941
(Rs.)
Total savings before
depriciation
2,50,000
2,50,000
3,00,000
3,00,000
3,00,000
SOLUTION 9
A.
Beta Limited
Calculation of net present value of purchase of computer by availing loan
Particulars/Year
a. Investment
Rs. 50,000
b. Depreciation
c. Interest payment 15% of e
d. Principal repayment
e. Principal outstanding at the beginning of the year
f. Cost before tax (b+c)
g. Tax rate @ 40%
h. Cost after tax (f-g)
i. Terminal flow
j. Net outflow (h+d+i)
k. PVIF @ 9%
l. PV (kxj)
l. Net PV (sum of k)
10000.00
7500.00
10000.00
50000.00
17500.00
7000.00
10500.00
10000.00
6000.00
10000.00
40000.00
16000.00
6400.00
9600.00
10000.00
4500.00
10000.00
30000.00
14500.00
5800.00
8700.00
10000.00
3000.00
10000.00
20000.00
13000.00
5200.00
7800.00
10000.00
1500.00
10000.00
10000.00
11500.00
4600.00
6900.00
1547.00
20500.00 19600.00 18700.00 17800.00 18447.00
0.92
0.84
0.77
0.71
0.65
18798.50 16503.20 14436.40 12602.40 11990.55
74331.05
B.
19108.23
LI(1-0.40) x
3.89
y availing loan
SOLUTION 10
Elite Builders
Calculation of Present Value of Cash Outflow
Cost of construction
Add: Registration and other costs @ 2.5%
Present value of Initial outlay
Add: Present value of Repairs cost Year 14: Repair cost
24,00,000
60,000
24,60,000
4,00,000
2,00,000
2,00,000
(2,00,000 x 0.26)
Present value
Total Present Value of Cash Outflows
(2,00,000 x 0.24)
52,000
4,00,000
2,00,000
2,00,000
48,000
25,60,000
Years
Lease Rentals
Discount Factor (Cumulative)
Present Value
Total Present Value
Less: Tax @ 50%
Present Value of net cash Inflows
1 to 5
Rs. 4,18,464/6
Rs.69,727
SOLUTION 11
Working Notes
Calculation Initial Cash Outflow
Particulars
(Rs. Lakhs)
Machine
Zee
Machine cost
Cost of utilities
Total
Less: Salvage value of old machine
Salvage value of old utilities
Initial Net Cash Outflow
Chee
5.00
1.00
6.00
1.00
1.00
5.00
5.00
2.00
7.00
1.00
0.20
1.20
5.80
4 years +
4.6 years
4.6 years
1.1
0.30 x 1
Machine Chee
4 years +
0.50
Profitability Index
Machine Zee
Machine Chee
Re. 1.088
Re. 1.034
Analysis:
The discounted payback period of both the machines and based on this it is difficult to select the
Machine. But, based on the profitability index method, the desirability factor of Machine Zee is higher.
Hence Machine Zee is recommended.