Professional Documents
Culture Documents
Q: 1 Modern Processors Ltd is evaluating a proposal to acquire an automation system for improving the
efficiency of its processing functions. The costs and benefits associated with the same are as under:
Cost of the system Rs. 15 lacs
Operation and maintenance cost Rs. 2.50 lacs
Savings in clerical and space costs Rs. 7 lacs
The asset will have an economic life of 5 yrs and it would be depreciated @ 33.33% as per WDV method. After
5 yrs it would be disposed of for a value equal to its book value. Tax rate is 30%.
On the basis of the above prepare a statement of estimated cash flows for a period of 5 years.
Q: 2 Medicare Ltd is planning to replace one of its equipments. The following information is available:
i)
The existing equipment was bought 2 yrs ago for Rs.10 lacs (Depn: 33.33% pa.) It can be presently
sold at its present book value. It has a remaining life of 5 years after which it can be disposed off at
its then book value.
ii)
The new equipment costs Rs.16 lacs. It will also be subject to a depn of 33.33% and it will fetch its
then book value.
iii)
The replacement of the old equipment will increase revenues by Rs. 2 lacs pa and reduce operating
costs (excl. depn) by Rs.1.50 lacs pa. Compute the incremental cash flows associated with the
replacement proposal assuming a tax rate of 30%
Q: 3 Naveen Enterprises is considering a capital project about which the following information is available:
1. The investment outlay on the project will be Rs.100 mn. ( Rs.80 mn in Plant & Machinery and Rs. 20
mn on Net working capital )
2. The project will be financed with Rs.45 mn of equity capital, Rs. 5 mn 15% preference capital and
Rs.50 mn of 15% debt capital
3. The life of the project is expected to be 5 yrs. At the end of 5 yrs the fixed assets will fetch a net
salvage value of Rs. 30 mn whereas the NWC will be liquidated at book value
4. The project is expected to increase the revenues by Rs.120 mn per yr. The increase in costs on a/c
of the project is expected to be Rs.80 mn per yr. ( This includes all items of cost except depreciation
), interest and tax @ 30% )
5. Plant and Machinery will be depreciated at 15% on WDV basis.
Prepare a statement of estimated cash flows from the project.
Q: 4 India Pharma Ltd. is engaged in the manufacture of pharmaceutical products. Presently the company
manufactures 16 products and has an annual turnover of Rs.2200 mn. The company is considering the
manufacture of a new antibiotic, K-cin.
1. K cin is expected to have a product life cycle of 5 years and thereafter it will be withdrawn from the market.
Projected sales for the 5 yrs are as under:
Rs. 100 mn. Rs.150 mn, Rs.200 mn, Rs.150 mn, Rs.100 mn respectively.
2. The capital equipment for manufacturing K-cin is Rs.100 mn and it will be depreciated @ 15% on WDV basis.
The expected salvage value after 5 years is Rs. 20 mn
3. The net working capital required is 20% of sales. The wc is expected to be liquidated at par barring an
estimated loss of Rs. 5 mn on account of bad debt.
4. The following are the cost estimates:
Raw material cost
30% of sales
20% of sales
Rs. 5 mn
Note: The overhead allocation is not likely to have any impact on total overhead costs.
Advise on the feasibility of the project using NPV as the basis. Make suitable assumptions where required.
Transfer Pricing
1. A Ltd an Indian company and subsidiary of X Ltd a US company has a manufacturing unit in Haryana. It
pays royalty to X Ltd for use of technical information supplied by X Ltd. For similar transfer it charges
USD 8000 per year. However it charges USD 11000 from A Ltd. on which tax is deducted at source.
Income of A Ltd. before deducting royalty is Rs.76.00 lacs.
Determine the income and tax liability of A Ltd.
2
X Ltd. a company incorporated in US sells laser printer cartridges to its 100% subsidiary A Ltd. in India
@ Rs.80/cartridge. X ltd also sells its cartridge to another company Y Ltd. @ 50/ cartridge. Total income
of A Ltd is Rs.1200000 ( No of cartridges purchased : 100 )
Compute ALP and total income of A Ltd. Assume USD 1= Rs.52/-
Double Taxation
2.00
1.00
0.30
0.18
80000
130000
60000
15000
39000