SOLVED PROBLEMS – CAPITAL BUDGETING
The cost of a plant is Rs. 5,00,000. It has an estimated life of 5 years after which it would be disposed off (scrap value nil). Profit before depreciation, interest and taxes (PBIT) is estimated to be Rs. 1,75,000 p.a.Find out the yearly cash flow from the plant. Tax rate 30%.
Annual depreciation charge (Rs. 5,00,000/5) 1,00,000Profit before depreciation, interest and taxes 1,75,000- Depreciation 1,00,000Profit before tax 75,000Tax @ 30% 22,500Profit after Tax 52,500+ depreciation (added back) 1,00,000herefore, cash flow 1,52,500
A cosmetic company is considering to introduce a new lotion. The manufacturing equipment will cost Rs.5,60,000. The expected life of the equipment is 8 years. The company is thinking of selling the lotion in asingle standard pack of 50 grams at Rs. 12 each pack. It is estimated that variable cost per pack would beRs. 6 and annual fixed cost Rs. 4,50,000. Fixed cost includes (straight line) depreciation of Rs. 70,000and allocated overheads of Rs. 30,000. The company expects to sell 1,00,000 packs of the lotion eachyear. Assume that tax is 45% and straight line depreciation is allowed for tax purpose. Calculate the cashflows.
Initial cash outflow
Cost of equipments Rs. 5,60,000
Subsequent cash flows
Units sold 1,00,000Sales @ Rs. 12/- Rs. 12,00,000- Variable cost @ Rs. 6/- 6,00,000- Fixed cost (4,50,000 – 30,000 – 70,000) 3,50,000- Depreciation 70,000Profit before tax 1,80,000Tax @ 45% 81,000Profit after tax 99,000Depreciation (added back) 70,000Cash flow 1,69,000There is no terminal cash inflow. It may be noted that the allocated overheads of Rs. 30,000 gave beenignored as they are irrelevant.