CAPITAL BUDGETING PRACTICE NUMERICAL 1. A company is engaged in evaluating an investment project which requires an initial cash outlay of Rs.

250,000 on equipment. The project’s economic life is 10 years and its salvage value Rs. 30,000. It would require current assets of Rs. 50,000. An additional investment of Rs. 60,000 would also be necessary at the end of five years to restore the efficiency of the equipment. This would be written off completely over the last five years. The project is expected to yield annual (before tax) cash inflow of Rs. 100,000. The company follows diminishing value method of depreciation. Income-tax rate is assumed to be 40%. Should the project be accepted if the minimum required rate of return is 20%? 2. CAS Co. Ltd. provides you the following information: Particulars Purchase Price of Machine Useful life of the machine Estimated salvage value at the end of useful life Method of depreciation Running Expenses per annum Required Rate of Return Tax Rate Project A 400,000 8 Years 16,000 Straight Line 140,000 10% 50% Project B 600,000 8 Years 56,000 Straight Line 80,000 10% 50%

Calculate the NPV and suggest the management on decision to be taken. 3. A company has to select one of the two alternatives projects whose particulars are given below: Project E (Rs.) 11,872 ---10,000 2,000 1,000 1,000 Project F (Rs.) 10,067 ---1,000 1,000 2,000 10,000

Initial Outlay Net Cash flow End of Year 1 2 3 4

The company can arrange the necessary fund at 8 per cent. Compute the NPV and IRR of each project and comment on the results. ****************

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