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2.Edited FM Capital Budgeting

2.Edited FM Capital Budgeting

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Sections

  • UNIT UNIT--II II
  • Capital Budgeting : Capital Budgeting :
  • Principles and Techniques Principles and Techniques
  • Nature Nature
  • Capital Budgeting Decisions Capital Budgeting Decisions
  • Data Requirement Data Requirement
  • Cash Flow Pattern Cash Flow Pattern
  • Determination of Relevant Determination of Relevant
  • Single Proposal Single Proposal
  • Replacement Situation
  • Mutually Exclusive Proposals
  • Pay Back Method Pay Back Method
  • IRR for an Annuity IRR for an Annuity
  • SOLVED PROBLEM SOLVED PROBLEM
  • MINI CASE MINI CASE

UNITUNIT-II

INVESTMENT DECISIONS

© Tata McGraw-Hill Publishing Company Limited, Financial Management McGraw-

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Capital Budgeting : Principles and Techniques

© Tata McGraw-Hill Publishing Company Limited, Financial Management McGraw-

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CAPITAL BUDGETING I: Principles and Techniques
Nature of Capital Budgeting Data requirement: Identifying Relevant Cash Flows Evaluation Techniques Solved Problem Mini Case
© Tata McGraw-Hill Publishing Company Limited, Financial Management McGraw-

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Financial Management McGraw- 9-4 . Capital Expenditure is an outlay of funds that is expected to produce benefits over a period of time exceeding one year. © Tata McGraw-Hill Publishing Company Limited.Nature Capital Budgeting is the process of evaluating and selecting long-term investments that are consistent with the goal of shareholders (owners) wealth maximisation.

© Tata McGraw-Hill Publishing Company Limited. Financial Management McGraw- 9-5 . (2) Investment Decisions Reducing Costs Such types of decisions are subject to less risk as the potential cash saving can be estimated better from the past production and cost data.Investment decisions are of two types (1) Investment Decisions Affecting Revenues It is more difficult to estimate revenues and costs of a new product line.

Capital Rationing Decision Capital rationing is the financial situation in which a firm has only fixed amount to allocate among competing capital expenditures. © Tata McGraw-Hill Publishing Company Limited. the acceptance of one eliminates the others from further consideration. Financial Management McGraw- 9-6 .Capital Budgeting Decisions Accept-reject Decision Accept reject decision/approval is the evaluation of capital expenditure proposal to determine whether they meet the minimum acceptance criterion. Mutually Exclusive Project Decisions Mutually exclusive projects (decisions) are projects that compete with one another.

incremental after-tax cash flows are the only relevant cashflows in the analysis of new investment projects. Relevant Cash Flow Relevant Cash Flow is the incremental after-tax cash outflow (investment) and resulting subsequent inflows associated with a proposed capital expenditure. Incremental Cash Flows Incremental Cash Flows are the additional cash flows (outflows as well as inflows) expected to result from a proposed capital expenditure.Data Requirement The data requirement for capital budgeting are after tax cash outflows and cash inflows. The existing fixed costs. therefore. are ignored. Besides. Financial Management McGraw- 9-7 . © Tata McGraw-Hill Publishing Company Limited. they should be incremental in that they are directly attributable to the proposed investment project. In brief.

Marginal taxes Irrelevant Cash Outflows 1. Variable labour expenses 2. Cost of the investment 5. Sunk costs © Tata McGraw-Hill Publishing Company Limited. Variable material expenses 3.Table 1: Relevant and Irrelevant Outflows Relevant Cash Outflows 1. Additional fixed overhead expenses 4. Financial Management McGraw- 9-8 . Fixed overhead expense (existing) 2.

(2) Non-Conventional Cash Flow Pattern Non-conventional cash flow pattern is a pattern in which an initial outflow is not followed by a series of inflows. Financial Management of working capital 9-9 .Cash Flow Pattern (1) Conventional Cash Flow Pattern Conventional cash flow pattern is an initial outflow followed by a series of inflows. Tax Effect Effect on Other Projects Effect of Indirect Expenses Effect of Depreciation McGrawEffect © Tata McGraw-Hill Publishing Company Limited. Cash Flow Estimates: There are certain ingredients of cash flow streams.

that is.Determination of Relevant Cash flows The data requirement for capital budgeting are cash flows. Financial Management McGraw- 9-10 . outflows and inflows. Their computation depends on the nature of the proposal. The investment in new capital projects can be categorised into 1) 2) 3) Single proposal Re-placement proposal Mutually exclusive proposals © Tata McGraw-Hill Publishing Company Limited.

the cash inflows include salvage value (if any. © Tata McGraw-Hill Publishing Company Limited.Single Proposal In the case of single/independent investment proposal. cash outflows primarily consist of (1) Purchase cost of the new plant and machinery (2) Its installation costs (3) Working capital requirement to support production and sales (in the case of revenue expanding proposals/release of working capital in cost reduction proposals. The cash inflows after taxes (CFAT) are computed by adding depreciation (D) to the projected earnings after taxes (EAT) from the proposal. net of removal costs). apart from operating CFAT. Financial Management McGraw- 9-11 . recovery of working capital and tax advantage\taxes paid on short-term capital loss\gain on sale of machine. In the terminal year of the project.

+ Installation cost of plant and equipments 3.. N Cash sales revenues Less: Cash operating cost Cash inflows before taxes (CFBT) Less: Depreciation Taxable income Less: Tax Earning after taxes Plus: Depreciation Cash inflows after tax (CFAT) Plus: Salvage value (in nth year) Plus: Recovery of working capital (in nth year) © Tata McGraw-Hill Publishing Company Limited.Format 1: Cash Outflows of New Project [Beginning of the Period at Zero Time (t = 0)] 1. Cost of new project 2... ± Working capital requirements Format 2: Determination of Cash Inflows: Single Investment Proposal (t = 1 ± N) Particulars 1 2 Years 3 4 . Financial Management McGraw- 9-12 .

The company has estimated that its extraction costs amount to 70 per cent of the net realisable value of the ore.10 lakh. If the output from the extraction process is sold immediately upon removal of dirt. 1. should the company instal the equipment if (a) the expected salvage is Rs 10 lakh and (b) there would be no salvage value at the end of year 5.100 lakh. rocks and other impurities.Example 1 An iron ore company is considering investing in a new processing facility. The additional cash cost of further processing would be Rs 100 per ton.000 per tonne.00. it is possible to process further 25 per cent of the output. It is expected to have useful life of 5 years. Assuming there is no other plant and machinery subject to 25 per cent depreciation. and can be sold at Rs 1. Financial Management McGraw- 9-13 . The company¶s cut-off rate for such investments is 15 per cent. the company would have to instal equipment costing Rs. Additional working capital requirement is estimated at Rs.600 per ton. As an alternative to selling all the ore at Rs 1. The proposed ore would yield 80 per cent final output. Corporate tax rate is 35 per cent. For additional processing. © Tata McGraw-Hill Publishing Company Limited. The equipment is subject to 25 per cent depreciation per annum on reducing balance (WDV -written down value ) basis/method. a price of Rs 1. During a year. The company extracts ore from an open pit mine.000 tonnes of ore is extracted.000 per ton of ore can be obtained.

45.000 9-14 © Tata McGraw-Hill Publishing Company Limited.00.75.00.250 30.000 15.813 20.00.187 25.000) ± Rs 1.750 17.00.000 25.859 22.000 29.82.00.54.00.25.00.937 14.000 38.05.000 35.81. Financial Management McGraw- .000 13.54.00.39.10.00.000 18.000 25.06.000 tons) Depreciation (working note 1) Earnings before taxes Less: Taxes (0.000 Rs 70.35) Earnings after taxes (EAT) Add: Depreciation CFAT Cash Inflows (CFAT) Year 1 2 3 4 5 Rs 70.00.10.000 Rs 70.688 34.00.000 7.000 Rs 70.00.000 26.94.000 14.000 20.00.000 10.00.250 25.00.000 Rs 70.Solution Financial Evaluation Whether to Instal Equipment for Further Processing of Iron Ore (A) Cost of equipment Plus: Additional working capital Cash Outflows Rs 1.25.000 ² 45.000)] Less: Processing costs: Cash costs (Rs 100 × 25.000 (B) Particulars Revenue from processing [(Rs 1.93.17.00.141 25.00.000 25.000 1.75.312 12.00.600 × 20.000 10.250 18.453 10.00.250 34.06.25.688 32.00.000 9.000 25.000 29.18.000 × 25.06.00.750 10.75.

00.75.250 10.64.000 75.54.062 Depreciation @ 25% on WDV Rs 25.000 14. © Tata McGraw-Hill Publishing Company Limited.Working Notes 1 Depreciation Schedule Year 1 2 3 4 5 Depreciation base of equipment Rs 1.000 56. no depreciation is to be charged in the terminal year of the project. Financial Management McGraw- 9-15 .688 Nil@ @As the block consists of a single asset.25.000 42.00.00.06.18.000 18.750 31.00.

Rs 33.062 Rs 10.35 × (Rs 31.658 0.497 0.81.00.000 1 35.10.141 4 29.422 b Tax benefit on short-term capital loss 10.725 4.48.572 0.439 4.97.07.000 27.57.15) 0.(C)(a) Determination of NPV (Salvage Value = Rs 10 lakh) Year CFAT PV factor (0.53.497 0.70.06.00.000 5 10.29.000 19.422.84.870 0.187 3 32.000 Salvage value 7.000 1.17.000 3.347 Recommendation: The company is advised to instal the equipment as it promises a positive NPV.64.94.000 Recovery of working capital Gross present value Less: Cash outflows Net present value (NPV) (b) 0.497 0.509 18.00. © Tata McGraw-Hill Publishing Company Limited.756 0.00.347 1.57.000) = Rs 7.250 2 34.70.249 14.425 22.76.97.00.25.497 Total PV Rs 38. Financial Management McGraw- 9-16 .

(D) Determination of NPV (Salvage Value = Zero) PV of operating CFAT (1 5 years) Add: PV of tax benefit on short term capital loss (Rs 31.47. Financial Management McGraw- 9-17 .497. PV factor) Add: PV of recovery of working capital Total present value Less: Cash outflows NPV Rs 115.50. the company is advised to instal the equipment.4.062 × 0.22 × 0.00.47.10.297 Since the NPV is still positive.07.64.97.26.000 1.297 1.35 = Rs 11.389 4.908 5. © Tata McGraw-Hill Publishing Company Limited.99.000 16.

Replacement Situation In the case of replacement situation. © Tata McGraw-Hill Publishing Company Limited. The relevant cash outflows are incremental after-tax cash flows. the sale proceeds from the existing machine reduce the cash outflows required to purchase the new machine. Financial Management McGraw- 9-18 .

± investment allowance 6. 1. Cost of the new machine 2. ± Sale proceeds of existing machine 5. + Installation Cost 3. ± Working Capital 4. ± taxes paid/saved on sale of the asset © Tata McGraw-Hill Publishing Company Limited. Financial Management McGraw- 9-19 .Format 3: Cash Outflows in a Replacement Situation.

It is 4 years old. The existing machine is in good operating condition. The machine was initially purchased for Rs 10 lakh and is being depreciated at 25 per cent on the basis of written down value method. The new machine will cost Rs 15 lakh and will be subject to the same method as well as the same rate of depreciation. It is expected to have a useful life of 6 years. The management anticipates that with the expanded operations.000 and a remaining life of 6 years.Example 2 Royal Industries Ltd is considering the replacement of one of its moulding machines. Financial Management McGraw- 9-20 . but is smaller than required if the firm is to expand its operations. The corporate tax rate is 35 per cent. Fixed costs (excluding depreciation) are likely to remain unchanged. if there is no salvage value? © Tata McGraw-Hill Publishing Company Limited. The company has several machines in the block of 25 per cent depreciation. Its cost of capital is 10 per cent. salvage value of Rs 1. there will be a need of an additional net working capital of Rs 1 lakh. Should the company replace its existing machine? What course of action would you suggest.000 at the sixth year end. has a current salvage value of Rs 2. variable cost to volume ratio is 30 per cent.00.000.50. The new machine will allow the firm to expand current operations and thereby increase annual revenues by Rs 5.00.

00.000 [Rs 5.10.250 1.000 3.509 1.63.47.30.250 3. Financial Management McGraw- 9-21 .488 2.08.50.187 2.50.3] 6 Rs 16.38.01.00.35) 5 Rs 8.000 Incremental depreciation(b) 3 Rs 3.37.062 1.512 86.672 1.000 3.000 1.12.50.25.624 Taxable income 4 Rs 25.000 2.891 2.08.188 58.000 CFAT [Col. variable cost to value (V/V) ratio] = Rs 3.50.515 74.659 2.12.5] Rs 15.50.000 3.60.Solution Financial Evaluation Whether to Replace Existing Machine (A) Cash Outflows (Incremental) Cost of the new machine Add: Additional working capital Less: Sale value of existing machine (B) Year 1 1 2 3 4 5 6 Determination of Incremental CFAT (Operating) Incremental contribution(a) 2 Rs 3.00.379 1.750 1.109 1.43.6 + Col.41.000 1. 4-Col.06.000 × 0.91.50.368 a Rs 5.485 2.250 69.50.832 39.744 7 Rs 3.02.000 14.812 2.82.632 EAT [Col.000 2.00.67.00.000 3.41.75.000 3.00.376 Taxes (0.491 2.813 1.000 b (Working note) © Tata McGraw-Hill Publishing Company Limited.750 37.168 3.

750 1.250 5.75. salvage value) = Rs 39.624c Incremental asset cost base Rs 13.50.02.496 Rs 1.000 2.Incremental Depreciation (t = 1 Year 1 2 3 4 5 6 c 0.11.08.25 × (Rs 3.Working Note 1.37.832 39.43.31.48.00. Financial Management McGraw- 9-22 .000.813 1.437 4.000 9.109 1.82.08.496 6) Depreciation (25% on WDV) Rs 3.25.000 7.328 3.624 © Tata McGraw-Hill Publishing Company Limited.

2. (i) Written Down Value (WDV) of Existing Machine at the Beginning of the Year 5 Initial cost of machine Rs 10,00,000 Less: Depreciation @ 25% in year 1 2,50,000 7,50,000 WDV at beginning of year 2 1,87,500 Less: Depreciation @ 25% on WDV 5,62,500 WDV at beginning of year 3 1,40,625 Less: Depreciation @ 25% on WDV 4,21,875 WDV at beginning of year 4 1,05,469 Less: Depreciation @ 25% on WDV 3,16,406 WDV at beginning of year 5 (ii) Depreciation Base of New Machine WDV of existing machine 3,16,406 Add: Cost of the new machine 15,00,000 Less: Sale proceeds of existing machine 2,00,000 16,16,406 (iii) Base for Incremental Depreciation Depreciation base of a new machine 16,16,406 Less: Depreciation base of an existing machine 3,16,406 13,00,000
© Tata McGraw-Hill Publishing Company Limited, Financial Management McGraw-

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(C) Determination of NPV (Salvage Value = Rs 1.50 lakh) Year 1 2 3 4 5 6 6 Salvage value 6 Recovery of working capital Gross present value Less: Cash outflows Net present value CFAT Rs 3,41,250 3,12,812 2,91,485 2,75,488 2,63,491 2,41,368 1,50,000 1,00,000 PV factor (0.10) 0.909 0.826 0.751 0.683 0.621 0.564 0.564 0.564 Total PV Rs 3,10,196 2,58,383 2,18,905 1,88,158 1,63,628 1,36,132 84,600 56,400 14,16,402 14,00,000 16,402

Recommendation: Since the NPV is positive, the company is advised to replace the existing machine. The NPV is likely to be higher as tax advantage will accrue on the eligible depreciation of Rs 1,18,872 (Rs 3,08,496 Rs 1,50,000 Rs 39,624) in the future years.
© Tata McGraw-Hill Publishing Company Limited, Financial Management McGraw-

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Determination of NPV (Salvage Value = Zero) (i) For the first 5 years, depreciation will remain unchanged. In the sixth year, it will be = Rs 3,08,496 × 0.25 = Rs 77,124. (ii) Operating CFAT for years 1 5 will remain unchanged. CFAT for year 6 would be: Incremental contribution Less: Incremental depreciation Taxable income Less: Taxes (0.35) EAT Add: Depreciation CFAT (iii) PV of operating CFAT (1 5 years) Add: PV of operating CFAT (6th year) (Rs 2,54,493 × 0.564) Add: PV of working capital Total present value Less: Cash outflows NPV

Rs 3,50,000 77,124 2,72,876 95,507 1,77,369 77,124 2,54,493 11,39,270 1,43,534 56,400 13,39,204 14,00,000 (66,796)

Recommendation: Since the NPV is negative, the existing machine should not be replaced.
© Tata McGraw-Hill Publishing Company Limited, Financial Management McGraw-

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the selection of one proposal precludes the selection of the other(s).Mutually Exclusive Proposals In the case of mutually exclusive proposals. The computation of the cash outflows and cash inflows are on lines similar to the replacement situation. Financial Management McGraw- 9-26 . © Tata McGraw-Hill Publishing Company Limited.

000. The project will generate additional sales of Rs 1.000 in each of the 5 years of its life. Proposal Y will require the purchase of machine Y for Rs 2. X and Y.30. Assuming the company does not have any other asset in the block of 25 per cent.000 with no salvage value and additional working capital of Rs 70. The project is expected to generate additional sales of Rs 2. has 12 per cent cost of capital and is subject to 35 per cent tax.000 over its life. advise which machine it should purchase? What course of action would you suggest if Machine X and Machine Y have salvage values of Rs 10.Example 3 A company is considering two mutually exclusive proposals.50.000 and Rs 25.000 respectively? © Tata McGraw-Hill Publishing Company Limited.000 with no salvage value but an increase in the level of working capital to the tune of Rs 50. Financial Management McGraw- 9-27 .50. Both the machines are subject to written down value method of depreciation at the rate of 25 per cent. Proposal X will require the purchase of machine X. for Rs 1.00.000.000 with cash expenses aggregating Rs 50.000 and require cash expenses of Rs 30.

000 2.000 65.00.35) CFAT (t = 1 5) (×) PV factor of annuity for 5 years (0.000 × 3.000 50.000 35.00. Financial Management McGraw- 9-28 .12) Present value Rs 1. X and Y Proposal X Cash outflows Cost price of machine Additional working capital Initial investment CFAT and NPV (i) Incremental sales revenue Less: Cash expenses Incremental cash profit before taxes Less: Taxes (0.50.34.000 1.000 1.605 2.Solution Financial Evaluation of Proposals.000 30.30.325 © Tata McGraw-Hill Publishing Company Limited.

00.893 0.721 7.522 28.461 STCL × 0.000 × 0.820 Tax savings Rs 13.567) Total present value Less: Cash outflows NPV © Tata McGraw-Hill Publishing Company Limited.346 9.712 0.257 3.636 Rs 11.094 15.797 0.567) (iv) Release of working capital (Rs 50.000 1. Financial Management McGraw- 9-29 .844 7.35 × 0.419 28.(ii) PV of Tax Savings Due to Depreciation Year 1 2 3 4 Depreciation Rs 37.125 21.846 5.350 3.00.440 2.500 28.440 (iii) PV of tax savings on short-term capital loss (STCL): (Rs 47.537 PVF Present value 0.383 5.00.125 9.

000 70.50.000 52.500 97.20.000 2.000 50.50.488 © Tata McGraw-Hill Publishing Company Limited.Proposal Y Cash outflows Cost price of machine Additional working capital Initial investment CFAT and NPV (i) Incremental sales revenue Less: Cash expenses Incremental cash profits before taxes Less: Taxes (0.51.35) CFAT (t = 1 5) (×) PV factor of annuity for 5 years (0. Financial Management McGraw- 9-30 .500 × 3.000 3.00.605 3.12) Present value 2.000 1.

35 × 0.229 PVF 0.761 5.(ii) PV of Tax Savings Due to Depreciation Year 1 2 3 4 Depreciation Rs 62.000 × 0.305 9.116 (iii) PV of tax savings on short term capital loss (Rs 79.893 0.567) Total present value Less: Cash outflows NPV Advice: Proposal Y is recommended in view of its higher NPV.367 Tax savings Rs 21.102 × 0.534 13.797 0.34.500 46.712 0.076 8.000 1.567) (iv) Release of working capital (Rs 70.116 3.636 Present value Rs 19.875 35.20.869 47. Financial Management McGraw- 9-31 .156 26.698 39. © Tata McGraw-Hill Publishing Company Limited.54.240 15.875 16.406 12.690 4.

20.00.20.000 70.17.Alternatively (Incremental Cashflow Approach) Incremental Cash Outflows Investment required in Proposal Y Less: Investment required in Proposal X Incremental CFAT and NPV (i) Incremental sales revenue (Y X) Less: Incremental cash expenses (Y ± X) Incremental cash profit before taxes Less: Taxes (0.000 17.12) Incremental present value Rs 3.605 1.162 © Tata McGraw-Hill Publishing Company Limited.35) Incremental CFAT (t = 1 5) (×) PV of annuity for 5 years (0.000 2. Financial Management McGraw- 9-32 .500 32.000 50.500 × 3.000 20.000 1.

348 18.20.750 6.000 0. Rs 50. Financial Management McGraw- 9-33 .000 18.53.504 2.893 0.461) × 0.102 Rs 47.691 PVF 0.567 (iv) Incremental (Y X) working capital (Rs 70.636 Present value Rs 7.896 iii) PV of tax savings on incremental (Y X) short term capital loss (STCL): (Rs 79.340 1.(ii) PV of Tax Savings Due to Incremental Depreciation Year 1 2 3 4 Depreciation Rs 25.677 © Tata McGraw-Hill Publishing Company Limited.712 0.677 1.547 Tax savings Rs 8.279 11.230 3.814 5.000) × 6.062 10.000 33.35 × 0.797 0.922 3.562 4.750 14.567 Incremental present value Less: Incremental cash outflows Incremental NPV Recommendation: Proposal Y is better.

567 Incremental present value Less: Incremental cash outflows Incremental NPV Rs 1.59.20. (ii) and (iv) (Rs 1.505 3.47. © Tata McGraw-Hill Publishing Company Limited.102 Rs 37.567) (c) PV of tax savings on incremental STCL@@ (Rs 54.461) × 0. the amount of short-term capital loss (STCL) will change.17.Financial Evaluation of Proposals.302 1.398 8. @ Items (i).000 39. Assuming Salvage Value of Machines X and Y (Incremental Approach) (a) Sum of PV of items (i). @@ As a result of salvage value.000 × 0.35 × 0.162 + Rs 18.896 + Rs 11.205 1. (ii) and (iv) when there is no salvage will not change due to salvage value. Financial Management McGraw- 9-34 .340)@ (b) PV of incremental salvage value (Rs 15.205 Decision: Decision (superiority of proposal Y) remains unchanged.

Financial Management McGraw- 9-35 .EVALUATION TECHNIQUES for CAPITAL BUDJECTING (1) Traditional Techniques (i) Average rate of return method (ii) Pay back period method (2) Discounted Cash flow (DCF)/Time-Adjusted (TA) Techniques (i) Net present value method (ii) Internal rate of return method (iii) Profitability index © Tata McGraw-Hill Publishing Company Limited.

Average Rate of Return Method The ARR is obtained dividing annual average profits after taxes by average investments. Average investment = 1/2 (Initial cost of machine Salvage value) + Salvage value + net working capital. Annual average profits after taxes = Total expected after tax profits/Number of years The ARR is unsatisfactory method as it is based on accounting profits and ignores time value of money. Financial Management McGraw- 9-36 . © Tata McGraw-Hill Publishing Company Limited.

125 3.Example 4 Determine the average rate of return from the following data of two machines.375 3. © Tata McGraw-Hill Publishing Company Limited.375 11.375 9.375 7.000 Depreciation has been charged on straight line basis. Financial Management McGraw- 9-37 .125 Machine B Rs 56.375 7.375 36. Particulars Cost Annual estimated income after depreciation and income tax: Year 1 2 3 4 5 Estimated life (years) Estimated salvage value Machine A Rs 56.375 5.375 36.375 5.000 11.875 5 3.375 9.875 5 3. A and B.

375.562.50) × 100 = 24. Financial Management McGraw- 9-38 . ARR (for machines A and B) = (Rs 7.875/5) = Rs 7. Average income of Machines A and B =(Rs 36.125 Rs 3.375/Rs 29.50.9 per cent.562.000 + 1/2 (Rs 56.Solution ARR = (Average income/Average investment) × 100. Average investment = Salvage value + 1/2 (Cost of machine Salvage value) = Rs 3.000) = Rs 29. © Tata McGraw-Hill Publishing Company Limited.

It is determined as follows (i) In the case of annuity CFAT: Initial investment/Annual CFAT.Pay Back Method The pay back method measures the number of years required for the CFAT to pay back the initial capital investment outlay. Original/initial Investment (outlay) is the relevant cash outflow for a proposed project at time zero (t = 0). Mixed Stream is a series of cash inflows exhibiting any pattern other than that of an annuity. (ii) In the case of mixed CFAT: It is obtained by cumulating CFAT till the cumulative CFAT equal the initial investment. Although the pay back method is superior to the ARR method in that it is based on cash flows. it also ignores time value of money and disregards the total benefits associated with the investment proposal. Annuity is a stream of equal cash inflows. ignoring interest payment. 9-39 © Tata McGraw-Hill Publishing Company Limited. Financial Management McGraw- .

Example 5 (i) In the case of annuity CFAT An investment of Rs 40.000 for 10 years. Financial Management McGraw- 9-40 .000/Rs 8.000 in a machine is expected to produce CFAT of Rs 8. PB = Rs 40.000 = 5 years © Tata McGraw-Hill Publishing Company Limited.

(ii) In the case of mixed CFAT Table 2 presents the calculations of pay back period for Example 4.000 60. ‡The initial investment of Rs.000 16. Financial Management McGraw- .000 93.000 in the fifth year includes Rs.000 20.000 25.3.000 18.000 17.000 18.000 16.000 68.56125 9-41 © Tata McGraw-Hill Publishing Company Limited.000 42.000 20.000* B 22.000* Cumulative CFAT A Rs 14. Table 2 Year 1 2 3 4 5 ‡CFAT Annual CFAT A Rs 14.000 93.000 B Rs 22.000 48.000 76.000 30.000 salvage value also.

406 years © Tata McGraw-Hill Publishing Company Limited. Financial Management McGraw- 9-42 .The initial investment of Rs.56125 A will recover between 3 and 4 Pay back period=3+(56125-48000)/20000 period=3+(56125=3.

© Tata McGraw-Hill Publishing Company Limited. It. In this method. present values. Financial Management McGraw- 9-43 . The present value or the discounted cash flow procedure recognises that cash flow streams at different time periods differ in value and can be compared only when they are expressed in terms of a common denominator. thus.Discounted Cash flow (DCF)/TimeAdjusted (TA) Techniques The DCF methods satisfy all the attributes of a good measure of appraisal as they consider the total benefits (CFAT) as well as the timing of benefits. takes into account the time value of money. that is. all cash flows are expressed in terms of their present values.

557 71.928 10.660 16. Year Machine A CFAT PV factor (0.645 *includes salvage value.751 0.000* 69.683 0.621 Present value 4 Machine B CFAT PV factor (0. Table 3: Calculations of Present Value of CFAT.751 0.000 25.909 0.000 13.10) 6 0.826 0. © Tata McGraw-Hill Publishing Company Limited.726 Rs 22.216 20.The present value of the cash flows in Example 4 are illustrated in Table 3.000 14.518 18.998 16. Financial Management McGraw- 9-44 .000 16.683 0.525 17.000 13.521 1 1 2 3 4 5 5 Rs 12.000 15.826 0.520 13.000 20.621 Present value 7 Rs 19.000 18.518 10.909 0.000* 3 0.10) 2 Rs 14.

accept. The decision rule for a project under NPV is to accept the project if the NPV is positive and reject if it is negative. Symbolically. Financial Management McGraw- 9-45 . (i) NPV > zero. Net Present Value = n ™ t=1 CFt (1+k)t + Sn + Wn (1+k)n - n ™ t=0 COt (1+k)t © Tata McGraw-Hill Publishing Company Limited. The project will be accepted in case the NPV is positive. reject Zero NPV implies that the firm is indifferent to accepting or rejecting the project. (ii) NPV < zero.Net Present Value (NPV) Method The NPV may be described as the summation of the present values of (i) operating CFAT (CF) in each year and (ii) salvages value(S) and working capital(W) in the terminal year(n) minus the summation of present values of the cash outflows(CO) in each year. The present value is computed using cost of capital (k) as a discount rate.

we shall find the proposals to purchase either of the machines are unacceptable as their net present values are negative. a choice is to be made between machine A and machine B on the basis of the NPV method. the various proposals would be ranked in order of the net present values.396) would be preferred to machine A (NPV being Rs 13. this method can also be used to make a choice between mutually exclusive projects.521 Rs 56. In Example 4.520). If. The negative NPV of machine A is Rs 6. As a decision criterion.125) and that of B is Rs 15. © Tata McGraw-Hill Publishing Company Limited. On the basis of the NPV method. Financial Management McGraw- 9-46 .379 (Rs 71.Example 6 In Example 4 we would accept the proposals of purchasing machines A and B as their net present values are positive.396 (Rs 71.900). followed by others in the descending order. if we incorporate cash outflows of Rs 25.520 (Rs 69. The project with the highest NPV would be assigned the first rank.255 (Rs 69.900 (56125+25000*.125).645 Rs 74. machine B having larger NPV (Rs 15. The positive NPV of machine A is Rs 13. in our example.000 at the end of the third year in respect of overhauling of the machine.751)) and of machine B is Rs 3.521 Rs 74.645 Rs 56.

R > k exceeds © Tata McGraw-Hill Publishing Company Limited.Internal Rate of Return (IRR) Method The IRR is defined as the discount rate (r) which equates the aggregate present value of the operating CFAT received each year and terminal cash flows (working capital recovery and salvage value) with aggregate present value of cash outflows of an investment proposal. r is found out from the relation Zero = n ™ t=1 CFt (1+r)t + Sn + Wn (1+r)n when IRR n ™ t=0 COt (1+r)t the The project will be accepted required rate of return. Financial Management McGraw- 9-47 .

note interest rate (r) corresponding to these PV values (DFr).IRR for an Annuity The following steps are taken in determining IRR for an annuity. From the top row of the table. © Tata McGraw-Hill Publishing Company Limited. find two PV values or discount factor (DFr) closest to PB period but one bigger and other smaller than it. Determine the pay back period of the proposed investment. Financial Management McGraw- 9-48 . In Table A-4 (present value of an annuity) look for the pay back period that is equal to or closest to the life of the project. In the year row.

IRR = r - Where PVCO = Present value of cash outlay PVCFAT = Present value of cash inflows (DFr x annuity) r = Either of the two interest rates used in the formula ¨ r = Difference in interest rates ¨ PV = Difference in calculated present values of inflows © Tata McGraw-Hill Publishing Company Limited. This can be done either directly using Equation 1 or indirectly by finding present values of annuity (Equation 2). DFrL = Discount factor for lower interest rate DFrH = Discount factor for higher interest rate.Determine actual IRR by interpolation. r = Either of the two interest rates used in the formula PVco PVCFAT ¨PV × ¨r (Equation 2) Alternatively.DFrH (Equation 1) PB = Pay back period DFr = Discount factor for interest rate r. IRR = r Where PB DFr DFrL . Financial Management McGraw- 9-49 .

Solution (1) The pay back period is 3. © Tata McGraw-Hill Publishing Company Limited.Example 7 A project costs Rs 36.214- 9-50 .199 (17 per cent rate of interest). Financial Management McGraw- [(3.274 (16 per cent rate of interest) and 3.274-3. Substituting the values in Equation 1 we get: IRR =16. The actual value of IRR which lies between 16 per cent and 17 per cent can.000 and is expected to generate cash inflows of Rs 11.214 (Rs 36.199)] = 16. be determined using Equations 1 and 2.199)/(3.8 per cent.2143.214 for 5 years are 3. now.000/Rs 11.199)] = 16. discount factors closest to 3.274-3.274)/(3.8 per cent.[(3.200) (2) According to Table A-2.200 annually for 5 years. IRR = 17 3. Calculate the IRR of the project. Alternatively (starting with the higher rate).

16) PVCFAT (0.828. Financial Management McGraw- 9-51 .17) = Rs 11.8 IRR = 16 Alternatively (starting with the higher rate).200 × 3.668.828. PVCFAT (0.8 = Rs 11.200 × 3. IRR = r IRR = 17 36.199 = Rs 35.828.Instead of using the direct method. again.8 35.8 36. Here.000 35.274 = Rs 36.668. we may find the actual IRR by applying the interpolation formula to the present values of cash inflows and outflows (Equation 2).8 % (PVCO PVCFAT) ¨ PV 36.8 × 1 = 16.668.000 36.8 % © Tata McGraw-Hill Publishing Company Limited.8 840 רr × 1 = 16. it is immaterial whether we start with the lower or the higher rate.

Profitability Index = Present value cash inflows Present value of cash outflows The proposal will be worth accepting if the PI exceeds one.Profitability Index (PI) or BenefitBenefitCost Ratio (B/C Ratio) The profitability index/present value index measures the present value of returns per rupee invested. It is obtained dividing the present value of future cash inflows (both operating CFAT and terminal) by the present value of capital cash outflows. © Tata McGraw-Hill Publishing Company Limited. Financial Management McGraw- 9-52 .

followed by others in the same order. The selection of projects with the PI method can also be done on the basis of ranking. In Example 4 (Table 3) of machine A and B. the NPV and PI approaches give the same results regarding the investment proposals.27 Since the PI for both the machines is greater than 1.27 for machine B: PI (Machine A) = PI (Machine B) = Rs 69. Thus.645 Rs 56. Financial Management McGraw- 9-53 .24 for machine A and 1. The highest rank will be given to the project with the highest PI. will be negative when the PI is less than one. In other words.24 = 1. the PI would be 1. equal to or less than 1.521 Rs 56. © Tata McGraw-Hill Publishing Company Limited.125 = 1. equal to or less than zero respectively. the net present value is greater than.Example 8 When PI is greater than. the NPV will be positive when the PI is greater than 1.125 Rs 71. both the machines are acceptable.

Financial Management McGraw- 9-54 .SOLVED PROBLEM © Tata McGraw-Hill Publishing Company Limited.

owned by the public sector Coal India Ltd has been producing coal through manual operations for the last eight years.The Domanhill Colliery. an underground mine. The past and projected revenues and cost data are summarised below Past and projected revenue and cost data (Rs crore) Year Sales revenue Direct labour cost Administrative expenses and selling expenses Fixed expenses (excluding depreciation) 15 17 22 25 31 49 51 68 68 75 83 91 98 Variable expenses Past Data: 1 2 3 4 5 6 7 8 Projected Data: 9 10 11 12 13 309 342 375 408 441 62 69 76 82 88 52 58 63 69 75 89 97 106 115 124 9-55 70 81 101 123 162 201 245 302 14 16 21 30 34 41 48 61 12 14 17 22 25 33 40 53 23 25 30 39 45 64 77 94 © Tata McGraw-Hill Publishing Company Limited. Financial Management McGraw- .

 10 per cent increase in fixed cost on account of setting up of additional maintenance facility. An additional Rs 2 crore would have to be spent on creation of additional facility like transformer. 50 per cent. The colliery does not have other machines in the block of 25 per cent. the following changes in the operating parameters are forecast:  Increase in projected sales revenue by 25 per cent due to faster speed of work.  The semi-mechanisation would require acquisition of 20 machines at a cost of Rs 1 crore each. as a result of additional electricity consumption. Financial Management McGraw- 9-56 .80 crore and year 11.  Loss in terms of disturbance charge due to opposition. strike and lockout: year 9. year 10 Rs 0.30 crore.With the liberalisation and opening up the coal sector to private firms. they are expected to be sold at Rs 2 crore. Rs 0. At the end of 5 years.  Decrease in direct labour cost by 5 per cent resulting from ban on new recruitments. special cables and installation of the machines.  Increase in variable expenses. The machines including the additional facility created would be depreciated over a five year period on the basis of written down value method @ 25 per cent. Rs 2 crore. © Tata McGraw-Hill Publishing Company Limited.  Fifteen per cent increase in administrative and selling expenses to support increased semi-mechanised production and sale. With the introduction of the SDL machine. the Board of Directors of Coal India Ltd have decided to undertake a feasibility study for semi-mechanisation of Domanhill Colliery by introducing side dump and load (SDL) machine.

what recommendation would you make to the Board of Directors of Coal India Ltd? Solution Financial analysis for semi-mechanisation of Domanhill Colliery (using NPV method) Incremental cash outflows Cost of new machine (SDL) (20 × Rs 1 crore) Additional cost of semi-mechanisation (Amount in crore of rupees) 20 2 22 © Tata McGraw-Hill Publishing Company Limited. present a financial analysis of the feasibility of semi-automation of the Domanhill Colliery. Financial Management McGraw- 9-57 . As a financial consultant.Assuming effective cost of capital of 8 per cent on World Bank loan to finance the project and 35 per cent tax.

19 15.5 13.Incremental CFAT and NPV Particulars Incremental sales revenue (0.5 2.68 3 93.25 × projected sales revenue) Add: Savings in direct labour cost (0.0 1.21 18.33 6.1 23.77 12.6 11.8 9.3 3.81 8.1 10.8 4.4 8.75 3. Financial Management McGraw- Year 1 77.35 × Rs 4.43 19.4 17.25 9.05 × DLC) Less: Incremental administrative and selling expenses (0.4 11.32 26.10 7.44 2 85.5 2.0 5.45 8.5 0.12 19.25 3.45 8.94 14.1 57.70 7.10 × FC) Less: Increase in variable costs (0.@ 31.35 9.5 48.8 6.56 16.5 ² 2.5 20.8 44.5 3.83 9.1 20.75 4.3 53 0.75 5 110.8 62 ² Nil.31 4 102 4.74 9-58 .25 4.50 × VC) Less: Disruption charges Less: Depreciation Earnings before taxes Less: Taxes Earnings after taxes CFAT (operating) Salvage value Tax benefit on short-term capital loss (0.96) © Tata McGraw-Hill Publishing Company Limited.15 × ASE) Less: Incremental fixed costs (0.

(x) PV factor (0. as block ceases to exist.794 0.53 22.51 65.857 0. the proposal is financially viable.00 43.81 0. Recommendation: Since the NPV is positive.37 0.08) Present value Total present value (t = 1 Less: Cash outflows Net present value 5) 0.681 16.926 13.76 12.53 @ No depreciation is charged in terminal year. © Tata McGraw-Hill Publishing Company Limited.08 12. Financial Management McGraw- 9-59 .Contd.735 10.

MINI CASE © Tata McGraw-Hill Publishing Company Limited. Financial Management McGraw- 9-60 .

P. It has grown significantly under the CEO Vivek Razdan¶s dynamic leadership. Marketing suggested to the CEO that a market penetration pricing strategy would be most suitable and Zimney should be priced at Rs 5.00. To gauge the market prospects for Zimney.(Net Present Value) Choolah Chimney Ltd (CCL) is a leading manufacturer of items used in kitchens such as gas stoves. The results of the survey were very positive showing a significant demand for Zimney. a market survey was conducted by Bazar Gyani. In line with his belief to enhance competitiveness by using research and development for launching innovative products in the market. the V. the market is expected to grow at 2 per cent annually. at an estimated cost of Rs 5.00.00.000 per unit in the initial year of the launch. Considering the growth of satellite towns/cities and residential colonies. The survey report also indicated that Zimney could capture 8 per cent of the current market size of 1.000 units of gas electric chimney.000 per year. Marketing. The marketing and administrative costs are expected to be Rs 4. The research and development cost of Zimney amounts to Rs 20. The price could be raised in subsequent years by 5 per cent annually. Financial Management McGraw- 9-61 .000.. electric chimneys. © Tata McGraw-Hill Publishing Company Limited. The VP.00. the CCL has recently developed a zero Maintenance Electric Chimney (known as Zimney) which is ideally suited for Indian cooking.000. ovens and so on.

000 per machine with a removal cost of Rs 30. The new machine.00. being state of the art technology would improve the productivity of the workers as well reduce the unit variable cost of manufacture to Rs 600.000 with a useful life of 4 years and salvage value of Rs 10.000 8.00.000 6. These machines are currently being used for manufacturing other types of chimneys. Exhibit 1 summarises the labour cost with the existing machine and the new equipment.000 9-62 © Tata McGraw-Hill Publishing Company Limited.00.000 8. It can produce other types of chimneys also.00. The machine to manufacture Zimney is available in that market for Rs 1.000 New Machine/Equipment Number 15 1 2 Monthly salary Rs 4. Financial Management McGraw- . with no salvage value. They could be sold for Rs 2. having a useful life of 7 years.000 each.000.00. Category Existing Number Monthly salary Skilled labour Maintenance men Floor managers 20 2 3 Rs 4.The CCL is presently using 6 machines acquired 3 years ago at a cost of Rs 10. which would increase by 5 per cent annually.000 for each.000 6.

The policy of CCL is to pay five months salary as compensation in case of layoff of employees. 14 per cent and (iii) Straight line depreciation for the tax purposes.07.001 © Tata McGraw-Hill Publishing Company Limited.The maintenance costs currently amount to 1.000 per year (existing machine).000.43. Solution Financial Evaluation of Proposal to launch Zimney (A) Incremental Cash Outflow (t = 0): 1.000 60.00.000 1.000) (8. Cost of new machine Less sale proceeds of existing machinesa Less tax benefits on loss of sale of existing machinesb Cost of laying-off workersc Additional working capital Rs 1. 4. Assume the following: (i) Tax.000 with the new equipment. Financial Management McGraw- 9-63 . 2.70.42.00. 3. Required Should the CCL launch the Zimney. 35 per cent (ii) Required rate of return.00. 5.999) 1.000 (10.00. They would total Rs 70.20.00. The net working capital required to start production of Zimney would be Rs 60.

000 © Tata McGraw-Hill Publishing Company Limited.00.57142.08.000 × 5 3. Rs 60.20.000 b Tax benefits on loss of existing machine (6 × Rs 1.28.000) (3 × Rs 8.000 ÷ 7)] = Rs 60.571.00.000 × 5 = Rs 1.00.000 30.42.000 Rs 25.000 1.08.20.00.28.e.428 = Rs 34.000 = = 40.000.571.571 Rs 10. Maintenance person = 1 × Rs 6.00. Tax benefit (Rs 24.a Sale proceeds of existing machines [(6 × Rs 2.571 (A) 0. 3. Loss on sale of existing machine [book value.999. Financial Management McGraw- 9-64 . Rs 34. sale price 30. Skilled labour 5 × Rs 4. c Cost of lay-off: 1. Floor manager = 1 × Rs 8.000.35) = Rs 8.000 × 5 (months) 2.71. sale proceeds] = Rs 24.70. Book value of existing machine [(6 × Rs 10.000. removal cost)] = Rs 10. annual depreciation i. 2.

00.28.20.887 (1.56.46.18.734 60.346) 2.858) 3.67.16.00.640 13.36.56.92.858) 3.640 30.000 3.498 4 (Rs) 4.50.200 2 (Rs) 4.33.92.40. 9.000 (62.53. 7.680 3 (Rs) 4.858 2.67.18. Sales revenuea Add savings in maintenance costb Add savings in labour costc Less variable costd Less incremental depreciatione EBT Less tax (0.519) 2.00.08.91.19.000 (55.000 4.92.58.27.38.92.08.000) (13.796) (13.63.92.05.822 13.858 2. 3. 12.82.92.010) 2. 10.(B) Incremental Cash Inflows: (t = 1 4): Year Particulars 1.876 13.63. Financial Management McGraw- .858 2.08.000 (52.33. 5.92.734 9-65 © Tata McGraw-Hill Publishing Company Limited.45142 (1.000 4.23.16.000 4.16.986 (1.44.45.000 4. 8.800) (13.99.498 ² 2.23.000 30. 6.663) (13.96. 11.46.858) 4.86.92.16.90.08.408 30.799) 2.59.92.40.00.000 30.35) EAT Add incremental depreciation CFAT Release of working capital Total 1 (Rs) 4.680 ² 2.858) 3.858 2.92.57.200 ² 2.50. 2.342 (1.000 (59.81. 4.36.342 13.34.72.20.

000 × 12) Floor manager (2 × Rs 8.00.000 × 12 months) Floor manager (3 × Rs 8.44.40.08 × 1. Rs 34.000 proposed) = Rs 30.000 × 12) d Variable cost and general administrative costs: Year 1 [(0.000 × Rs 600) + Rs 4.81.08 × 1.00.08 × 1.000 Rs 52.28.000 2.08 × 1.000 4.50.92.08. 2.000] 4 [(0.040 × Rs 5.000 4.663 Rs 22.34.000 × 12) Maintenance (2 × Rs 6.96.000 4.571 0) ÷ 4 © Tata McGraw-Hill Publishing Company Limited.142 13.796 62.08 × 1.00.000] e Incremental depreciation: 1.02.05.000 × 12) 2 New: Skilled labour (15 × Rs 4.000) ÷ 4 Existing (Book value.00.00. Financial Management McGraw- .57.20.00. existing c Savings in labour cost: 1 Existing:Skilled labour (20 × Rs 4.000 × Rs 630) + Rs 4.000 × 12) Maintenance (1 × Rs 6.000 Rs 10.000 × Rs 5.858 9-66 New equipment (Rs 1.000.08 × 1.06.408 b Savings in maintenance cost (Rs 1.120 × Rs 5.92.a Sales revenue : Year 1 (0.00.000 59.000 55.000] 3 [(0.92.000 7.91.04.88.640 4.040 × Rs 661) + Rs 4.60.000 Rs 9.08 × 1.00.00.02.000 9.04.000) 2 (0.84.787) = = = = Rs 4.120 × Rs 694) + Rs 4.000 1.58.000 8.000 Rs 13.000 72.512) 4 (0.00.08 × 1.000] 2 [(0.00.000 1.28.06.250) 3 (0. = = = = Rs 70.000 × Rs 5.00.00.40.

Incremental cash inflows Rs 2.001 6.16.592 Total PV Rs 2.675 0.50.877 0.636 2.527 1.92.93.000) and expenses incurred on market survey (Rs 5.00.06.000) are sunk cost and.106 7.00.07.680 2.200 2.14.92. irrelevant for analysis.05.56.33.43.37.67.498 3.769 0.14) 0.734 PV factor (0.60.526 © Tata McGraw-Hill Publishing Company Limited.83. Financial Management McGraw- 9-67 .39.826 1.80.959 1.(C) Computation of NPV Year 1 2 3 4 Total Less Incremental cash outflow NPV Decision: The Chola Chimney should launch the Zimney Note: The research and development cost of Zimney (Rs 20.04. therefore.16.99.46.

555 5% 0.933 0.917 0.924 0.747 0.990 0.661 0.388 0.871 0.388 0.564 0.763 0.813 0.935 0.340 0.544 0.601 0.923 0.766 0.614 0.429 0.442 0.502 0.681 0.424 0.925 0.863 0.683 0.890 0.558 0.705 0.463 0.527 0.971 0.826 0.513 0.888 0.547 0.942 0.475 0. Financial Management McGraw- .951 0.790 0.621 0.642 4% 0.772 0.444 0.907 0.596 0.650 0.315 9% 0.623 0.508 0.961 0.943 0.842 0.263 0.703 0.889 0.794 0.823 0.417 7% 0.708 0.962 0.665 0.857 0.855 0.751 0.677 0.275 10% 0.319 0.837 0.422 0.879 0.758 0.887 0.Table A-1 : The Present Value of One Rupee Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1% 0.592 0.481 6% 0.906 0.469 0.853 0.804 0.789 0.942 0.627 0.505 0.326 0.397 0.888 0.760 0.744 0.789 0.915 0.943 0.792 0.711 0.731 0.971 0.822 0.585 0.666 0.873 0.926 0.840 0.864 0.557 0.952 0.837 0.743 3% 0.980 0.914 0.961 0.746 0.650 0.467 0.630 0.299 0.530 0.713 0.645 0.980 0.816 0.784 0.350 0.386 0.540 0.497 0.368 0.905 0.676 0.239 9-68 © Tata McGraw-Hill Publishing Company Limited.625 0.356 0.415 0.577 0.722 0.735 0.460 0.701 0.681 0.870 0.820 0.773 0.582 0.583 0.896 0.362 8% 0.290 0.500 0.861 2% 0.909 0.

543 0.204 0.499 0.108 17% 0.870 0.194 0.519 0.885 0.231 0.391 0.232 0.152 0.636 0.327 0.243 0.) Yea r 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 11% 0.308 0.333 0.693 0.285 0.783 0.370 0.658 0.209 0.266 0.112 0.104 0.145 0.402 0.195 0.352 0.410 0.534 0.352 0.088 0.130 0.191 0.480 0.535 0.123 16% 0.376 0.552 0.419 0.111 0.Table A-1: The Present Value of One Rupee (Contd.855 0.314 0.257 0.456 0.862 0.579 0.178 0.901 0.279 0.893 0.613 0.095 18% 0.482 0.333 0.718 0.731 0.140 15% 0.756 0.743 0.205 0.847 0.084 19% 0.659 0.507 0.609 0. Financial Management McGraw- 9-69 .335 0.390 0.833 0.437 0.675 0.233 0.354 0.261 0.078 0.706 0.317 0.249 0.572 0.434 0.237 0.286 0.141 0.400 0.295 0.258 0.287 0.162 0.476 0.425 0.797 0.263 0.567 0.840 0.227 0.176 0.516 0.183 13% 0.270 0.187 0.731 0.116 0.361 0.137 0.160 14% 0.162 0.208 0.376 0.877 0.124 0.209 12% 0.093 0.593 0.125 0.296 0.482 0.208 0.182 0.351 0.163 0.099 0.148 0.712 0.215 0.284 0.305 0.593 0.322 0.769 0.497 0.229 0.404 0.641 0.592 0.065 © Tata McGraw-Hill Publishing Company Limited.694 0.160 0.181 0.624 0.247 0.812 0.452 0.225 0.135 0.168 0.432 0.074 20% 0.456 0.

134 13.580 5.942 2.394 9.630 4.783 2.747 6.230 7.814 7.020 7.971 1.161 7.624 3.296 11.100 4.242 6.355 4.859 2.139 7.348 12.530 9.255 12.536 7.384 8.118 5% 0.329 5.759 2.941 3.452 5.247 6.210 6.886 2.368 11.795 6.546 4.387 4.722 8.786 8.787 10.486 5.418 6.312 3.990 1.487 3.212 4.712 7% 0.926 1.983 9.623 5.560 9% 0.253 9.601 6.723 3.566 9.902 4.899 10.865 2% 0.076 5.733 7.833 2.970 2.487 7.995 6.061 10% 0.829 3.240 3.887 8.335 5.582 6.004 13.853 5.786 6.791 4.913 2.326 8.360 7.954 10.746 9.108 7.515 7.471 10.775 3.673 3.385 9.106 12.909 1.971 6.993 4.577 3.849 3% 0.943 8.917 1.563 11.499 7.962 1.145 6.531 3.435 8.868 5.108 8% 0.802 7.389 5.767 5.808 4.170 3.943 1.472 7.980 1.736 2.713 5.535 5.111 8.890 4.986 10.465 4.917 5.952 1. Financial Management McGraw- 9-70 .103 7.306 8.002 6.024 7.367 7.935 1.635 11.606 © Tata McGraw-Hill Publishing Company Limited.759 6.295 9.244 8.863 9.495 6.710 7.380 6% 0.884 3.808 2.938 4% 0.575 11.417 6.728 6.033 5.463 7.358 8.728 8.904 8.805 7.206 5.760 9.Table A-2 : The Present Value of an Annuity of One Rupee Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1% 0.786 8.853 9.717 4.162 8.

589 3.327 4.855 3.566 2.564 4.793 4.324 18% 0.889 4.234 5.696 4.462 14% 0.910 5.713 2.421 5.750 6.410 3.687 5.743 3.328 5.798 3.111 4.799 5.833 1.605 2.140 2.918 6.901 1.537 5.802 4.439 4.893 1.517 3.914 3.078 4.889 6.146 5.288 4.842 6.444 3.207 6.855 1.487 4.339 4.352 3.690 2.847 1.453 5.528 2.974 3.605 3.885 1.423 4.199 3.626 2.812 4.451 4.659 4.690 3.106 2.) Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 11% 0.533 4.303 6.197 5.019 5.283 2.142 15% 0.122 5.492 6.850 1.837 4.675 © Tata McGraw-Hill Publishing Company Limited.246 2.008 5.628 6.833 5.468 5.968 5.132 5.160 4.487 4.192 4.982 7.Table A-2: The Present Value of an Annuity of One Rupee (Contd.216 5.946 5.231 4.433 3.862 1.424 6.547 2.039 4.575 17% 0.877 1.938 6.303 4.656 4.811 13% 0.494 4.163 4.002 6.660 5.426 5.191 12% 0.605 4.102 3.784 4.037 3.847 16% 0.706 3.991 3.174 2.611 4. Financial Management McGraw- 9-71 .207 4.583 5.685 4.229 5.274 3.647 2.712 5.210 2.342 5.058 3.639 3.668 2.322 2.361 2.585 2.876 20% 0.772 5.611 4.326 3.922 4.998 4.607 4.870 1.344 4.118 5.639 4.029 5.194 6.589 2.031 4.498 3.650 5.715 4.092 9%1 0.836 4.954 4.724 5.402 3.988 5.127 3.

tax saving due to investment allowance 50000 10000 40000 6250 (5000*25%)*50% Format 2: Determination of Cash Inflows: Single Investment Proposal (t = 1 10) Particulars 1 Cash sales revenues 42000 Less: Cash operating cost 32000 Less: Depreciation 6000 Taxable income 4000 Less: Tax (50%) 2000 Earning after taxes 2000 Plus: Depreciation 6000 Cash inflows after tax (CFAT) 8000 2 32000 Years 3 32000 4 32000 . Financial Management McGraw- 40000 48000 9-72 . Cost of new machine 2. 10 42000 32000 42000 42000 42000 6000 6000 4000 4000 2000 2000 2000 2000 6000 6000 8000 8000 6000 4000 2000 2000 6000 8000 «.. «. «.. + Installation cost 3.Format 1: Cash Outflows of New Project [Beginning of the Period at Zero Time (t = 0)] a) No salvage 1. «. «« «. «« 6000 4000 2000 2000 6000 8000 Plus: Recovery of working capital (in10th year) © Tata McGraw-Hill Publishing Company Limited... «.. + Working capital requirements 4...

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