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Solution of Pb 20.14 (5ed) and Pb 20.

27(6th ed)

Current Budgeted ROCE = Return / Capital Employed


(330 / 1,155) x 100

28.57 %

Capital employed = SHE + Total Liab OR


Capital employed = Total assets

W-1: Capital Employed:


1 Net Current assets 375
2 Net Fixed Assets:
Cost of Fixed assets 1,500
Less: Accumulated dep (720) 780
Capital Employed 1,155

Required a) Suggestion for 4 transactions:

Transaction A:
Profit decrease by 8,000 due to cash discount given to customer.

Revised ROCE = Return / Capital Employed


(322 / 1,125) x 100

28.62 %

Return: Capital Employed:


Budgeted profit 330 Net Current assets
Less: Cash discount (8) Budgeted Net current asset
322 Less; decrease in debtors

Net Fixed Assets:


Cost of Fixed assets 1,500
Less: Accumulated dep (720)
Capital Employed
Transaction B:

Revised ROCE = Return / Capital Employed


(345 / 1,195) x 100

28.87 %

Return: Capital Employed:


Budgeted profit 330 Net Current assets
add: Increase in contribution 15 Budgeted Net current asset
345 Add: Increase in stock

Net Fixed Assets:


Cost of Fixed assets
Less: Accumulated dep

Capital Employed

Transaction C:

Revised ROCE = Return / Capital Employed


(320 / 1,095) x 100
29.22 %

Return: Capital Employed:


Budgeted profit 330 Net Current assets
Less: Loss due to sale of fixed asset (25) Budgeted Net current asset
Less: Reduction in profit (45)
add: Reduction in depreciation b/c Net Fixed Assets:
asset is sold 60 Cost of Fixed assets
RETURN 320 Less: Accumulated dep

Capital Employed
Assumption:
Loss on sale of fixed assets: Cash received from sale of asset is remitted to
Cost of fixed asset 300,000 HO, that is why there is no impact on increase
Less: Accumulated depreciation of cash on net current asset.(Book) because,
(300,000 x 4/5) (240,000) Cash is normally hold at head office.

Written Down Value 60,000


Sold at 35,000
Loss on sale of FA 25,000

Transaction D:

Revised ROCE = Return / Capital Employed


(347 / 1,299) x 100

26.67 %

Return: Capital Employed:


Budgeted profit 330 Net Current assets
add: Decrease in revenue cost (Inc in CM) 52.50
less: Increase in depreciation (180 / 5 y) (36) Fixed Asset:
347 Cost of Fixed asset (1,500+180)
Less: Accumulated dep (720 + 36)

Assumption:
Cash paid on purchase on asset is provided by
HO, that is why there is no impact on decrease
of cash on net current asset.(Book)

Required no. 2: Evaluation of 4 non - routine transactions are in the best interest of group:

Transaction
Year Cash Inflow Cash outflow Net Cash PV factor NPV
Flow 15%

A 1 30 (8) 22 0.8696 19.1312


2-4 (8) 1.9854 (15.8832)
NPV 3.2480
OR

A 1 30 (8) 22 0.8696 19.1304


2 - (8) (8) 0.7561 (6.0491)
3 - (8) (8) 0.6575 (5.2601)
4 - (8) (8) 0.5718 (4.5740)
3.2471

Rs. 30 inflow cash is due to decrease in account receivable in year 01 and decrease of Rs 8
is due to cash discount given to customer.

Transaction
Year Cash Inflow Cash outflow Net Cash PV factor NPV
Flow 15%

B 1 15 (40) (25) 0.8696 (21.7400)


2-4 15 15 1.9854 29.7810
NPV 8.0410

Increase in contribution margin per year and Increase in stock in first year,resulting decrease
in cash

1 15 (40) (25) 0.8696 (21.7391)


2 15 - 15 0.7561 11.3422
3 15 - 15 0.6575 9.8627
4 15 - 15 0.5718 8.5763
8.0421

Transaction
Year Cash Inflow Cash outflow Net Cash PV factor NPV
Flow 15%

C - 35 - 35 1.0000 35.0000
1 (45) (45) 0.8696 (39.1320)
NPV (4.1320)

Sale of asset is made at the start of the year. On time line diagram the value of the year is zero
at the start of the year as well PV factor is 01. The profit reduce after one year that is why it
is taken at 0.8696 (discounted value)
Transaction
Year Cash Inflow Cash outflow Net Cash PV factor NPV
Flow 15%

D - (180) (180) 1.0000 (180.0000)


1- 5 52.50 52.50 3.3520 175.9800
NPV (4.0200)

0 - (180) (180) 1.0000 (180.0000)


1 52.50 - 52.5000 0.8696 45.6522
2 52.50 - 52.5000 0.7561 39.6975
3 52.50 - 52.5000 0.6575 34.5196
4 52.50 - 52.5000 0.5718 30.0170
5 52.50 - 52.5000 0.4972 26.1018
(4.0119)

CONCULSION:
Transaction A and B yeild positive NPV, therefore it will be undertaken
Transaction C and D yeild negative NPV, therefore it will be rejected.
375
(30) 345

780
1,125
375
40 415

1,500
(720) 780

1,195
375

1,200
(480) 720

1,095

ale of asset is remitted to


is no impact on increase
asset.(Book) because,
at head office.

375

,500+180) 1,680
ep (720 + 36) (756) 924
1,299
Solution of Ques. 20.18 (5th ed) + 20.19(6th ed)

Aromatic Plant:

Particulars 2001 2002 2003 2004

Net Cash in flow, before tax (in M) 2.4 2.4 2.4 2.4
Less: Depreciation (6.4 / 4) (1.6) (1.6) (1.6) (1.6)

Net Profit before I/ Tax(Accounting Profit) 0.8 0.8 0.8 0.8


Less: Cost of Capital (16%) of WDV (1.02) (0.77) (0.51) (0.26)

Residual Income (DCF Profit) (0.22) 0.03 0.29 0.54

Summary:
Benefit obtain from Aromatic plant 2.4 2.4 2.4 2.4

Less: Cost on Aromatic Plant


a) depreciation cost (1.60) (1.60) (1.60) (1.60)
b) Cost of investment (1.02) (0.77) (0.51) (0.26)
Total Cost (2.62) (2.37) (2.11) (1.86)

Net Result (0.22) 0.03 0.29 0.54

Calculation of WDV of Aromatic Plant


Cost / WDV of aromatic plant 6.4 6.4 4.8 3.2
Less: Depreciation expenses (1.6) (1.6) (1.6)

WDV at the Opening of the year 6.4 4.8 3.2 1.6

WDV means Capital Employed.

RETURN ON CAPITAL EMPLOYED:

12.50 16.67 25.00 50.00


ROCE = Net Income / Capital Employed % % % %
Capital Employed = Net Current asset + BV of fixed asset

Zomin Plant:

Particulars 2001 2002 2003 2004

Net Cash in flow, before tax (in M) 2.6 2.2 1.5 1.0
Less: Depreciation (5.2 / 4) (1.3) (1.3) (1.3) (1.3)

Net Profit before I/ Tax 1.3 0.9 0.2 (0.3)


Less: Cost of Capital (16%) of WDV (0.83) (0.62) (0.42) (0.21)

Residual Income 0.47 0.28 (0.22) (0.51)

Calculation of WDV of Aromatic Plant


Cost / WDV of aromatic plant 5.2 5.2 3.9 2.6
Less: Depreciation expenses (1.3) (1.3) (1.3)

WDV at the Opening of the year 5.2 3.9 2.6 1.3

RETURN ON CAPITAL EMPLOYED:

ROCE = Net Profit / WDV 25.00 23.08 7.69 (23.08)


ROCE = Net Income / Capital Employed % % % %

Capital Employed = Net Current asset + BV of fixed asset


Total

9.6
(6.4)

3.2
(2.56)

0.64
Total

7.3
(5.2)

2.1
(2.08)

0.02
Aromatic

PV of Cash outflow -6.4 1 -6.4

PV of Cash inflow 2.4 0.86 2.07


2.4 0.74 1.78
2.4 0.64 1.54
2.4 0.55 1.33

315,634