Requirement (a)

Year 0 1
Sales 700.00
Less:
Raw material costs 280.00
Variable manufacturing cost 140.00
Fixed annual operating and maintenance costs 2.50
Variable selling expenses 105.00
Depreciation expense (Note 1) 150.00
Income before taxes 22.50
Tax expense 6.75
Net income after taxes 15.75
Add: Depreciation expense 150.00
Post tax operating cash flows (A) 165.75

Cost of equipment - 600.00

Working capital investment - 70.00 - 15.00
Liquidation of working capital investment (net of Rs.5 million loss)
Tax advantage for loss of working capital (Rs.5 million*30%)
Net receipt on sale of equipment (note 2)
Post tax non-operating cash flows (B) - 670.00 - 15.00

Post tax Incremental cash flows (A + B) - 670.00 150.75

Requirement (b)

Year Cash flows

0 - 670.00
1 150.75
2 155.75
3 226.06
4 212.23
5 341.70
Net present value

NPV of the project is -$33.97

 Note 1: Calculation of Depreciation expe
(Rs. in millions)

2 3 4 5 Year
850.00 1,100.00 1,000.00 800.00 0
1
340.00 440.00 400.00 320.00 2
170.00 220.00 200.00 160.00 3
2.50 2.50 2.50 2.50 4
127.50 165.00 150.00 120.00 5
112.50 84.38 63.28 47.46
97.50 188.13 184.22 150.04 Note 2: Post tax salvage value of equipm
29.25 56.44 55.27 45.01
68.25 131.69 128.95 105.03 Book value of the equipment at the end
112.50 84.38 63.28 47.46 Salvage value of equipment at the end o
180.75 216.06 192.23 152.49 Loss on sale of equipment
Tax advantage for loss on sale of equipm

- 25.00 10.00 20.00 Post tax salvage value of equipment

75.00
1.50
112.71
- 25.00 10.00 20.00 189.21

155.75 226.06 212.23 341.70

Present value Present value

of Re.1 at 18% of cash flows
1 - 670.00
0.84746 127.75
0.71818 111.86
0.60863 137.59
0.51579 109.47
0.43711 149.36
present value - 33.97
Note 1: Calculation of Depreciation expense and Book value
(Rs. in millions)
Beginning book value of Depreciation Ending book value of
equipment expense equipment
600.00
600.00 150.00 450.00
450.00 112.50 337.50
337.50 84.38 253.13
253.13 63.28 189.84
189.84 47.46 142.38

Note 2: Post tax salvage value of equipment

Book value of the equipment at the end of 5 years 142.38 million

Salvage value of equipment at the end of 5 years 100.00 million
Loss on sale of equipment 42.38 million
Tax advantage for loss on sale of equipment 12.71 million

Post tax salvage value of equipment 112.71 million