CAPITAL BUDGETING NUMERICAL

1) Khurana Industries Ltd. is considering investing in a project for which the capital outlay is Rs. 200,000. The
depreciation is to be provided on Straight Line Method basis. The corporate tax rate is 30%. Using Net Present
Value method you are required to evaluate the project. WACC is 15% and annual operating profits before
charging depreciation is as follows –

Year 1 2 3 4 5
PBDT 1,00,000 1,00,000 80,000 80,000 40,000

2) Amar Ltd. is considering investment in one of the mutually exclusive projects. Project P – initial investment Rs.
10 lakhs and will generate annual CFAT Rs. 3.50 lakhs for 5 years. Project Q - initial investment Rs. 12.50
lakhs and will generate CFAT Rs. 3 lakhs p.a. for 8 years. Which project should Amar Ltd. undertake assuming
a cost of capital of 10 %

3) Shubham Ltd. wants to install a large forging machine. Machine Yuva costs Rs. 50,000 and will generate
annual cash inflows of Rs. 20,000. Yuva has a useful life of 6 years and is expected to yield Rs. 2,000 scrap
value at the end of its life. Machine Guru costs Rs. 65,000 and generates cash inflows of Rs. 25,000 p.a. The
machine is expected to be useful for 10 years, with salvage value of Rs. 5,000. Both machines are depreciated
on straight line basis and tax rate is 40 % and hurdle rate is 10 %. Which machine should be purchased?

4) Aaron Ltd. is planning investment in fixed assets of Rs. 10 lakhs having useful life of 5 years. The project shall
generate sales of Rs. 15 lakhs in the 1st year and increase by 20% upto year 3 and thereafter by 10%. The
variable costs are 60% of sales and annual fixed costs Rs. 2 lakhs. Depreciation is charged on SLM basis with
salvage value Rs. 2 lakhs. Income Tax rate 30%. WACC 11%. Compute Simple payback period, Discounted
Payback period, NPV and PI.

5) Compute NPV, Internal Rate of Return and Profitability Index from the following cash-flows. Discount rate 13%

Year Cash flows Rs.

0 (7,00,000)
1 1,10,000
2 2,10,000
3 3,10,000
4 2,50,000
5 1,70,000

6) A new machine costs Rs. 100,000. The life of the machine is 10 years and has an expected salvage value of
Rs. 10,000 at the end of life. The annual operating cost of the machine is Rs. 10,000. It is expected to generate
revenues of Rs. 50,000 p.a. Cost of capital is 10%. Tax rate 30%. Compute simple payback period and advice
whether to purchase the machine? A similar machine is available with a simple payback of 4 years.
 Capital Budgeting
7) Kymera Ltd. has Rs. 10,00,000 allocated for investment purposes. The following indivisible proposals and
associated profitability indexes have been determined:

Project Investment Rs. Profitability Index

A 3,00,000 1.22
B 1,50,000 0.95
C 3,50,000 1.20
D 4,50,000 1.18
E 2,00,000 1.20
F 4,00,000 1.05

Which of the above investments should be undertaken? Assume opportunity cost of idle money is 10%.

8) Chamko Ltd. has Rs. 7 lakhs available for investment. It has four feasible investment opportunities. All these
investments are divisible, with cost of idle funds at 15%. Advice the management which projects be selected?

Project Initial Investment NPV

P 300,000 60,000
Q 200,000 50,000
R 250,000 150,000
S 600,000 180,000

9) Beta Ltd. is considering the acquisition of a computer system costing Rs. 50,000. The effective life of the
computer is expected to be 5 years. The company plans to acquire the same either by borrowing Rs. 50,000
from its bankers at 15% interest p.a. or by lease at Rs. 15,000 p.a.
The following further information is provided to you:
 The Principal amount of the loan will be paid in five (5) annual equal instalments.
 Interest, lease rentals, principal repayment are to be paid on the last day of each year.
 The computer will be depreciated on 25% WDV method and the same will be allowed for tax purposes.
 The company’s effective tax rate is 40% and the after tax cost of capital is 9%.
 The computer will be sold for Rs. 1,700 at the end of the 5th year. The commission on such sales is 9%
on the sale value and the same will be paid.
You are required to analyse the two proposals and decide the best alternative.

10) To reduce cost, a company has proposed to install a new machine for manufacturing useful component.

 Option-1 - Installation of semi-automatic machine involving annual fixed expenses of Rs. 22 lakhs and a
variable cost of Rs.18 per component manufactured.
 Option-2 - Installation of automatic machine involving an annual fixed cost of Rs. 40 lakh and variable cost
of Rs. 15 per component manufactured.
a) Find indifference point.
b) If annual requirement is 800,000 units, which machine would you advise the company to install?
 Capital Budgeting
11) Following are the data on a capital project being evaluated by the management of Xanadu Ltd.:

Particulars Project M Particulars Project M

Annual cost saving Rs. 40,000 Cost of capital ???
Useful life 4 years Cost of project ???
I.R.R. 15% Payback ???
Profitability Index (PI) 1.064 Salvage value Nil
NPV ???

Find the missing values considering the following table of discount factor only:

Discount factor 15% 14% 13% 12%

1st year 0.869 0.877 0.885 0.893
2nd year 0.756 0.769 0.783 0.797
3rd year 0.658 0.675 0.693 0.712
4th year 0.572 0.592 0.613 0.636
PVIFA (R %, 4 years) 2.855 2.913 2.974 3.038

12) A company is considering three methods of attracting customers to expand its business by undertaking - (A)
advertising campaign: (B) display of neon signs; (C) direct delivery service. The initial outlays are:

Project A B C
Investments (Rs.) 100,000 150,000 150,000

If A is carried out, but not B, it has an NPV of Rs. 125,000. If B is done, but not A, B has an NPV of Rs. 45,000.
However, if both are done, then NPV is Rs. 200,000. The NPV of the delivery system C is Rs. 90,000. Its NPV
is not dependent on whether A or B is adapted and the NPV of A or B does not depend on whether C is
adopted. Which of the investments should be made by the company if –

a) Firm has no budget constraint, and

b) The budgeted amount is only Rs. 250,000?

13) Database Ltd. has the following estimates of the present values of the future cash flows after tax associated
with the investment proposal, concerned with expanding the plant capacity. The plant expansion expects cost
of Rs. 300,000. Using probability approach, advice the company regarding feasibility of the project. The present
value of future CFAT:

With expansion Without expansion Probability

3,00,000 2,00,000 0.2
5,00,000 2,50,000 0.4
9,00,000 3,50,000 0.4
 Capital Budgeting
14) Prithvi Ltd. is a manufacturer of variety of electrical equipment. The existing machine is based on old
technology. In order to improve the quality of the product and bring down operating cost, the management is
planning to replace the existing machine with a new one based on latest technology. Following information:

Existing machine: New replacement machine:

Purchased 5 years ago Capital cost Rs. 10,00,000
Remaining life 5 years Estimated useful life 5 years
Salvage value at end of life Rs. 20,000 Estimated salvage value Rs. 100,000
Current book value Rs. 300,000
Realisable market value Rs. 350,000
Annual depreciation: Rs. 28,000

Due to replacement sales shall increase by Rs. 100,000 p.a., operating expenses would fall by Rs. 200,000 per
year. It would require additional inventory Rs. 200,000 and additional payables by Rs. 50,000. Tax rate is 30%
(including capital gains) and cost of capital of 12%. Depreciation is SLM method. Advice the company

15) A hospital wishes to purchase a diagnostic machine costing Rs. 80,000. The projected life of the machine is 8
years and has an expected salvage value of Rs. 6,000 at the end of 8 years. The annual operating cost of the
machine is Rs. 7,500. It is expected to generate revenues of Rs. 40,000 p.a. for 8 years. Presently, the hospital
is outsourcing the diagnostic work and is earning commission income is Rs. 12,000 p.a. Cost of capital is 10%.
Tax rate 30%. Advise - Whether the hospital should purchase the machine? Use NPV and P. I. method.

16) Tikdam Ltd. is considering investment in one of the two proposals. Project A involves investment Rs. 150,000
and project B needs Rs. 170,000. The probability approach is used for evaluation. The current yield on treasury
bills is 5%. Which project should be accepted? Expected values of net cash flows with their probability are:

Year Project A Project B

Cash Flow Prob. Cash Flow Prob.
1 90,000 0.8 90,000 0.9
2 1,00,000 0.7 90,000 0.8
3 1,10,000 0.5 1,00,000 0.6

17) Sydney Ltd. is considering two mutually exclusive projects, following are three possibilities for cash inflows –

Situation Prob. CFAT Rs. (A) CFAT Rs. (B)

Good 0.30 600 500
Normal 0.40 400 400
Bad 0.30 200 200

Which project should be accepted, considering risk parameter for decision making.
 Capital Budgeting
18) Elite Cooker Company is evaluating three investment situations: (1) produce a new line of aluminium skillets,
(2) expand its existing cooker line to include several new sizes, and (3) develop a new, higher-quality line of
cookers. If only the project in question is undertaken, the expected present values and the amounts of
investment required are:

Project Investment required Present value of Future Cash-Flows

1 200,000 290,000
2 115,000 185,000
3 270,000 400,000

If projects 1 and 2 are jointly undertaken, there will be no economies; the investments required and present
values will simply be the sum of the parts. With projects 1 and 3, economies are possible in investment
because one of the machines acquired can be used in both production processes. The total investment
required for projects 1 and 3 combined is Rs. 440,000. If projects 2 and 3 are undertaken, there are economies
to be achieved in marketing and producing the products but not in investment. The expected present value of
future cash flows for projects 2 and 3 is Rs. 620,000. If all three projects are undertaken simultaneously, the
economies noted will still hold. However, Rs. 125,000 extension on the plant will be necessary, as space is not
available for all three projects. Which project or projects should be chosen?

19) The management of a firm is considering an investment project costing Rs. 15,00,000 and it will have a scrap
value of Rs. 100,000 at the end of the its 5 years life. Machine transportation charges are Rs. 50,000 and
installation charges are expected to be Rs. 250,000. Annual revenue is expected to be Rs. 17,00,000 and
annual operating expenses are estimated to be material Rs. 700,000. Depreciation at 25% WDV and income
taxes at 30%. Calculate CFAT and NPV and decide feasibility of the project. (Discount Factor = 12%)

20) Rajan Electronics wishes to start new plant. A detailed feasibility analysis provided the following information -

Land Cost (incurred at the start of year 1) Rs. 2 lakhs

Buildings (to be acquired at the end of year 1) Rs. 3 lakhs
Machinery (installed at the end of year 2) Rs. 10 lakhs
Working capital (needed at the start of year 3) Rs. 5 lakhs

Actual production shall commence at start of year 3 and will continue for 5 years.
Estimated Sales Rs. 24 lakhs
Estimated Variable Costs Rs. 8 lakhs
Fixed costs (excl. depreciation) Rs. 5 lakhs
Depreciation on assets p.a. Rs. 2 lakhs
Salvage value of Fixed assets (at end of life) Rs. 5 lakhs

Cost of capital 10% and Tax rate applicable 30%.

Advice whether the project should be accepted? Use NPV method.

 Capital Budgeting
21) Fixed assets required for a capital project is Rs. 100 lakhs with working capital Rs. 40 lakhs. Other details are –
 Production and sale quantity – 100000 units p.a. for 5 years
 Selling price Rs. 150 per unit, P/V ratio 50%, Fixed Costs (excl. depreciation) Rs. 15 lakhs p.a.
 Depreciation 20 % WDV. Salvage value equal to WDV after 5 years
 Tax rate 40%, Life 5 years, Cut-off rate 12%

Compute NPV and evaluate feasibility of the project.

22) Chandu Ltd. is considering the possibility of manufacturing a particular component which is being imported.
The manufacture of this component would call for an investment of Rs. 750,000 in a new machine besides an
additional investment of Rs. 50,000 in working capital. The life of the machine would be 10 years with a salvage
value of Rs. 50,000. The estimated PBDT would be Rs. 180,000 p.a. The income-tax rate is 35%. The
company’s expected ROI is 10%. Depreciation is considered on straight line system. Whether investment
feasible?

23) Robin-Hood Ltd. wants to replace its old machine with a new automatic machine. Two models X and Y are
available at the same cost of Rs. 5 lakhs each. Salvage value of the old machine is Rs. 1 lakh. The utilities of
the existing machine can be used if the company purchases X. Additional cost of utilities to be purchased in
that case are Rs. 1 lakh. If the company purchases Y then all the existing utilities will have to be replaced with
new utilities costing Rs. 2 lakhs. The salvage value of the old utilities will be Rs. 0.20 lakhs. Compute the cash
outflows at the start of the project.

24) An oil company proposes to install a pipeline for transport of crude from wells to refinery. Investments and
operating costs of pipelines vary for different sizes of pipelines. The following details have been conducted:

Pipeline diameter (in inches) 3 4 5 6 7

Investment required (Rs. lakhs) 16 24 36 64 150
Gross savings in operating costs before depreciation (Rs. lakhs) 5 8 15 30 50

The estimated life of the installation is 10 years. The oil company's tax rate is 50%. There is no salvage value
and straight line rate of depreciation is followed. Calculate the net savings after tax and cash flow generation
and recommend there from, the largest pipeline to be installed, if the company desires a 15% post-tax return.
Also indicate which pipeline will have the shortest payback.