Department of Management Studies

Faculty of Business Studies

BBA 9th Batch 1st Year 2nd Semester -2019
Course Code # MGT 108, Principles of Finance

COVID-19 :Creative Assignment

Mark -10
Bela,Chief Financial Officer of Clark Upholstery Company, expects the firm’s net operating profit after
taxes for the next 5 years to be as shown in the following table.

Year Net Operating Profit after Taxes

I Tk100,000
2 Tk150,000
3 Tk200,000
4 Tk250,000
5 Tk320,000

Bela is beginning to develop the relevant cash flows needed to analyze whether to renew or replace
Clark’s only depreciable asset, a machine that originally cost Tk30,000,has a current book value of zero,
and can now be sold for Tk20,000.(Note:because the firm’s only depreciable asset is fully depreciated –
its book value is zero-its expected operating cash inflows equal its net operating profit after taxes).He
estimates that at the end of 5 years , the existing machine can be sold to net Tk2000 before taxes.Bela
plans to use the following information to develop the relevant cash flows for each of the alternatives.

Alternative-1: Renew the existing machine at a total depreciable cost of Tk90,000. The renewed
machine would have a 5-year usable life and would be depreciated using straight line method over 5
years, zero salvage value. Renewing machine would result in the following projected revenues and
expenses excluding depreciation and interest.

Year Revenues Expenses

(Excl.Depreciation and Interest)
I Tk1,000,000 Tk801,300
2 Tk1,175,000 Tk884,200
3 Tk1,300,000 Tk918,100
4 Tk1,425,000 Tk943,100
5 Tk1,550,000 Tk968,100

The renewed machine would result in an increased investment in working capital of Tk15,000. At the
end of 5 years , the machine could be sold to net Tk8000 before taxes.
Alternative-2: Replaced the existing machine with a new machine that cost Tk110,000 and requires
installation costs of Tk10,000.The new machine would have 5-year usable life and would be depreciated
using straight line depreciation method, no salvage value. The firm’s projected revenues and expenses
(excluding depreciation and interest), if it acquires the machine, as follows.

Year Revenues Expenses

(Excl.Depreciation and Interest)
I Tk1,000,000 Tk764,500
2 Tk1,175,000 Tk839,800
3 Tk1,300,000 Tk914,900
4 Tk1,425,000 Tk989,900
5 Tk1,550,000 Tk998,900

The new machine would result in an increased investment in net working capital of tk22,000.At the end
of 5 years , the new machine could be sold to net Tk25,000 before taxes.

The firm subject to 40% tax rate & cost of capital is 20%.

WHAT TO DO:

a) Calculate the initial investment associated with each of Clark Upholstery’s Alternatives.
b) Calculate the incremental operating cash inflows associated with each of Clark’s Alternatives.
c) Calculate the terminal cash flow at the end of year 5 associated with each of Clark’s Alternatives.
d) Use your finding in parts a,b and c to depict on a time line the relevant cash flows associated
with each of Clark’s Alternatives.
e) Solely on the basis of your comparison of their relevant cash flows, which alternative appears to
be better? Why.
f) Calculate Payback period, NPV & IRR of each alternatives and make & justify you
recommendation for Clark.

Instructions:

Hand written PDF copy mail to_cmia9906@gmail.com, before 5 days of final EXAM.