CAPITAL BUDGETING PROBLEMS

Solution:- 1

Initial Investment
a) Payback Period
amount

Year Cash Inflow Cumulative

1 300,000 300,000
2 300,000 600,000
3 450,000 1,050,000
4 450,000 1,500,000
5 750,000 2,250,000

Payback Period = 3 + 1,50,000 / 4,50,000

3.33 Years

b) Net Present Value

Present Value
Year Cash Inflow Factor
(10%)
1 300,000 0.909
2 300,000 0.826
3 450,000 0.751
4 450,000 0.683
5 750,000 0.621

Net Present Value ( NPV) =

c) Profitability Index = Total PV of Cash Inflow / Cash Ou

16,31,550 / 12,00,000

d) Discounting Payback Period

Present Value
Year Cash Inflow
Factor (10%)
1 300,000 0.909
2 300,000 0.826
3 450,000 0.751
4 450,000 0.683
5 750,000 0.621

Payback Period = 4 + 34,200 / 4,65,750

4.07 Years

Solution:- 2

Initial Investment
a) Pay Back
amount

Year Proposal X Proposal Y

1 100,000 650,000
2 250,000 600,000
3 350,000 600,000
4 550,000 575,000
5 750,000 525,000
Total 2,000,000 2,950,000

4 + 2,50,000 /
Pay Back Period (X) =
7,50,000
 4.33 Years

2 + 2,50,000 /
Pay Back Period (Y) =
6,00,000
2.41 Years

b) Net Present Value X

Present Value
Year Cash Inflow Factor
(10%)
1 100,000 0.909
2 250,000 0.826
3 350,000 0.751
4 550,000 0.683
5 750,000 0.621

NPV = PV - COF
14,01,650 - 15,00,000
-98,350

Net Present Value Y

Present Value
Year Cash Inflow Factor
(10%)
1 650,000 0.909
2 600,000 0.826
3 600,000 0.751
4 575,000 0.683
5 525,000 0.621

NPV = PV - COF
 22,55,800 - 15,00,000
755,800

c) Profitability Index = Total PV of Cash Inflow / Cash Ou

X = 14,01,650 / 15,00,000

Y = 22,55,800 / 15,00,000

d) Internal Rate of Return X

Present Value
Year Cash Inflow Factor
(5 %)

1 100,000 0.952
2 250,000 0.907
3 350,000 0.864
4 550,000 0.823
5 750,000 0.784

NPV = Present Value - Cash Outflow

16,65,000 - 15,00,000
165,000

Lower Rate + NPV @ Lower Rate /

IRR = Difference between the PV Values
* Difference in the Rates

5 + 1,65,000 / 2,63,350 * 5
8.13%

Internal Rate of Return Y

 Present Value
Year Cash Inflow Factor
(35 %)
1 650,000 0.74
2 600,000 0.548
3 600,000 0.406
4 575,000 0.301
5 525,000 0.223

NPV = Present Value - Cash Outflow

13,43,550 - 15,00,000
-156,450

Lower Rate + NPV @ Lower Rate /

IRR = Difference between the PV Values
* Difference in the Rates
10 + 7,55,800 / 9,12,250 * 25
30.70%

Solution:- 3 Initial Outflow

A Year EBDT Depreciation

1 650,000 450,000
2 725,000 450,000
3 875,000 450,000
4 950,000 450,000
5 900,000 450,000
6 800,000 450,000

Depreciation = 27,00,000 / 6
 450,000

a) Pay Back Period = 3 + 7,20,000 / 8,00,000

3.9 Years

b) NPV =

Year Cash Inflow PV Factor @ 15%

1 590,000 0.869
2 642,500 0.756
3 747,500 0.657
4 800,000 0.571
5 765,000 0.497
6 695,000 0.432
4,240,000

NPV = PV of CI - CO
26,26,793 - 27,00,000
-73,207

c) ARR = Average Income / Average Investment * 100

EAT / No. of Years
15,40,000 / 6
256,667

Investment + Salvage Value / 2

27,00,000 + Nil / 2
1,350,000

2,56,667 / 13,50,000 * 100

19.01%

Solution:- 4
Total cash outflow of machine is:
Cost 500,000
Add: Working Capital 75,000
575,000

The cash inflow are as follows:

Particulars Rs. Rs.
Sales 1,500,000
Less: Expenses
Material 450,000
Labour 550,000
Other Expenses 150,000 1,150,000
EBDT/PBDT 350,000
Less: Depreciation
(5,00,000 / 5) 100,000
EBT/PBT 250,000
Less: Tax (30%) 75,000
EAT/PAT 175,000
Add: Depreciation 100,000
Cash Inflow 275,000

Present Values of Cash flows

1-5 years @ 12% P.V. Factor = 2,75,000 * 3.605
PV Cash Inflow 991,375
Add: Working Capital Recovery
(75,000 * .567) 42,525
PV Cash Inflow 1,033,900
Less: Cash Outflow 575,000
NPV 458,900
MS

1,200,000

+ 1,50,000 / 4,50,000
3.33 Years

Present Value
1/1.10
Cash Inflow

272,700
247,800
337,950
307,350
465,750
1,631,550

Total PV of Cash Inflow - Cash Outflow

16,31,550 - 12,00,000
431,550
 tal PV of Cash Inflow / Cash Outflow

16,31,550 / 12,00,000
1.36

Present Value Cumulative

Cash Inflow Cash Inflow
272,700 272,700
247,800 520,500
337,950 858,450
307,350 1,165,800
465,750 1,631,550
1,631,550

4 + 34,200 / 4,65,750
4.07 Years

1,500,000

Cumulative X Cumulative Y
100,000 650,000
350,000 1,250,000
700,000 1,850,000
1,250,000 2,425,000
2,000,000 2,950,000
 Present Value
1 / 1.10
Cash Inflow

90,900
206,500
262,850
375,650
465,750
1,401,650

0 - 15,00,000

Present Value
Cash Inflow

590,850
495,600
450,600
392,725
326,025
2,255,800
0 - 15,00,000

tal PV of Cash Inflow / Cash Outflow

14,01,650 / 15,00,000
0.93

22,55,800 / 15,00,000
1.503

Present Value
1/ 1.05
Cash Inflow

95,200
226,750
302,400
452,650
588,000
1,665,000

nt Value - Cash Outflow

6,65,000 - 15,00,000
165,000

Rate + NPV @ Lower Rate /

nce between the PV Values
Difference in the Rates

1,65,000 / 2,63,350 * 5
8.13%
 Present Value
1/1.35
Cash Inflow

481,000
328,800
243,600
173,075
117,075
1,343,550

nt Value - Cash Outflow

3,43,550 - 15,00,000
-156,450

Rate + NPV @ Lower Rate /

nce between the PV Values
Difference in the Rates
5,800 / 9,12,250 * 25
30.70%

2,700,000

EBT Tax (30%) EAT Depreciation Cash Inflow

200,000 60,000 140,000 450,000 590,000

275,000 82,500 192,500 450,000 642,500
425,000 127,500 297,500 450,000 747,500
500,000 150,000 350,000 450,000 800,000
450,000 135,000 315,000 450,000 765,000
350,000 105,000 245,000 450,000 695,000
1,540,000 4,240,000
000 / 8,00,000

PV Cash Inflow
512,710
485,730
491,108
456,800
380,205
300,240
2,626,793

3 - 27,00,000

Income / Average Investment * 100

= Average Income

nt + Salvage Value / 2 Average Investment

/ 13,50,000 * 100
Cumulative
Cash Inflow
590,000
1,232,500
1,980,000
2,780,000
3,545,000
4,240,000