Q1. You are interested in replacing the heating system of your building.

If your
opportunity cost is 10%, which out of the following alternatives will you choose:

 A solar heating system which will cost USD 12,000 to install and USD 500
a year to run and will last forever
 A gas heating system will cost USD 5,000 to install, US 1,000 a year to run
and will last 20 years
 An oil heating system which will cost USD 3,500 to install and USD 1,200
to run and will last 15 years

Q2. You are a small company with limited access to capital. You have a capital
rationing constraint of INR 2,00,00,000. Which projects out of the following would
you accept and why?

Project Initial Investment (in NPV (in crores) IRR

crores)

A 0.5 0.35 21%

B 1 0.55 28%

C 1 0.5 19%

D 1.5 0.7 24%

E 0.5 0.2 20%

Q3. IIMU needs a software for timely preparation of control reports. One such
software can be procured for Rs. 15 lakhs with a operation and maintenance cost of
Rs.2,50,000 per year. If this software is adopted, there will be a savings in clerical
costs of Rs.6,00,000 per annum and other savings of Rs. 1,00,000 per annum. The
software has an economic life of five years and can be depreciated at the rate of
33.33 per cent per year per the WDV (accelerated depreciation) method. After five
years, the software can be disposed off for value equal to its book value. Tax rate is
50%. What would be the projected cash flows of this capital budgeting proposal
for submission to the Board of Directors?

Ans: -15 4.75 3.92 3.36 2.99 4.72

Q4. ABC is planning to buy an equipment to manufacture product that would cost
Rs. 1 lakh and would last 5 years. Expected sale price is Rs.10,000, net of capital
gains tax and rate of depreciation is 20% WDV.  It produces a product which can
be sold at Rs.4 per unit. Regardless of the level of production, manufacturer will
incur a cost of Rs.25,000 each year if the project is undertaken. Additional working
capital requirement is Rs.50,000. The overhead costs allocated would be Rs.5,000.
The variable costs are estimated to be Rs.2 per product. The manufacturer
estimates he can sell 75,000 products each year. Tax rate is 35%, Cost of capital is
20%. Should the equipment be purchased?

Ans: 132,295
Q5. A company is looking to buy a new machine for Rs 9 lakhs. The machine will
serve for 3 years and will be depreciated on a straight line basis to zero. The
machine will generate revenue of 6 lakhs for the company each year for the 3
years. The costs of generating the revenue will be 2 lakhs each year. The machine
can be sold for 2 lakhs at the end of the 3 years. If tax rate is 35% and cost of
capital is 10% then show whether buying the machine is worthwhile or not.

Ans. 1.054

Q6. You run a charity organization which has been able to convince Bianca
Chopra to perform a stage show for you and the proceeds from the show would be
donated to your charity. However, she has agreed to do the show once any time
over the next 6 years. You believe that her popularity will grow with time and
hence if you wait, you get more money through ticket sales. The following table
lists the expected earnings for your NGO if the show is done in each of the years.

Year 2018 2019 2020 2021 2022 2023 2024

Cash-Flow 100 125 150 173 196 219 239
a. Assuming that you can anyway borrow money at 10%, which year should you
ask Bianca to do the show for you? (2 marks)

b. Assume that you waited till 2020. The interest rate in the market increased
during that time and now you can borrow money at 12%. Which year would you
now ask Bianca to conduct the charity show in? (2 marks)

Q7. You as an analyst of an all equity firm Micro corp. is evaluating an investment
in a project with the following cashflows

Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr5 Yr 6 Yr 7 Yr 8
-3000 0 0 0 0 0 0 0 10000

You have to choose an appropriate discounting rate for the project and evaluate the
project. You have the following information.

a. Very recently two other all equity firms have used 18% as the discounting rate
for projects of similar risk.

b. The WACC (i.e., cost of equity for the all equity firm) of Micro corp. is 12%

(You have to provide one NPV as your final answer. If you choose both the
discounting rates and produce two NPV's in your final answer, you will get zero
credit for the question)
Q8. IIMU has two large printing/photocopying machines in the reprography

section. With the advent of technology, IIMU realizes that a large number of

students have started reading class material on their phones and laptops and hence

do not need to print or photo-copy class material as much. Hence, IIMU decides to

dispose of one of the machines. To dispose of a machine, IIMU could sell it

directly or collect an annual rent on it forever. Machine A could either be sold for

Rs. 60,000/- or rented out for an annual rent (assume no repair costs) of 5000/-

forever. If the machine is continued, it has an operating cost of 10,000 in year 1

which keeps growing at 4% forever. Machine B could either be sold for Rs.

40,000/- or it could be rented out for Rs. 3800/- per year forever (no repair costs).

If machine B is continued though, it would cost 12,000 to operate in year 1 and the

operating cost keeps increasing at 3%. The cost of capital for IIMU is 10%. Which

machine should IIMU dispose of?