SIESCOMS / SIESSBS, Navi Mumbai

Problems and Cases – Capex Project Appraisal

Numerical Problems
1) Aram Ltd. purchased machinery worth Rs.10 lakhs having five years life and scrap value of Rs.1 lakh at the
end of its life. Its expected profit after tax from the project using same machinery is Rs.3 lakhs per annum.
You are required to calculate Average Rate of Return for the project. Also calculate payback period of the
project.

2) Box Ltd. purchased machinery worth Rs.15 lakhs having five years life and scrap value of Rs.3 lakhs at the
end of its life. Its expected profit after tax from the project using same machinery is as under:
Years Profit after tax (Rs. in lakhs)
1 02
2 03
3 04
4 05
5 06
You are required to calculate Average Rate of Return for the project. Also calculate payback period of the
project.

3) Cox Ltd. purchased machinery worth Rs.35 lakhs having five years life and scrap value of Rs.5 lakhs at the
end of its life. Its expected profit after tax from the project using same machinery is as under:
Years Profit after tax (Rs. in lakhs)
1 12
2 10
3 08
4 07
5 06
You are required to calculate:
a) Average Rate of Return for the project.
b) Simple payback period of the project.
c) Average pay back period of the project.
d) Discounted payback period if relevant cost of capital is 10%. Present value factors are 0.909, 0.826,
0.751, 0.683, 0.621, and 0.564.

4) Dominos Ltd. wants to implement a project having initial outlay Rs.250000. Expected life of the project is
seven years and scrap value Rs.40000. Annual profit after tax is expected as Rs.40000, Rs.50000, Rs.60000,
Rs.70000, Rs.60000, Rs.50000, Rs.40000. Relevant Cost of Capital is 12% and PVF are 0.893, 0.797,
0.712, 0.636, 0.567, 0.507, 0.452. Calculate NPV and PI.

5) Excel Ltd. wants to implement a project having initial outlay Rs.700000. Expected life of the project is
seven years and scrap value is nil. Annual cash inflows are expected as Rs1.40000, Rs.150000, Rs.160000,
Rs.170000, Rs.160000, Rs.150000, and Rs.140000. Relevant cost of capital is 10%. Present value factors
are 0.909, 0.826, 0.751, 0.683, 0.621, 0.564, 0.513.Also calculate NPV at COC 12% and PVF are 0.893,
0.797, 0.712, 0.636, 0.567, 0.507, 0.452. Calculate IRR.

Dr. Kaustubh Arvind Sontakke, Associate Professor of Finance and Accounting, SIESCOMS
Subject: Financial Management Topic: Capex Project Appraisal
SIESCOMS / SIESSBS, Navi Mumbai
Case Studies
Case 01:
Codex Ltd. is operating its business activities in the manufacturing of electrical components since last few
decades. The CEO of the company Mr.Raw Codex is expecting downfall in the electrical component
manufacturing business owing to the overall slowdown of business activities across the global economy. Thus,
Mr.Codex is simultaneously planning to get into the business of computer hardware manufacturing for which his
business consultants have given him the following estimates.
The technological options available for Mr.Codex for manufacturing computer hardware products are Opex
Technology and Topex Technology. If Opex Technology is adopted then it will require immediate initial capital
expenditure of Rs.5175 million. The Opex Technology has got an estimated life of 8 years and expected scrap
value of Rs.375 million at the end of 8th year. As per the estimate given by business consultants, the Opex
technology will generate annual net profit of Rs.1035 million. The Opex Technology though cheaper than
Topex Technology in term of initial capital outlay it is exposing higher risk to the capital suppliers and hence
the funds required to begin the business with Opex technology will typically attract overall cost as 14% pa.
If Codex Ltd. goes for the option of Topex technology, then it will need immediate initial outlay of Rs.7600
million. It has got an estimated life of 10 years and expected salvage value of Rs.700 million at the end of 10 th
year. As per the estimate given by business consultants, the Topex technology will generate Net profit of
Rs.1000 million for initial three years followed by Rs.1500 for subsequent four years and then Rs.1750 for last
three years. The Topex Technology being more trusted for the production of computer hardware systems it is
attracting comparatively lesser risk for the suppliers of capital and hence the funds required to begin with
business with Topex Technology will be available at 12% pa.
The company would like to use your financial expertise in evaluation of these two mutually exclusive
technologies using the above-mentioned information obtained from the business consultants of Codex Ltd.
Thus, evaluate the above technological options on the basis of evaluation parameters of Capex Project Appraisal
and suggest an appropriate technology for computer hardware manufacturing business of Codex Ltd. In case of
both the technologies, Capital expenditure is subject to depreciation and hence Codex Ltd. would like you to
consider it on SLM basis. Also it would like you to suggest the evaluation results if RBM as a method of
depreciation is considered with the rate of depreciation 15%pa and last year ending WDV as scrap value.

Case 02:
Codex Ltd. wants to utilize your financial expertise for contingency profitability planning too. In the view of
shadow of global recession, it is expecting to have lesser estimates relating to net profits for both the
technologies namely Opex and Topex. Thus, Opex will have uniform amount of net profit Rs.735 million per
annum. Topex Technology, on the other hand will generate uniform amount of net profit Rs.700 million per
annum.
Further, looking at the expected risk exposure the Opex Technology may attract finance at a cost of capital of
18% pa or 22% pa whereas Topex Technology may continue to attract finance at a cost of capital 12% pa or
maximum 14% pa.
Calculate Net Present Values of the mutually exclusive technologies in all the alternative scenarios and help
Codex Ltd. calculate maximum tolerable cost of capital for both the technologies in order to enable them to
decide about funding and required returns of investment.

Case 03:
Rox Ltd. is planning to implement one of the two mutually exclusive projects namely Project White-Cat (WC)
and Project Black-Cat (BC). Initial investment in WC is Rs.500000 having useful life of five years and scrap
value nil. Initial investment in BC is Rs.800000 having useful life of eight years and no salvage value.
Rox Ltd. would like to adopt straight line method of charging depreciation for capital expenditure in both the
projects. Income tax rate applicable is 30%. Annual sales expected by Rox Ltd. are Rs.1000000. The amount of
sales revenue will be same under both projects and it will remain unchanged over a period of life of the project.
Variable cost for WC will be 40% of sales and for BC it will be 30% of sales. Fixed cost other than depreciation
for WC will be Rs.100000 and for BC will be Rs.200000. Applicable cost of capital for both the projects is 10%.
Annuity Factor @ 10% for 5 years is 3.791 and for 8 years is 5.335. Using your financial expertise, give your

Dr. Kaustubh Arvind Sontakke, Associate Professor of Finance and Accounting, SIESCOMS
Subject: Financial Management Topic: Capex Project Appraisal
SIESCOMS / SIESSBS, Navi Mumbai
valuable suggestion to Rox Ltd about selection of better project for investment. You may adopt suitable capital
budgeting techniques to arrive at conclusion.

Case 04:
Genpact Ltd. has generated following alternative projects. You are required to evaluate the same and suggest the
best project for implementation.
Particulars P1 P2 P3 P4
Initial investment (Rs.) 500000 600000 700000 800000
Life of the project 5 years 6 years 7 years 8 years
Scrap Value (Rs.) 20000 Nil 40000 80000
Applicable Cost of Capital 12% 13% 14% 15%
Annuity value @ 6th year 3.605 3.998 4.288 4.487
PVF at the end of 6th Year 0.5066 0.4803 0.4556 0.4323
Net Profit after tax (Rs) 100000 140000 175000 185000
Method of depreciation SLM SLM SLM SLM
Using your financial expertise, give your valuable suggestion to Genpact Ltd about selection of better project for
investment. You may adopt suitable capital budgeting techniques to arrive at conclusion.

Dr. Kaustubh Arvind Sontakke, Associate Professor of Finance and Accounting, SIESCOMS
Subject: Financial Management Topic: Capex Project Appraisal