Solution:

Tax shield (savings) on depreciation (in Rs)

Depreciation Tax shield PV of tax shield
Year charge (DC) =0.34 x DC @ 16% p.a.

1 60,000 20,400 17,586

2 45,600 15,504 11,522

3 34,656 11,783 7,549

4 26,339 8,955 4,946

5 20,017 6,806 3,240

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44,843
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Present value of the tax savings on account of depreciation = Rs.44,843

2 . Solution:

Tax shield (savings) on depreciation (in Rs)

Depreciation Tax shield PV of tax shield
Year charge (DC) =0.36 x DC @ 18% p.a.

1 183,600 66,096 56,014

2 134,028 48,250 34,652
3 97,840 35,222 21,437
4 71,423 25,712 13,262
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125,365
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3 . Ojus ( refer Excel Sheet)

4 . Solution:

(a) A. Initial outlay (Time 0)

i. Cost of new machine Rs. 5,000,000

ii. Salvage value of old machine 800,000
iii Incremental working capital requirement 200,000
iv. Total net investment (=i – ii + iii) 4,400,000

B. Operating cash flow (years 1 through 4)

Year 1 2 3 4

i. Post-tax savings in
manufacturing costs 528,000 528,000 528,000 528,000
(0.66 * Tax Savings)
ii. Incremental
depreciation 760,000 608,000 486,400 389,120

iii. Tax shield on

incremental dep. 258,400 206,720 165,376 132,301

iv. Operating cash

flow ( i + iii) 786,400 734,720 693,376 660,301
 C. Terminal cash flow (year 4)

i. Salvage value of new machine Rs. 2,500,000

ii. Salvage value of old machine 500,000
iii. Recovery of incremental working capital 200,000
iv. Terminal cash flow ( i – ii + iii) 2,200,000

D. Net cash flows associated with the replacement project (in Rs)

Year 0 1 2 3 4
NCF (4,400,000) 786,400 734,720 693,376 2,860,301

(b) NPV of the replacement project

= - 4,400,000 + 786,400 x ( PVIF (15,1) i.e. 0.870 = 6,84,168
+ 734,720 x PVIF (15,2) i.e. 0.756 = 5,55,448.32
+ 693,376 x PVIF (15,3) i.e. 0. 658 = 4,56,241.4
+ 2,860,301 x PVIF (15,4) i.e. 0.572 = 16,36,092.6
= - 44,00,000 + 33,32,155.32 = - Rs.10,68,050
Solution:

(a) A. Initial outlay (Time 0)

i. Cost of new machine Rs. 8,000,000

ii. Salvage value of old machine 2,200,000
iii Incremental working capital requirement 600,000
iv. Total net investment (=i – ii + iii) 6,400,000

E. Operating cash flow (years 1 through 4)

Year 1 2 3 4 5

i. Post-tax savings in
manufacturing costs 6,70,000 6,70,000 6,70,000 6,70,000 6,70,000
ii. Depreciation on
new machine 2,000,000 1,500,000 1,125,000 843,750 632,813
iii. Depreciation on
old machine 8,40,000 588,000 411,600 288,120 201,684
iv.Incremental
dereciation 11,60,000 9,12,000 7,13,400 5,55,630 4,31,129
v.Tax shield on
incremental dep. 3,82,800 3,00,960 2,35,422 1,83,358 1,42,273
iv. Operating cash
flow( i +v) 10,52,800 9,70,960 9,05,422 8,53,358 8,12,273
 F. Terminal cash flow (year 5)

i. Salvage value of new machine Rs. 3,500,000

ii. Salvage value of old machine 900,000
iii. Recovery of incremental working capital 600,000
iv. Terminal cash flow ( i – ii + iii) 3,200,000

G. Net cash flows associated with the replacement project (in Rs)

Year 0 1 2 3 4 5

NCF (6,400,000) 10,52,800 9,70,960 9,05,422 8,53,358 8,12,273

(c) NPV of the replacement project

(6,400,000)+ 10,52,800x 0.877 {PVIF (14,1)}+ 9,70,960x0.769{ PVIF (14,2)} + 9,05,422x

0.675{PVIF (14,3)}+ 8,53,358 x 0.592 { PVIF (14,4) }+ 8,12,273 x 0.519 {PVIF (14,5)} =
48,68,691 – 64,00,000 = - Rs.15,31,308

Present value of the tax savings on account of depreciation = Rs.125,365