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Capital Expenditure Decisions

1. From the following information of MAK Ltd. calculate Pay Back Period
a) Purchase price of new machinery – Rs. 10,00,000
b) Installation expenses – Rs. 1,50,000
c) Workers training expenses incurred to put the assets to use – Rs. 50,000
d) Subsidy from government 60% of purchase price
e) Working capital Rs. 3,00,000
f) Useful life of the machine – 5 years
g) Book salvage value – 10% of purchase price
h) Cash salvage value- 1,20,000
i) Method of depreciation – straight line
j) Tax rate – 30%
k) Sales unit 1,00,00 unit p.a.
Initial selling price per unit is Rs.10 and variable cost is 40% of initial selling
priceannual fixed cost other than depreciation is Rs. 2,00,000.
2. Beta company is considering the purchase of one of the following machines, relevant
datagiven below:
Machine A Machine B
Original cost Rs. 1,00,000 Rs. 1,00,000
Estimated life 3 years 3 years
Earnings (after tax): RS. Rs.
Year 1 30,000 20,000
Year 2 50,000 80,000
Year 3 40,000 40,000
The firm follows the straight line method of depreciation, estimated salvage value of
boththe machine is zero. Determine the ARR of both the machines.

3. A company has to select one of the two alternative projects whose particulars are given
below :
Initial Net cash flow (Rs.)
Outlay (Rs.) Y1 Y2 Y3 Y4
Project | 11.872 10,000 2,000 1,000 1,000
Project || 10,067 1,000 1,000 2,000 10,000
The company can arrange the fund at 8%.compute the NPV and IRR of each project
andcomment on the result.
The present value of Rs. 1 at different cost of capital is given below:
Year 8% 10% 12% 14%
1 0.926 0.909 0.893 0.877
2 0.857 0.826 0.797 0.770
3 0.794 0.751 0.712 0.675
4 0.735 0.683 0.636 0.592

4. X Ltd. has been producing a chemical product by using machine Z for the last 2 years.
Now, the management of the company is thinking to replace this machine either by X or
by Y machine. The following details are furnished to you:

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Z X Y
Book value (RS.) 1,00,000 _ _
Resale value now (RS) 1,10,000 _ _
Purchase price (RS.) _ 1,80,000 2,15,000
Annual fixed costs( including depreciation) (RS.) 92,000 1,08,000 1,32,000
Variable running cost (including labour) per unit (RS.) 3 1.50 2.50
Production per hour (unit) 8 8 12
You are also provided the following additional information :
Selling price per unit Rs.20
Cost of materials per unit Rs.10
Annual operating hours 2,000
Working life of each of the 3 machines (as from now) – 5 years
Salvage value of machines – Z Rs. 10,000,XRs. 15,000 and Y Rs.
33,000.
The company charges depreciation using straight line method. It is anticipated that an
additional cost of Rs.8,000 p.a. would be incurred on special advertising to sale the
extra output of machine Y.
Assume tax rate of 50% and cost of capital 10%.
The present value of RS.1 to be received at the end of each year at 10% is as under:
Year 1 2 3 4 5
Present value 0.909 0.826 0.751 0.683 0.621
Using NPV method, analyse the feasibility of the proposal and make recommendations.
5. An enterprise can make either of the two investments at the beginning of 2016.
Assuming a required rate of return at 10% p.a., evaluate the investments proposals
under each one of the following criteria :
a) Return on investments
b) Discounted Payback Period and
c) Profitability Index

The forecasted figures are given :

Investment Cost of Estimated Scrap

proposals investment life value
year Rs. 2016 2017 2018 2019 2020
Rs. Rs Rs. Rs. Rs
P Rs. 40,000 4 NIL 1,000 4,000 7,000 5,000 -
Q Rs. 56,000 5 NIL NIL 6,800 6,800 6,800 6,800
It is estimated that each of the alternative projects would require an additional working capital
of Rs. 4,000 which would be received back in full after the expiry of each project. Depreciation is
provided under straight line method.

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