Corporate Finance Practice Worksheet 4

PGDM (A & B)
Date: 02/01/23

1. The revenue of a company is ₹1,00,000. Its expenditure breakup is as follows: Salaries –

₹30,000, Administration expenses – ₹20,000, Depreciation – ₹30,000. The rate of tax is 35%.
Find out the benefits of the company according to accounting approach and cash flows
approach.

2. The cost of a plant is ₹5,00,000. It has an estimated life of 5 years after which it would be
disposed of, and scrap value is nil. PBDT is estimated to be ₹1,75,000. Find out the yearly cash
flow from the plant assuming tax rate to be 30%.

3. Determine the average rate of return from the following data of two machines A and B

Machine Machine
Particulars A B
Cost 56,125 56,125
Annual Estimated Income
After Depreciation and
Income Tax
Year 1 3375 11375
Year 2 5375 9375
Year 3 7375 7375
Year 4 9375 5375
Year 5 11375 3375
36875 36875
Estimated Life 5 Years 5 Years

Estimated Salvage Value 3,000 3,000

4. A project costs ₹50,000 and has a scrap value of ₹10,000. Its stream of income before
depreciation and tax during next five years is ₹12,000, ₹14,000, ₹16,000, ₹18,000, and
₹20,000. Assuming a 50% tax rate and depreciation on straight line basis, calculate ARR of the
project and suggest its acceptability if the average rate of return of the firm is 12%.
5. A project requires an outlay of ₹60,000 and yields an annual cash inflow of ₹15,000 for 7
years. Calculate the PBP.

6. Calculate PBP for a project which requires a cash outlay of ₹30,000 and generates cash
inflows of ₹9,000, ₹8,000, ₹7,000, ₹6,000 and ₹5,000

7. Calculate the PBP of the following projects each requiring a cash outlay of Rs.10,000.
Suggest which one of the following is acceptable if the standard PBP is 5 years.

Years Project X Project Y Project Z

1 2,500 4,500 500
2 2,500 3,500 1,500
3 2,500 2,500 2,500
4 2,500 1,500 3,500
5 2,500 500 4,500

8. Projects P and Q involve the same cash outlay of ₹4,000 each. The rate of the return of the
company is 10%. The projected cash inflows from both the projects are as follows:

C1 C2 C3 C4
Project P 3,000 1,000 1,000 1,000
Project Q NIL 4,000 1,000 2,000
Calculate PBP and Discounted PBP for both the projects.

9. A project will cost ₹4,00,000. Its stream of earnings before depreciation and tax during first
year through five years is expected to be ₹1,00,000, ₹1,20,000, ₹1,40,000, ₹1,60,000,
₹2,00,000. Assume a 30% tax rate and depreciation on straight line basis, calculate the
project’s accounting rate of return and payback period.