LEAD College of Management

Financial Management
Re Test 5

1. ABC Ltd has under consideration of 2 mutually exclusive proposals, for the purchase
of new equipment. Assuming the Tax rate @50% suggest the management the best
alternative by using PBP method.

Particulars Machine X Machine Y

Net Cash outlay(Rs) 1,00,000 75,000

Salvage Nil Nil

Life(Years) 5 5

PBDT Rs Rs

1 25,000 18,000

2 30,000 20,000

3 35,000 22,000

4 25,000 20,000

5 20,000 16,000

2. Project M has an initial investment of Rs. 3 Lakhs. Its cash flows for 5 years are
90,000/ 1,08,000/ 90,000/79,200/72000. Determine the discounted PBP assuming
the discount rate at 10%.
3. It is proposed to introduce a new machine from Machine A & B. The rate of taxation
can be regarded as 50% profit
Which machine can be recommended for purchase?

Particulars Machine A Machine B

Cost of machine 3.5 L 6.3 L

Life 7 10

Savings in scrap 20,000 32,000

Cost of indirect materials 10,000 16,000

Savings in wages

Employees not required 15 20

Wages per employee pa 10,000 16,000

Additional cost of 7,200 12,000

maintenance PA

Additional Cost of 24,000 36,000

supervision PA