SOLUTIONS TO PROBLEMS ON CAPITAL BUDGETING

1) PARTICULARS ₹
SAVINGS
Salary of 4 Staff @ ₹ 20,000 80000
Savings in Maintenance 10000
Savings in Wastage 40000
TOTAL SAVINGS (1) 130000

ADDITIONAL COSTS:
Additional Staff required 1 Staff @ ₹ 40000 40000
Additional electricity Bill 15000
TOTAL ADDITIONAL EXPENSES (2) 55000

NET SAVINGS/ ANNUAL CASH FLOWS (1)- (2) 75000

PAY BACK PERIOD = ORIGINAL/ INITIAL INVESTMENT/ AVG ANNUAL CASH FLOWS
=900000/75000= 12 YEARS

2) YEAR PAT ( ₹) DEPRECIATION CASH FLOW ( ₹) CUM. CASH FLOWS ( ₹ )

1 15000 10000 25000 25000

2 25000 10000 35000 60000
3 20000 10000 30000 90000
4 20000 10000 30000 120000

PAY BACK PERIOD = 3 YRS + 0.33=3.33 YRS OR 3 YRS AND 4 MONTHS

FOR 1 YR = 30000 SO FOR ₹ 10,000 IT IS 10000/30000=0.33 YR

FOR 12 MONTHS = 30000 SO FOR ₹ 10,000 IT IS 10000/30000*12= 4 MONTHS

COMPUTATION OF PAY BACK PERIOD

3)

YEAR ANNUAL NET CASH FLOWS ( ₹) CUM. NET CASH FLOWS ( ₹ )

1 9000 9000
2 12000 21000
3 8000 29000
4 4000 33000
5 5000 38000

PAY BACK PERIOD = 3 YEARS + (1000/4000*12) =3 YEARS AND 4 MONTHS

4) PROFITABILITY STATEMENT

PARTICULARS MACHINE A MACHINE B MACHINE C

(₹) (₹) (₹)

Estimated savings in scrap 400 750 250

Estimated Savings in Direct
Wages 2750 6000 2250
Estimated Savings in Indirect
Materials 100 - 250

TOTAL SAVINGS (1 ) 3250 6750 2750

Additional cost of Indirect 400

Materials - -
Additional cost of Maintenance 750 550 500

Additional cost of supervision - 800 -

TOTAL ADDITIONAL COST 750 1750 500

(2)

TOTAL SAVINGS BEFORE

DEPRECIATION/ PROFIT BEFORE 2500 5000 2250
DEPRECIATION ( 1)- (2 )

LESS: DEPRECIATION 1750 2083 1800

NET SAVINGS AFTER 750 2917 450
DEPRECIATION
LESS: TAX @ 40 % 300 1167 180
NET SAVINGS AFTER TAXATION 450 1750 270
ADD: DEPRECIATION 1750 2083 1800
NET ANNUAL CASH FLOWS 2200 3833 2070

PAY BACK PERIOD = ORIGINAL INVESTMENT/ ANNUAL AVERAGE CASH FLOWS

A B C

=17500/2200 =12500/3833 =9000/2070

7.955 3.261 4.348

RECOMMENDATION

On the basis of profitability statement and according to the payback periods, the
Management is advised to purchase Machine B , since it has lesser Pay Back period.

5) STATEMENT OF CASH FLOWS

PARTICULARS STANDARD ASSEMBLED

(₹) ( ₹)

SALES ( A) 50000 50000

LESS COST:
Materials 15000 15000
Labour 7000 6000
Variable Overheads 7000 6000
(B) 29000 27000

CASH INFLOWS ( A ) - ( B ) 21000 23000

PAY BACK PERIOD = ORIGINAL INVESTMENT/ ANNUAL AVERAGE CASH FLOWS

=50000/21000 =50000/23000

2.381 2.174

PAY BACK PROFITABILITY= ANNUAL CASH INFLOWS * ( ESTIMATED LIFE- PAY BACK PERIOD ) + SCRAP

21000*(5-2.381) 23000*(5-2.174)
54999 64998

I.E ₹ 55000 I.E ₹ 65000

RECOMMENDATION
The above analysis shows that the Assembled machine should be acquired since
(a) Pay Back period is shorter
(b) The Pay Back profittability is higher

6) STATEMENT SHOWING ANNUAL CASH FLOWS

PARTICULARS MACHINE P MACHINE Q

(₹) ( ₹)
Estimated savings in scrap 500 800
Estimated savings in direct wages 6000 8000

TOTAL SAVINGS ( 1 ) 6500 8800

Additional Cost of Maintenance 800 1000

Additional Cost of Supervision 1200 1800

TOTAL ADDITIONAL COST 2000 2800
(2)

NET CASH FLOW ( 1 ) - ( 2 ) 4500 6000

PAY BACK PERIOD = ORIGINAL INVESTMENT/ ANNUAL AVERAGE CASH FLOWS

=9000/4500 =18000/6000

YEARS 2 3

Based on Payback period , Machine P has a shorter pay back period , hence it should be
preferred to Machine Q

PAY BACK PROFITABILITY= ANNUAL CASH INFLOWS * ( ESTIMATED LIFE- PAY BACK PERIOD ) + SCRAP

4000*(4-2) 6000*(5-3)
₹ 8000 12000

RECOMMENDATION
Based on the payback profitability, Machine Q would be preferred as the Payback profitability is higher than Machine P

7) PARTICULARS ₹

Sales 8000
Less : Variable cost 3000
5000
Less: Fixed Cost 2000
3000
Less: Depreciation
(10000/ 10 Yrs) 1000
Profit before Tax 2000
Less : Tax @ 50 % 1000
1000
Add: Depreciation 1000
Cash flow 2000

PAY BACK PERIOD = ORIGINAL INVESTMENT/ ANNUAL AVERAGE CASH FLOWS

10000/2000 5 years

PAY BACK PROFITABILITY= ANNUAL CASH INFLOWS * ( ESTIMATED LIFE- PAY BACK PERIOD ) + SCRAP

=2000* (10-5)
₹ 10000

8) STATEMENT SHOWING ANNUAL CASH FLOWS

Particulars ₹

Annual Net Profit before Tax 20000

Less : Tax @ 35 % 7000
Net Profit after Tax 13000
Add: Depreciation
( Cost- Scrap)/ years
=(200000-5000)/10 19500
Annual Cash Flow 32500

PAY BACK PERIOD = ORIGINAL INVESTMENT/ ANNUAL AVERAGE CASH FLOWS

200000/32500 6.1538 years

PAY BACK PROFITABILITY= ANNUAL CASH INFLOWS * ( ESTIMATED LIFE- PAY BACK PERIOD ) + SCRAP

=32500* (10-6.154)+5000
₹ 129995
₹ i.e 1,30,000

ACCOUNTING RATE OF RETURN AVERAGE ANNUAL PAT / AVERAGE INVESTMENT *100

AVERAGE INVESTMENT = ( ORIGINAL INVESTMENT- SCRAP )/2 + ADDITIONAL NET WORKING CAPITAL + SCRAP

= (200000-5000)/2+0+5000
102500

ARR= 13000/102500*100
12.68 %

9) PROFITABILITY STATEMENT

PARTICULARS OLD MACHINE NEW MACHINE

Calculation Amount (₹) Calculation Amount (₹)

Annual Sales ( Hrs * Units/Hr * S.P 2000 Hrs *24 Units *₹ 6.25 300000 2000 Hrs *36Units *₹ 6.25 450000
per Unit)
Less: Cost of Sales
Direct Material 2000 Hrs *24 Units *₹ 2.50 120000 2000 Hrs *36Units *₹ 2.50 180000
Wages 2000 Hrs *₹ 15 30000 2000 Hrs *₹26.25 52500
Power 10000 22500
Consumable Stores 30000 37500
Other Charges 40000 45000
Depreciation ₹ 200000/10 20000 ₹300000/10 30000

250000 367500

Net Profit before Tax 50000 82500

Less: Tax @ 40 % 20000 33000
Net Profit after Tax 30000 49500

ACCOUNTING RATE OF RETURN AVERAGE ANNUAL PAT / AVERAGE INVESTMENT *100

30000/(200000 /2)*100 49500/(300000/2)*100

30 % 33 %

Since ARR of the new Machine is higher as compared to old machine, hence new machine be preferred.

10) COMPUTATION OF PAY BACK PERIOD

YEAR PAT DEPRECIATION CASH FLOWS ( ADD DEP) CUMM. CASH FLOWS
₹ ₹ ₹ ₹
1 30000 100000 130000 130000
2 50000 100000 150000 280000
3 70000 100000 170000 450000
4 90000 100000 190000 640000
5 110000 100000 230000 870000 * Includes scrap value of ₹ 20,000 at the end of 5th year
TOTAL 350000 500000 870000

DEPRECIATION= (ORIGINAL INVESTMENT - SCRAP)/ESTIMATED LIFE IN YEARS

(520000-20000)/5
100000 ₹ per year

PAY BACK PERIOD = =3 years+(520000-45000)/190000

3.368 years

ACCOUNTING RATE OF RETURN AVERAGE ANNUAL PAT / AVERAGE INVESTMENT *100

AVERAGE ANNUAL PAT= TOTAL PROFIT AFTER TAX/NO.OF =350000/5 70000

YEARS

AVERAGE INVESTMENT = ( ORIGINAL INVESTMENT- SCRAP )/2 + ADDITIONAL NET WORKING CAPITAL + SCRAP

= (520000-20000)/2+0+20000
270000 ₹

ARR= 70000*100/270000
25.93 %

11) NET PRESENT VALUE

YEAR PVF @ 15 % PROJECT X PROJECT Y PROJECT Z
CASH INFLOWS PRESENT VALUE CASH INFLOWS PRESENT VALUE CASH INFLOWS PRESENT VALUE
₹ ₹ ₹ ₹ ₹ ₹
1 0.870 10000 8700 50000 43500 90000 78300
2 0.756 30000 22680 65000 49140 120000 90720
3 0.658 45000 29610 85000 55930 70000 46060
4 0.572 65000 37180 50000 28600 50000 28600
5 0.497 45000 22365 35000 17395 20000 9940
TOTAL PV 120535 194565 253620
LESS CASH OUTLAY 120000 170000 240000
NPV 535 24565 13620
RANKING III I II

PROFITABILITY INDEX

PROFITABILITY INDEX = BENEFIT/ COST= PV OF CASH INFLOWS/ PV OF CASH OUTFLOWS

PROJECT X PROJECT Y PROJECT Y
=120535/120000 =194565/170000 =253620/240000
1.004 1.145 1.057

RANKING III I II

12) PAY BACK PERIOD METHOD

TATA BATA
CFAT CUMM. CFAT CFAT CUMM. CFAT
YEAR ₹ ₹ ₹ ₹

1 50000 50000 80000 80000

2 80000 130000 60000 140000
3 100000 230000 80000 220000
4 80000 310000 60000 280000
5 60000 370000 80000 360000

PAY BACK PERIOD = 2 YEARS + 70000/100000 = 2 YEARS +(70000/80000)

2.7 YEARS 2.875 YEARS
OR OR
=2 YRS+ 70000/100000*12 )'=2 YEARS +(70000/80000*12
8.4 MONTHS 10.5 MONTHS
I.E 2 YEARS & 8.4 MONTHS I.E 2 YEARS & 10.5 MONTHS

NET PRESENT VALUE METHOD

PVF @ 11 % TATA BATA

YEAR
CFAT CUMM. CFAT CFAT CUMM. CFAT
₹ ₹ ₹ ₹

1 0.901 50000 45050 80000 72080

2 0.812 80000 64960 60000 48720
3 0.731 100000 73100 80000 58480
4 0.659 80000 52720 60000 39540
5 0.593 60000 35580 80000 47440

PRESENT VALUE OF CASH 271410 266260

INFLOWS
LESS: PRESENT VALUE OF CASH 200000 210000
OUTFLOWS

NET PRESENT VALUE 71410 56260

PROFITABILITY INDEX RATIO/ BENEFIT COST RATIO

PROFITABILITY INDEX = BENEFIT/ COST= PV OF CASH INFLOWS/ PV OF CASH OUTFLOWS

TATA BATA
=271410/200000 =266250/210000

1.36 1.27

CHOOSE TATA BASED ON PAY BACK PERIOD, NPV AND BC RATIO

13) INTERNAL RATE OF RETURN METHOD ( IRR METHOD)

YEAR CASH FLOW BEFORE DEP & TAX DEPRECIATION NET EARNINGS TAX @ 55 % NET EARNINGS LESS CFAT=EAT +
TAX= EAT DEPRECIATION
₹ ₹ ₹ ₹ ₹ ₹

1 150000 100000 50000 27500 22500 122500

2 250000 100000 150000 82500 67500 167500
3 250000 100000 150000 82500 67500 167500
4 200000 100000 100000 55000 45000 145000
5 150000 100000 50000 27500 22500 122500
TOTAL CFAT 725000

FAKE PAY BACK PERIOD CASH OUTLAY OR ORIGINALOR INITIAL INVESTMENT/ AVERAGE ANNUAL CASH INFLOWS

=500000/(725000/5)
3.448

AS PER ANNUITY TABLE THE PV FACTORS CLOSEST TO 3.448 ACROSS THE LINE OF 5TH YEAR ARE
DISCOUNT RATE PV FACTOR
AT 12 % 3.605
AT 14 % 3.433

YEAR CFAT PV FACTOR @ 12 % PV OF CFAT AT 12 % PV FACTOR @ 14 % PV OF CFAT AT 14 %

(₹ ) (₹ ) (₹ )

1 122500 0.893 109392.50 0.877 107432.50

2 167500 0.797 133497.50 0.769 128807.50
3 167500 0.712 119260.00 0.675 113062.50
4 145000 0.636 92220.00 0.592 85840.00
5 122500 0.567 69457.50 0.519 63577.50
TOTAL PV OF CFAT 523827.50 498720.00

IRR= D1 + ( PV OF CFAT AT D1)- (PV OF CASH OUTLAYS)/ ( PVOF CFAT AT D2 - PV OF CFAT AT D2)* ( D2-D1)

= 12 % + (523827.50-500000)/(523827.50- 498720) * ( 14%-12%)

13.898 %

SINCE IRR IS HIGHER THAN THE COST OF CAPITAL , THE PROJECT IS RECOMMENDED FOR ACCEPTANCE

14) Note: The Machine is depreciated under WDV method. Assuming that the scrap value will be zero at the end of 5th Year, therefore
the entire remaining depreciable value of the asset in the 5th year will be charged as depreciation.

CASH FLOW BEFORE DEPRECIATION @ 20 % ON WDV EARNINGS AFTER Tax @ 50 % EARNINGS AFTET TAX CASH FLOW
YEAR DEPRECIATION AND TAX DEPRECIATION AFTER TAX = EAT
+ DEPRECIATION

₹ ₹ ₹ ₹ ₹ ₹
1 8000 4000 4000 2000 2000 6000
2 8000 3200 4800 2400 2400 5600
3 9000 2560 6440 3220 3220 5780
4 9000 2048 6952 3476 3476 5524
5 7500 8192 -692 0 -692 7500
TOTAL 41500 20000 21500 11096 10404 30404

FAKE PAY BACK PERIOD CASH OUTLAY OR ORIGINALOR INITIAL INVESTMENT/ AVERAGE ANNUAL CASH INFLOWS

=20000/(30404/5)
3.289

AS PER ANNUITY TABLE THE PV FACTORS CLOSEST TO 3.289 ACROSS THE LINE OF 5TH YEAR ARE
DISCOUNT RATE PV FACTOR
AT 15% 3.352
AT 16 % 3.274

YEAR CFAT PV FACTOR @ 15 % PV OF CFAT AT 15 % PV FACTOR @ 16 % PV OF CFAT AT 16 %

(₹ ) (₹ ) (₹ )

1 6000 0.870 5220.00 0.862 5172.00

2 5600 0.756 4233.60 0.743 4160.80
3 5780 0.658 3803.24 0.641 3704.98
4 5524 0.572 3159.73 0.552 3049.25
5 7500 0.497 3727.50 0.476 3570.00
TOTAL PV OF CFAT 20144.07 19657.03

IRR= D1 + ( PV OF CFAT AT D1)- (PV OF CASH OUTLAYS)/ ( PVOF CFAT AT D2 - PV OF CFAT AT D2)* ( D2-D1)

= 15 % + (20144.07-20000)/(20144.07- 19657.03) * ( 16%-15%)

15.29568789 %
I.E 15.30 %
SINCE IRR IS LESS THAN THE COST OF CAPITAL , THE PROJECT SHOULD BE REJECTED.

15)
PROJECT X
FAKE PAY BACK PERIOD CASH OUTLAY OR ORIGINALOR INITIAL INVESTMENT/ AVERAGE ANNUAL CASH INFLOWS

=600000/(810000/6)
4.444

AS PER PROBLEM , THE PV FACTORS FOR PROJECT X TO BE CONSIDERED IS 8 % & 10 %.

YEAR CFAT PV FACTOR @ 8 % PV OF CFAT AT 8 % PV FACTOR @ 10 % PV OF CFAT AT 10 %

(₹ ) (₹ ) (₹ )

1 30000 0.926 27780.00 0.909 27270.00

2 120000 0.857 102840.00 0.826 99120.00
3 180000 0.794 142920.00 0.751 135180.00
4 240000 0.735 176400.00 0.683 163920.00
5 300000 0.681 204300.00 0.621 186300.00
6 -60000 0.630 -37800.00 0.564 -33840.00
TOTAL PV OF CFAT 616440.00 577950.00

IRR= D1 + ( PV OF CFAT AT D1)- (PV OF CASH OUTLAYS)/ ( PVOF CFAT AT D2 - PV OF CFAT AT D2)* ( D2-D1)

= 8 % + (616440-600000)/(616440- 577950) * ( 10%-8%)

8.854247857 %
I.E 8.85 %

PROJECT Y
FAKE PAY BACK PERIOD CASH OUTLAY OR ORIGINALOR INITIAL INVESTMENT/ AVERAGE ANNUAL CASH INFLOWS

=660000/(900000/6)
4.400

AS PER PROBLEM , THE PV FACTORS FOR PROJECT Y TO BE CONSIDERED IS 12 % & 14 %.

YEAR CFAT PV FACTOR @ 12 % PV OF CFAT AT 12 % PV FACTOR @ 14 % PV OF CFAT AT 14 %

(₹ ) (₹ ) (₹ )

1 360000 0.893 321480.00 0.877 315720.00

2 240000 0.797 191280.00 0.769 184560.00
3 0 0.712 0.00 0.675 0.00
4 0 0.636 0.00 0.592 0.00
5 180000 0.567 102060.00 0.519 93420.00
6 120000 0.507 60840.00 0.456 54720.00
TOTAL PV OF CFAT 675660.00 648420.00

IRR= D1 + ( PV OF CFAT AT D1)- (PV OF CASH OUTLAYS)/ ( PVOF CFAT AT D2 - PV OF CFAT AT D2)* ( D2-D1)

= 12 % + (675660-660000)/(675660-648420) * ( 14%-12%)
13.14977974 %
i.e 13.15 %

PROJECT Z
FAKE PAY BACK PERIOD CASH OUTLAY OR ORIGINALOR INITIAL INVESTMENT/ AVERAGE ANNUAL CASH INFLOWS

=720000/(900000/6)
4.800

AS PER PROBLEM , THE PV FACTORS FOR PROJECT Z TO BE CONSIDERED IS 6 % & 8 %.

YEAR CFAT PV FACTOR @ 6 % PV OF CFAT AT 6 % PV FACTOR @ 8 % PV OF CFAT AT 8 %

(₹ ) (₹ ) (₹ )

1 120000 0.943 113160.00 0.926 111120.00

2 180000 0.89 160200.00 0.857 154260.00
3 120000 0.84 100800.00 0.794 95280.00
4 300000 0.792 237600.00 0.735 220500.00
5 120000 0.747 89640.00 0.681 81720.00
6 60000 0.705 42300.00 0.630 37800.00
TOTAL PV OF CFAT 743700.00 700680.00

IRR= D1 + ( PV OF CFAT AT D1)- (PV OF CASH OUTLAYS)/ ( PVOF CFAT AT D2 - PV OF CFAT AT D2)* ( D2-D1)

= 6 % + (743700-720000)/(743700-700680) * ( 8%-6%)
7.10181311 %
I.E 7.10 %

SUMMARY

PROJECT IRR
X 8.85%
Y 13.15%
Z 7.10%

SINCE IRR FOR PROJECT Y IS HIGHER THAN PROJECT X AND Z , PROJECT Y IS MOST PROFITABLE PROJECT

16) NOTE:
PROJECT CAN BE EVALUATED WORKING OUT VARIOUS METHODS BEFORE ACCEPTING THE MOST PROFITABLE AND ACCEPTABLE PROJECT
INITIAL OUTLAY ₹ 2,00,000
PAY BACK PERIOD
PROJECT X PROJECT Y
YEAR
CASH FLOW ( ₹ ) CUM.CASH FLOW (₹) CASH FLOW ( ₹ ) CUM.CASH FLOW (₹)

1 35000 35000 118000 118000

2 80000 115000 60000 178000
3 90000 205000 40000 218000
4 75000 280000 14000 232000
5 20000 300000 13000 245000

PAY BACK PERIOD = 2 YEARS + ( ( 200000-115000)/90000 = 2 YEARS + ( ( 200000-178000)/40000

2.944444444 YEARS 2.55 YEARS

= 2 YEARS AND = 2 YEARS AND

11.33333333 MONTHS 6.6 MONTHS

OR 2 YEARS , 11 MONTHS & 10 DAYS OR 2 YEARS , 6 MONTHS & 18 DAYS

( .33 OF MONTH= 1/3RD OF 30 DAY IN MONTH) ( 0.6 OF MONTH= 60 % OF 30 DAYS IN MONTH)

ACCEPT PROJECT Y

ACCOUNTING RATE OF RETURN

NOTE: PROFIT WILL BE LESS UNDER ACCOUNTING RATE OF RETURN METHOD AS DEPRECIATION HAS TO BE REDUCED FROM CASH FLOW.
CASH FLOW GIVEN IS AFTER TAX WHICH IS COMPUTED AFTER TAKING BENEFIT OF DEPRECIATION . IN ARR, THE CASH FLOW WILL REDUCE
TO THE EXTENT OF DEPRECIATION.
UNDER ARR, THE CASH INFLOWS WILL FURTHER REDUCE TO THE EXTENT OF DEPRECIATION
YEAR PROJECT X PROJECT Y
CASH INFLOWS ( ₹) DEPRECIATION PROFIT AFTER TAX CASH INFLOWS ( ₹) DEPRECIATION PROFIT AFTER TAX
( TO BE DEDUCTED FROM CASH FLOW) ( NO TAX APPLICABLE)
1 2 3 2-3=4 5 6 5-6=7

1 35000 40000 -5000 118000 40000 78000

2 80000 40000 40000 60000 40000 20000
3 90000 40000 50000 40000 40000 0
4 75000 40000 35000 14000 40000 -26000
5 20000 40000 -20000 13000 40000 -27000

100000 45000

NOTE: IT IS ASSUMED THAT DEPRECIATION HAS BEEN CHARGED BY STRAIGHT LINE METHOD ( SLM)

ARR= AVERAGE ANNUAL PROFIT AFTER TAX / ORIGINAL INVESTMENT 0R AVERAGE INVESTMENT

PROJECT X PROJECT Y

ARR= CONSIDERING ORIGINAL INV =100000/5*1/200000*100 =45000/5*1/200000*100

10 % 4.5 %

OR OR

ARR= CONSIDERING AVG INV =100000/5*1/(200000/2)*100 =45000/5*1/(200000/2)*100

20 % 9 %
ACCEPT PROJECT X AS ITS ARR IS HIGHER THAN PROJECT Y

NET PRESENT VALUE METHOD

PROJECT X PROJECT Y
YEAR P V FACTOR
CASH FLOW ( ₹ ) CUM.CASH FLOW (₹) CASH FLOW ( ₹ ) CUM.CASH FLOW (₹)

1 0.91 35000 31850 118000 107380

2 0.83 80000 66400 60000 49800
3 0.75 90000 67500 40000 30000
4 0.68 75000 51000 14000 9520
5 0.62 20000 12400 13000 8060

PV OF CASH INFLOWS 229150 204760

LESS: PV OF CASH OUTFLOWS 200000 200000
NET PRESENT VALUE 29150 4760

ACCEPT PROJECT X AS ITS NPV IS MORE THAN PROJECT Y

PROFITABILITY INDEX

PROFITABILITY INDEX = PV OF CASH INFLOWS/ PV OF CASH OUTFLOWS

PROJECT X PROJECT Y
229150/200000 =204760/200000
1.14575 1.0238

ACCEPT PROJECT X SINCE ITS PROFITABILITY INDEX IS HIGHER THAN PROJECT Y

INTERNAL RATE OF RETURN ( IRR)

NOTE: SINCE TWO DISCOUNTING FACTORS ARE GIVEN IN THE QUESTION, WE WILL FIND OUT IRR USING THE GIVEN DATA.

PROJECT X

YEAR CASH INFLOWS ( ₹) PV FACTOR @ 10 % PV CASH INFLOW @ 10 % PV FACTOR @ 20 % PV CASH INFLOW @ 20 %

1 35000 0.91 31850 0.83 29050
2 80000 0.83 66400 0.69 55200
3 90000 0.75 67500 0.58 52200
4 75000 0.68 51000 0.48 36000
5 20000 0.62 12400 0.41 8200

PV OF CASH INFLOWS 229150 180650

LESS: PV OF CASH OUTFLOWS 200000 200000
NET PRESENT VALUE 29150 -19350

IRR= D1 + ( PV OF CFAT AT D1)- (PV OF CASH OUTLAYS)/ ( PVOF CFAT AT D2 - PV OF CFAT AT D2)* ( D2-D1)

= 10 % + (229150-200000)/(229150-180650) * ( 20%-10%)
16.01030928 %

PROJECT Y

YEAR CASH INFLOWS ( ₹) PV FACTOR @ 10 % PV CASH INFLOW @ 10 % PV FACTOR @ 20 % PV CASH INFLOW @ 20 %

1 118000 0.91 107380 0.83 97940
2 60000 0.83 49800 0.69 41400
3 40000 0.75 30000 0.58 23200
4 14000 0.68 9520 0.48 6720
5 13000 0.62 8060 0.41 5330

PV OF CASH INFLOWS 204760 174590

LESS: PV OF CASH OUTFLOWS 200000 200000
NET PRESENT VALUE 4760 -25410

IRR= D1 + ( PV OF CFAT AT D1)- (PV OF CASH OUTLAYS)/ ( PVOF CFAT AT D2 - PV OF CFAT AT D2)* ( D2-D1)

= 10 % + (204750-200000)/(204750-174590) * ( 20%-10%)
11.57441167 %

ACCEPT PROJECT X SINCE ITS IRR IS HIGHER

PROJECT X PROJECT Y
SUMMARY RANK RANK
1 Pay Back Period II 2.944 Years 1 2.55 years
2 ARR 1 10% II 4.50%
3 NPV 1 ₹ 29,150 II ₹ 4,760
4 Profitability index 1 1.146 II 1.024
5 IRR 1 16.01% II 11.58%

BASED ON THE ABOVE ANALYSIS, PROJECT X IS TO BE SELECTED AS RANKED 1ST IN ALL EVALUATION METHODS COMPARED TO PROJECT Y.

17) PAY BACK PERIOD PROJECT P

( INV ₹ 2,00,000)
YEAR PAT & AFTER DEP DEPRECIATION CFAT CUMM. CFAT
₹ ₹ ₹ ₹
1 10000 40000 50000 50000
2 10000 40000 50000 100000
3 20000 40000 60000 160000
4 20000 40000 60000 220000
5 20000 40000 60000 280000

PAY BACK PERIOD= =3+(40000/60000)

3.666666667 YEARS
OR
=3+(40000/60000)*12
3 YEARS AND 8 MONTHS

( INV ₹ 2,80,000) PROJECT Q

YEAR PAT & AFTER DEP DEPRECIATION CFAT CUMM. CFAT
₹ ₹ ₹ ₹
1 24000 56000 80000 80000
2 24000 56000 80000 160000
3 24000 56000 80000 240000
4 24000 56000 80000 320000
5 24000 56000 80000 400000

PAY BACK PERIOD= =3+(40000/80000)

3.5 YEARS
 OR
=3+(40000/80000)*12
3 YEARS AND 6 MONTHS

BASED ON PAY BACK PERIOD , PROJECT Q IS RECOMMENDED SINCE IT HAS A SHORTER PAY BACK PERIOD

DISCOUNTED PAY BACK PERIOD

PROJECT P ( INVESTMENT ₹ 2,00,000)
YEAR PV FACTOR @ 10 % CASH INFLOWS ( ₹) P V CASH INFLOWS CUMM PV CASH FLOW

1 0.909 50000 45450 45450

2 0.826 50000 41300 86750
3 0.751 60000 45060 131810
4 0.683 60000 40980 172790
5 0.621 60000 37260 210050
0 1 -200000 -200000 10050

PAY BACK PERIOD = =4+(200000-172790)/37260

4.730273752 YEARS

PROJECT Q ( INVESTMENT ₹ 2,80,000)

YEAR PV FACTOR @ 10 % CASH INFLOWS ( ₹) P V CASH INFLOWS CUMM PV CASH FLOW

1 0.909 80000 72720 72720

2 0.826 80000 66080 138800
3 0.751 80000 60080 198880
4 0.683 80000 54640 253520
5 0.621 80000 49680 303200
0 1 -80000 -80000 223200

PAY BACK PERIOD = =4+(280000-253520)/49680

4.533011272 YEARS

BASED ON THE DISCOUNTED PAY BACK PERIOD, PROJECT Q IS RECOMMENDED , SINCE IT HAS A SHORTER PAY BACK PERIOD

PROFITABILITY INDEX

YEAR PV FACTOR @ 10 % PROJECT P PROJECT P

CFAT (₹) PVCFAT (₹) CFAT (₹ ) PVCFAT (₹)
1 0.909 50000 45450 80000 72720
2 0.826 50000 41300 80000 66080
3 0.751 60000 45060 80000 60080
4 0.683 60000 40980 80000 54640
5 0.621 60000 37260 80000 49680

PRESENT VALUE CASH INFLOW 210050 303200

LESS: PV CASH OUTFOW 200000 280000
NET PRESENT VALUE 10050 23200

PROFITABILITY INDEX = PV OF CASH INFLOWS/ PV OF CASH OUTFLOWS

PROJECT P PROJECT Q

=210050/200000 =303200/280000
1.05025 1.082857143

BASED ON PI PROJECT Q IS REOMMENDED SINCE THE PI IS GREATER THAN PROJECT P

INTERNAL RATE OF RETURN

FAKE PAY BACK PERIOD= INITIAL OUTLAY/ AVERAGE ANNUAL CASH INFLOWS
PROJECT P =200000*5/280000
3.571428571

AS PER PROBLEM USING 10 % AND 12 % DISCOUNT FACTORS , IRR WILL BE COMPUTED

IRR USING TRIAL AND ERROR METHOD

YEAR CFAT ( ₹ ) PVF @ 10 % PV CFAT @ 10 % PVF @ 12 % PV CFAT @ 12 %

1 50000 0.909 45450 0.893 44650

2 50000 0.826 41300 0.797 39850
3 60000 0.751 45060 0.712 42720
4 60000 0.683 40980 0.636 38160
5 60000 0.621 37260 0.567 34020

210050 199400

IRR= D1 + ( PV OF CFAT AT D1)- (PV OF CASH OUTLAYS)/ ( PVOF CFAT AT D2 - PV OF CFAT AT D2)* ( D2-D1)

= 10 % + (210050-200000)/(210050-199400) * ( 12%-10%)
11.88732394 %
PROJECT Q
IF THE CASH FLOW AFTER TAX IS EVEN, WE CAN ADD THE FACTORS I.E ASCERTAIN PRESENT VALUE OF ANNUITY FACTOR @ 10 % AND 12 %

FAKE PAY BACK PERIOD= INITIAL OUTLAY/ AVERAGE ANNUAL CASH INFLOWS
=280000*5/400000
3.571428571

AS PER PROBLEM USING 12 % AND 14 % DISCOUNT FACTORS , IRR WILL BE COMPUTED

PV FACTOR( AS PER ANNUITY

TABLE) DISCOUNT RATE
3.605 12%
3.433 14%

IRR USING TRIAL AND ERROR METHOD

YEAR CFAT ( ₹) PV ANNUITY FACTOR @ 12 % PV CFAT @ 12 % PV ANNUITY FACTOR @ 14 % PV CFAT @ 14 %

1-5 80000 3.605 288400 3.433 274640
( SINCE CFAT FOR 1-5 IS EVEN) ( SINCE CFAT FOR 1-5 IS EVEN)

IRR= D1 + ( PV OF CFAT AT D1)- (PV OF CASH OUTLAYS)/ ( PVOF CFAT AT D2 - PV OF CFAT AT D2)* ( D2-D1)

= 12 % + (288400-280000)/(288400-274640) * ( 14%-12%)
13.22093023 %

18) NOTE: EAT + DEPRECIATION = CFAT

YEAR EBT TAX @ 40% EAT DEPRECIATION CFAT

( GIVEN BELOW. BALANCE
CHARGED IN LAST YEAR)
1 200000 80000 120000 500000 620000
2 500000 200000 300000 375000 675000
3 700000 280000 420000 281250 701250
4 900000 360000 540000 210937.5 750937.5
5 200000 80000 120000 632812.5 752812.5

1500000

DEPRECIATION @ 25 % ON WDV
PARTICULARS AMOUNT ( ₹ )
COST YEAR O 2000000
Less DEPRECIATION @ 25 % 500000
WDV END OF 1ST YEAR 1500000
Less DEPRECIATION @ 25 % 375000
WDV END OF 2ND YEAR 1125000
Less DEPRECIATION @ 25 % 281250
WDV END OF 3RD YEAR 843750
Less DEPRECIATION @ 25 % 210937.5
WDV END OF 4TH YEAR 632812.5
Less ENTIRE DEP CHARGED 632812.5
WDV AT END OF 5TH YEAR ZERO

ARR
( a ) Based on Original Investment
=Average Annual EAT/Original Investment * 100
=1500000/5/2000000*100
15 %

(b) Based on Average Investment

=Average Annual EAT/ Average Investment *100
=1500000/5*2/20000000 * 100
30 %

DISCOUNTED PAY BACK PERIOD

YEARS CFAT PVF @ 10 % PV OF CFAT CUMM PV OF CFAT

1 620000 0.909 563580.00 563580.00

2 675000 0.826 557550.00 1121130.00
3 701250 0.751 526638.75 1647768.75
4 750937.5 0.683 512890.31 2160659.06
5 752812.5 0.621 467496.56 2628155.63

GROSS PV OF CASH INFLOWS 2628155.63

LESS: COST OF PROJECT 2000000.00
DISCOUNTED PAY BACK PROFIT/NPV 628155.63

DISCOUNTED PAY BACK PERIOD =

=3+(2000000-1647768)/512890.31
3 YEARS AND
=352231.25/512890.31 YEARS
0.686757467 YEARS
=3.687 YEARS

19) NOTE: ADDITIONAL WORKING CAPITAL IS REPORTED WHICH MEANS IT IS OUTFLOW(-) AT BEGINNING OF YEAR AND RECOVERY (+)AT END OF THE YEAR .

PARTICULARS ₹
Cost 10000000
Less: Dep @ 25 % on WDV 2500000
WDV at end of 1st Year 7500000
Less: Dep @ 25 % on WDV 1875000
WDV at end of 2nd Year 5625000
Less: Dep @ 25 % on WDV 1406250
WDV at end of 3rd Year 4218750
Less: Dep @ 25 % on WDV 1054688
WDV at end of 4th Year 3164063
Less: Dep @ 25 % on WDV 791016
WDV at end of 5th Year/charged
entirely/Scrap
2373047

PARTICULARS Per Unit Total for 1,00,000 units

Sales 120
Less: Variable Cost 60
Contribution 60 6000000
Less Fixed Overheads 1500000
Profit before Dep & Tax 4500000

PARTICULARS CASH INFLOWS YEARS

YEARS 1 2 3 4 5
Profit before Dep & Tax 4500000 4500000 4500000 4500000 4500000
Less: Depreciation 2500000 1875000 1406250 1054688 791016
Profit before Tax 2000000 2625000 3093750 3445312 3708984
Less : Tax @ 40 % 800000 1050000 1237500 1378125 1483594
Profit After Tax( Earnings) 1200000 1575000 1856250 2067187 2225390
Add : Depreciation 2500000 1875000 1406250 1054688 791016
Cash Flow After Tax 3700000 3450000 3262500 3121875 3016406

NET PRESENT VALUE

NOTE: OUTFLOW TOWARDS WORKING CAPITAL IS AT BEGINNING OF THE YEAR AND RECOVERY OF WORKING CAPITAL IS AT END OF THE YEAR

PARTICULARS YEAR CASH INFLOW PVF @ 12 % PV OF CASH INFLOW

1 3700000 0.8929 3303730

2 3450000 0.7972 2750340
3 3262500 0.7118 2322248
4 3121875 0.6355 1983952
5 3016406 0.5674 1711509
WORKING CAPITAL RECOVERY 5 4000000 0.5674 2269600
DEPRECIATION/ SCRAP 5 2373046 0.5674 1346466

GROSS PV OF CASH INFLOWS 15687844

OUTLAY = 100 LAKHS + 40 LAKHS LESS: COST OF P& M & WC 14000000
NET PRESENT VALUE 1687844

DISCOUNTED PAY BACK PERIOD

YEAR CASH INFLOW PV @ 12 % PV OF CASH INFLOW CUM. PV OF CASH INFLOW

1 3700000 0.8929 3303730 3303730

2 3450000 0.7972 2750340 6054070
3 3262500 0.7118 2322248 8376318
4 3121875 0.6355 1983952 10360269
5 3016406 0.5674 1711509 12071778

DISCOUNTED PAY BACK PERIOD 3 + (10000000-8376318)/1983952 YEARS

= 3 YEARS AND
=(1623682/1983952)
0.818407905 YEARS
I.E 3 .818 YEARS

20 ) CAPITAL RATIONING PROBLEMS

NOTE CAPITAL BUDGET CONSTRAINT IS ₹ 3,00,000
IN VIEW OF CONSTRAINTS OR RESOURCES BEING LIMITED , WE HAVE TO MAKE A CHOICE BETWEEN PROJECTS HAVING HIGHER NPV AND RATE OF RETURN ON INVESTMENT

WE SHOULD PROVIDE 2 OPTIONS ONE WITH HIGHEST NPV AND ANOTHER WITH HIGHER RATE OF RETURN ON INVESTMENT

COMBINATION 1 OUTLAY NPV

₹ ₹

A 160000 65000
B 140000 50000
300000 115000

RETURN= =115000/300000*100
38.33 %

COMBINATION 2 OUTLAY NPV

₹ ₹

A 160000 65000
E 70000 32000
230000 97000

RETURN= =97000/230000*100
42.17 %

IN COMBINATION 1 NPV IS HIGHER AND IN COMBINATION II RETURN ON CAPITAL EMPLOYED ( NPV/ INVESTMENT *100) IS HIGHER.
HOWEVER ₹ 70,000 SHOULD BE PROFITABLY INVESTED . ALSO TO BE NOTED THAT NPV IS LESS BY ₹ 18000 IN COMBINATION II.

21) CAPITAL BUDGET CONSTRAINT IS ₹ 25,00,000

COMBINATION 1 OUTLAY NPV
₹ ₹
A 1500000 500000
B 1000000 450000
2500000 950000

COMBINATION 2 OUTLAY NPV

₹ ₹
C 900000 400000
D 800000 350000
E 700000 250000
2400000 1000000

COMBINATION 3 OUTLAY NPV

₹ ₹
B 1000000 450000
D 800000 350000
E 700000 250000
2500000 1050000

COMBINATION 3 IS SELECTED SINCE THE ENTIRE OUTLAY IS COVERED AND THE NPV IS ALSO HIGHER COMPARED TO COMBINATION 1 & 2.

22) RANK PROJECTS BASED ON PROFITABILITY INDEX AND THEN BASED ON THE AVAILABILITY OF FUNDS
PROJECT WHICH HAS LESS THAN 1 PROFITABIITY INDEX IS TO BE REJECTED
CAPITAL BUDGET CONSTRAINT IS ₹ 200000
RANK PROJECT PROFITABILITY INDEX INITIAL OUTLAY (₹)

1 D 1.25 80000
2 G 1.19 20000
3 B 1.16 35000
4 C 1.14 25000
5 F 1.09 40000
200000
6 E 1.05 20000
220000

FROM ABOVE , OUTLAY IS COVERED FOR FIRST 5 PROJECTS OF HIGHER PI AS PER RANKING METHOD SO PROJECT E IS REJECTED
AND PROJECTS D, G, B,C & F ARE ACCEPTED. PROJECT A IS REJECTED OUTRIGHT AS IT HAS LESS THAN 1 PROFITABILITY INDEX.

23) CAPITAL BUDGET CONSTRAINT IS ₹ 60,000

FORMULA PI= PV OF CASH INFLOWS/ PV OF CASH OUTFLOW ALSO NET FLOW= INFLOW - OUTFLOW
RANK PROPOSAL PI

1 R 1.15
2 P 1.13
3 Q 1.11
4 S 1.08
COMBINATION PROPOSAL INITIAL OUTLAY ( ₹) PI CASH INFLOW( OUTLAY * PI) NET FLOW= INFLOW-
OUTFLOW

1 R 40000 1.15 46000 6000

2 P 25000 1.13 28250 3250

3 P 25000 1.13 28250 3250

Q 35000 1.11 38850 3850
60000 67100 7100

COMBINATION 3 IS SELECTED SINCE ENTIRE FUNDS ARE UTILISED ( ₹ 60,000 AND HAS HIGHEST NPC OF ₹ 7,100 COMPARED TO COMBINATION 1 & 2.

24) CAPITAL RATIONING / CONSTRAINT ₹ 700 LAKHS

CASH INFLOW = NET CASH FLOW + CASH OUTFLOW/OUTLAY & PI= PV OF CASH INFLOW/ CASH OUTLAY
IN THIS PROBLEM WE HAVE TO RANK THE PROJECT BASED ON PI SO PI HAS TO BE CALCULATED

PROJECT NET CASH FLOW(GIVEN) CASH OUTFLOW CASH INFLOW PI= PV CASH INFLOW/CASH OUTFLOW RANK
₹ IN LAKHS ₹ IN LAKHS ₹ IN LAKHS
M 26.7 340 366.7 1.079 4
 N 36.7 280 316.7 1.131 2
O 38.8 300 338.8 1.129 3
P 70.6 320 390.6 1.221 1

CAPITAL CONSTRAINT ₹ 700 LAKHS

RANK PROJECT INITIAL OUTLAY NPV
( ₹ IN LAKHS) ( ₹ IN LAKHS)

1 P 320 70
2 N 280 36.7
3 O 100 ( BALANCE) 12.93
700 120.23

FOR 300 OUTFLOW NET CASH FLOW IS 38.8

SO FOR 100 ( BALANCE) IT IS 100*38.8/300=12.93

25) CAPITAL RATIONING ₹ 70 LAKHS

NOTE Q & R ARE MUTUALLY EXCLUSIVE PROJECTS. IT MEANS IF Q IS SELECTED CANNOT ACCEPT R AND VICE VERSA.
NOTE IT IS ALSO ASSUMED THAT THE PROJECTS ARE INDIVISIBLE

COMBINATION PROJECT INITIAL OUTLAY NPV

₹ IN LAKHS ₹ IN LAKHS
1 P 50 20
Q 10 9
60 29
2 Q 10 9
S 32 6.4
42 15.4
3 R 35 7.2
S 32 6.4
67 13.6

26) ACCOUNTING RATE OF RETURN

NOTE WE CONSIDER PAT/ EAT FOR ARR INV PROJECT X= 400000 INV PROJECT Y= 560000
YEAR MACHINE X MACHINE Y
PAT + DEPRECIATION=CASH INFLOWS PAT + DEPRECIATION=CASH INFLOWS
PAT DEPRECIATION CFAT/CASH INFLOW PAT DEPRECIATION CFAT/CASH INFLOW
1 12000 80000 92000 10000 80000 90000
2 12000 80000 92000 40000 80000 120000
3 42000 80000 122000 40000 80000 120000
4 24000 80000 104000 20000 80000 100000
5 12000 80000 92000 10000 80000 90000
6 10000 80000 90000
7 10000 80000 90000

TOTAL 102000 400000 502000 140000 560000 700000

MACHINE X MACHINE Y
ARR= AVERAGE ANNUAL/ ORIGINAL INV * 100 AVERAGE ANNUAL/ ORIGINAL INV * 100
=102000/(5/400000)*100 =140000/(7/560000)*100
5.1 % 3.59 %
OR
( CONSIDERING AVG INV)

AVERAGE ANNUAL/ AVERAGE INV * 100 AVERAGE ANNUAL/ AVERAGE INV * 100

=102000/(5/200000)*100 =140000/(7/280000)*100
10.2 % 7.14 %

MACHINE X IS RECOMMENDED SINCE ARR IS IS HIGHER THAN MACHINE Y

PROFITABILITY INDEX

NOTE: CONSIDERING CFAT/ CASH INFLOWS , ASCERTAIN PV

YEAR PV FACTOR @ 10 % MACHINE X MACHINE Y

CASH INFLOWS PV OF CASH INFLOWS CASH INFLOWS PV OF CASH INFLOWS
1 0.909 92000 83628 90000 81810
2 0.826 92000 75992 120000 99120
3 0.751 122000 91622 120000 90120
4 0.683 104000 71032 100000 68300
5 0.621 92000 57132 90000 55890
6 0.564 0 90000 50760
7 0.513 0 90000 46170
PV OF CASH INFLOWS 379406 492170
MACHINE X MACHINE Y
PROFITABILITY INDEX = PV OF CASH INFLOWS/ PV OF CASH OUTFLOWS = PV OF CASH INFLOWS/ PV OF CASH OUTFLOWS
=379406/400000 =492170/560000
0.95 0.88

NOTE: PI OF BOTH MACHINE X AND MACHINE Y IS LESS THAN 1 SO BOTH ARE TO BE REJECTED . BUT IF ONE HAS TO BE SELECTED , WE MAY CONSIDE MACHINE X SINCE PI IS HIGHER THAN MACHINE Y

27) CALCULATION OF NPV INVESTMENT ₹ 5,00,000

MACHINE A
YEAR EAT/PAT DEPRECIATION CASH INFLOWS AT PV FACTOR @ 10 % PRESENT VALUE
1 150000 100000 250000 0.909 227250
2 200000 100000 300000 0.826 247800
3 250000 100000 350000 0.751 262850
4 150000 100000 250000 0.683 170750
5 100000 100000 200000 0.621 124200
1032850
NPV= PV OF CASH INFLOWS- PV CASH OUTFLOW
=1032850-500000
532850

PROFITABILITY INDEX PV OF CASH INFLOWS/PV OF CASH OUTFLOW

=1032850/500000
2.0657

CALCULATION OF NPV INVESTMENT ₹ 5,00,000

MACHINE B
YEAR EAT/PAT DEPRECIATION CASH INFLOWS AT PV FACTOR @ 10 % PRESENT VALUE
1 50000 100000 150000 0.909 136350
2 150000 100000 250000 0.826 206500
3 200000 100000 300000 0.751 225300
4 300000 100000 400000 0.683 273200
5 200000 100000 300000 0.621 186300
1027650
NPV= PV OF CASH INFLOWS- PV CASH OUTFLOW
=1027650-500000
527650

PROFITABILITY INDEX PV OF CASH INFLOWS/PV OF CASH OUTFLOW

=1027650/500000
2.0553

MACHINE A IS MORE PROFITABLE THAN MACHINE B

28) BAJAJ MOTORS- EQUIPMENT A

NOTE; COST OF EQUIPMENT =14 LAKHS
OUTFLOW TOWARDS WORKING CAPITAL IS INCURRED AT BEGINNING OF THE YEAR AND RECOVERY IS DONE AT END OF THE YEAR.
CALCULATION OF NPV
YEAR NET PROFIT BEF DEP & TAX DEPRECIATION(NOTE) NP BEFORE TAX TAX NPAT/EAT CFAT ( ADD DEP)
PV FACTOR @ 10
PV%CASH INFLOW
1 700000 200000 500000 200000 300000 500000 0.9091 454550
2 700000 200000 500000 200000 300000 500000 0.8264 413200
3 700000 200000 500000 200000 300000 500000 0.7513 375650
4 700000 200000 500000 200000 300000 500000 0.6830 341500
5 700000 200000 500000 200000 300000 500000 0.6209 310450
5 WORKING CAPITAL 600000 0.6209 372540
5 SCRAP/SALVAGE 400000 0.6209 248360
GROSS PRESENT VALUE OF CASH INFLOWS 2516250
LESS: COST OF P & M 2000000
NET PRESENT VALUE 516250
NOTE
DEPRECIATION = ( COST OF ASSET- SCRAP)/ ESTIMATED LIFE
=(1400000-400000)/5
200000

BAJAJ MOTORS- EQUIPMENT B

NOTE; COST OF EQUIPMENT =14 LAKHS
OUTFLOW TOWARDS WORKING CAPITAL IS INCURRED AT BEGINNING OF THE YEAR AND RECOVERY IS DONE AT END OF THE YEAR.
CALCULATION OF NPV
YEAR NET PROFIT BEF DEP & TAX DEPRECIATION(NOTE) NP BEFORE TAX TAX NPAT/EAT CFAT ( ADD DEP)
PV FACTOR @ 10
PV%CASH INFLOW
1 200000 200000 0 0 0 200000 0.9091 181820
2 300000 200000 100000 40000 60000 260000 0.8264 214864
3 500000 200000 300000 120000 180000 380000 0.7513 285494
4 600000 200000 400000 160000 240000 440000 0.6830 300520
5 2800000 200000 2600000 1040000 1560000 1760000 0.6209 1092784
5 WORKING CAPITAL 600000 0.6209 372540
5 SCRAP/SALVAGE 400000 0.6209 248360
GROSS PRESENT VALUE OF CASH INFLOWS 2696382
LESS: COST OF P & M 2000000
NET PRESENT VALUE 696382
NOTE
DEPRECIATION = ( COST OF ASSET- SCRAP)/ ESTIMATED LIFE
=(1400000-400000)/5
200000

EQUIPMENT B IS MORE PROFITABLE

29)
PANTHER CLAW PRODUCTION LTD
CALCULATION OF NET PRESENT VALUE

YEAR CASH INFLOW PV FACTOR @ 10 % PRESENT VALUE

1 125000 0.9091 113638

2 150000 0.8264 123960
3 187500 0.7513 140869
4 180000 0.6830 122940
5 112500 0.6209 69851
SCRAP 15000 0.6209 9314
WORKING CAPITAL 20000 0.6209 12418
PV OF CASH INFLOWS 592989
LESS PV OF CASH OUTLAY 270000
NET PRESENT VALUE 322989

PROFITABILITY INDEX

PI= PV OF CASH INFLOWS/ PV OF CASH OUTFLOW

=592989/270000
2.20

30) CALCULATION OF CASH INFLOW

PARTICULARS ₹
Sales 40000
Less: Operating Expenses 7500
Net Profit before Dep. & Tax 32500
Less: Depreciation 9250
Net Profit before Tax 23250
Less: Tax @ 40 % 9300
Net Profit after Tax 13950
Add: Depreciation 9250
Cash Inflow 4700

Depreciation = (Cost of Asset- Scrap Value)/ Life of Asset

= (80000-6000)/8
=9250

NPV AND PROFITABILITY UNDER OUTSOURCING

YEAR CASH INFLOW PV FACTOR @ 10 % PRESENT VALUE

₹ ₹ ₹
1 12000 0.909 10908
2 12000 0.826 9912
3 12000 0.751 9012
4 12000 0.683 8196
5 12000 0.621 7452
6 12000 0.564 6768
7 12000 0.513 6156
8 12000 0.467 5604

64008

NPV= PV OF CASH INFLOWS - PRESENT VALUE OF CASH OUTFLOWS

= 64008- NIL 64008 ₹

PROFITABILITY INDEX = PV OF CASH INFLOWS/ PV OF CASH OUTFLOWS

64008/0 0

NPV AND PROFITABILITY UNDER PURCHASE OF DIAGNOSTIC EQUIPMENT COST = ₹ 80,000

YEAR CASH INFLOW PV FACTOR @ 10 % PRESENT VALUE

₹ ₹ ₹
1 23200 0.909 21088.8
2 23200 0.826 19163.2
3 23200 0.751 17423.2
4 23200 0.683 15845.6
5 23200 0.621 14407.2
6 23200 0.564 13084.8
7 23200 0.513 11901.6
8 23200 0.467 10834.4
SALVAGE 9 6000 0.467 2802
126550.8

NPV= PV OF CASH INFLOWS - PRESENT VALUE OF CASH OUTFLOWS

= 126550.8-80000 46550.8 ₹

PROFITABILITY INDEX = PV OF CASH INFLOWS/ PV OF CASH OUTFLOWS

=126550.8/800000
1.58

OUTSOURCING IS MORE PROFITABLE SINCE NPV IS HIGHER THAN THAT UNDER PURCHASE OF DIAGNOSTIC EQUIPMENT

31) PROPOSAL A : ₹ 195 LAKHS IN FULLY AUTOMATIC MACHINE

YEAR EARNINGS BEFORE DEP & TAX DEP @ 10 % WDV EBT TAX @ 40 % EAT= EBT - TAX CFAT= EAT+DEP PV @ 10 % PRESENT VALUE
(₹ LAKHS) (₹ LAKHS) (₹ LAKHS) (₹ LAKHS) (₹ LAKHS) (₹ LAKHS) (₹ LAKHS) (₹ LAKHS)
1 36 19.50 16.50 6.60 9.90 29.40 0.909 26.72
2 38 17.55 20.45 8.18 12.27 29.82 0.826 24.63
3 40 15.79 24.21 9.68 14.53 30.32 0.751 22.77
4 42 14.21 27.79 11.12 16.67 30.88 0.683 21.09
5 44 12.79 31.21 12.48 18.73 31.52 0.621 19.57
6 46 11.51 34.49 13.80 20.69 32.20 0.564 18.16
7 47 10.36 36.64 14.66 21.98 32.34 0.513 16.59
8 48 9.32 38.68 15.47 23.21 32.53 0.467 15.19
SCRAP 83.97 0.467 39.21

PRESENT VALUE OF INFLOW 203.95

LESS: CASH OUTFLOW 195
8.95

PROPOSAL B : ₹ 150 LAKHS IN SEMI AUTOMATIC MACHINE

YEAR EARNINGS BEFORE DEP & TAX DEP @ 10 % WDV EBT TAX @ 40 % EAT= EBT - TAX CFAT= EAT+DEP PV @ 10 % PRESENT VALUE
(₹ LAKHS) (₹ LAKHS) (₹ LAKHS) (₹ LAKHS) (₹ LAKHS) (₹ LAKHS) (₹ LAKHS) (₹ LAKHS)
1 23 15.00 8.00 3.20 4.80 19.80 0.909 18.00
2 24 13.50 10.50 4.20 6.30 19.80 0.826 16.35
3 25 12.15 12.85 5.14 7.71 19.86 0.751 14.91
4 26 10.93 15.07 6.03 9.04 19.97 0.683 13.64
5 27 9.84 17.16 6.86 10.30 20.14 0.621 12.50
6 28 8.86 19.14 7.66 11.48 20.34 0.564 11.47
7 29 7.97 21.03 8.41 12.62 20.59 0.513 10.56
8 30 7.17 22.83 9.13 13.70 20.87 0.467 9.75
SCRAP 64.58 0.467 30.16

PRESENT VALUE OF INFLOW 137.35

LESS: CASH OUTFLOW 150
NET PRESENT VALUE -12.65
NOTES CALCULATION OF DEPRECIATION

PARTICULARS FULLY AUTOMATIC SEMI- AUTOMATIC

(₹ LAKHS) (₹ LAKHS)
COST 195.00 150.00
1 DEPRECIATION @ 10 % 19.50 15.00
WDV 175.50 135.00
2 DEPRECIATION @ 10 % 17.55 13.50
WDV 157.95 121.50
3 DEPRECIATION @ 10 % 15.79 12.15
WDV 142.16 109.35
4 DEPRECIATION @ 10 % 14.21 10.93
WDV 127.95 98.42
5 DEPRECIATION @ 10 % 12.79 9.84
WDV 115.16 88.58
6 DEPRECIATION @ 10 % 11.51 8.85
WDV 103.65 79.73
7 DEPRECIATION @ 10 % 10.36 7.97
WDV 93.29 71.76
8 DEPRECIATION @ 10 % 9.32 7.17
WDV 83.97 64.59

RECOMMENDATION
FULLY AUTOMATIC MACHINE IS MORE PROFITABLE THAN SEMI-AUTOMATIC MACHINE AS ITS NPV IS POSITIVE

32) STATEMENT OF NET PRESENT VALUE AT 10 %

YEAR INFLOW ( ₹) PV FACTOR @ 10 % PRESENT VALUE

₹
1 20000 0.90909 18181.8
2 30000 0.82645 24793.5
3 60000 0.75131 45078.6
4 80000 0.68301 54640.8
5 30000 0.62092 18627.6
40000 0.62092 24836.8

PRESENT VALUE OF INFLOWS 186159.1 (A)

LESS: CASH OUTFLOW AT

BEGINING OF YEAR ₹ 1,50,000 1 150000

AND CASH OUTFLOWS ( 2ND YR) ₹ 30,000 0.90909 27273

TOTAL PV OF CASH OUTFLOW 177273 (B)

NET CASH INFLOW 8886 (A)- (B)

RECOMMENDATION

NPV IS POSITIVE SO THE PROJECT CAN BE ACCEPTED