M1 M2 M3 M1 M2 M3

Initial Investment (in Rs) 300000 300000 300000 Initial Investment 300000 300000 300000
Scrap Value 40000 25000 30000
Sales (revenue) 500000 400000 450000 Economic Life (in years) 2 3 3
Costs/ Expenditure
Direct Materials 40000 50000 48000 Cost of the machine 260000 275000 270000
Direct labor 50000 30000 36000 Depreciation (SLM) 260000/2 275000/3 270000/3
Factory OH 60000 50000 58000 Annual depreciation amoun 130000 91666.67 90000
Administration cost 20000 10000 15000
Selling and Distribution cost 10000 10000 10000
Depreciation 130000 91667 90000
Total of the cost 310000 241667 257000

PBT (revenue-exp) 190000 158333 193000

Less: Tax @40% 76000 63333.2 77200
PAT (profit after tax) 114000 94999.8 115800
Add: Depreciation 130000 91667 90000
Net Cash Flow (operating savings) 244000 186666.8 205800
Pay back period (Initial Investment/ OS) 1.229508 1.607142 1.457726
1.22 years 1.61 years 1.46 years
Decision
Machine 1 should be selected
as the pay back period is the
least among all machines
Payback period for Equipment 'Best'

Initial Investment 75000

Annual CF 20000
Economic Life 6
Pay back period Initial Investment/ annual OS
75000/20000
3.75 years

Payback period for Equipment 'Better'

Initial Investment 50000

Annual CF 18000
Economic Life 4years
Pay back period 50000/18000
2.777778 years

Decision: Selecting equipment 'better' is good as it has a lower payback period

calculation of NPV (at 7% opportunity rate) PVF= 1/(1+r)^n
Machine A MachineB
Year PVF Cash flows PVF PV(CF*PVF) Cash Flows PVF PV
0 1 -100000 1 -100000 -60000 1 -60000
1 0.934579 20000 0.935 18700 -60000 0.935 -56100
2 0.873439 60000 0.873 52380 60000 0.873 52380
3 0.816298 40000 0.816 32640 60000 0.816 48960
4 0.762895 30000 0.763 22890 80000 0.763 61040
5 0.712986 20000 0.713 14260 0 0.713 0
NPV =sum of all the cash NPV =sum of all the cash
flows 40870 flows 46280
Decision Machine B is having a higher NPV and may be selected
(i) Year
1
2
3
4
5

(ii) Calculation of ARR

Average Investment
Average Profit

(iii) Year
1
2
3
4
5
 Depreciati PAT+depr Cummula
CF on PBT PAT eciation tive CF PayBack period
10000 10000 0 0 10000 10000 E=4years
11000 10000 1000 650 10650 20650 B=50000-46500=3500
14000 10000 4000 2600 12600 33250 C=19750
15000 10000 5000 3250 13250 46500
25000 10000 15000 9750 19750 66250 4.17721518987342

Calculation of ARR
Average Investment 25000
Average Profit 3250
13 %

Pv of Cash
CF PVF@10% PV Outflow NPV PI
10000 0.909091 0.909 9090
10650 0.826446 0.826 8796.9
12600 0.751315 0.751 9462.6
13250 0.683013 0.683 9049.75
19750 0.620921 0.621 12264.75
48664.00 50000 -1336.00 0.97328
 PVF to three decimal Discounted Cash
(ii) Cash flows PVF @ 16%places flows (iii)
Years Project A Project B Project A Project B Years
1 0 60000 0.862069 0.862 0 51720 1
2 30000 84000 0.743163 0.743 22290 62412 2
3 132000 96000 0.640658 0.641 84612 61536 3
4 84000 102000 0.552291 0.552 46368 56304 4
5 84000 90000 0.476113 0.476 39984 42840 5
Total of PV of inflows 193254 274812
PV of Cash outflow
NPV=PV of inflows-PV of 135000 240000
outflows 58254 34812
PI value= PV of Years
(iii) PI for project A & B inflows/PV of outflows 1.431511 1.14505 1
2
3
Calculate - payback period, MPV & PI for both 4
5
 Cummulative
Discounted Discounted
Cash flows Casf flow
Project A
0 0 E=3
22290 22290 B=135000-106 28098
84612 106902 C=46368
46368 153270 3+(28098/46368)
39984 193254 3.605978261 3.61 years

Project B
51720 51720 E=4
62412 114132 B=240000-231 8028
61536 175668 C=42840
56304 231972 4+(8208/42840)
42840 274812 4.191596639 4.19 years