Your company is considering two projects M and N each of which requires an in

year project M project N

1 11 38
2 19 22
3 32 18
4 37 10

(a) What is the payback period for M and N

(b) What is the discounted payback period for M and N if the cost of capital is 12
(c ) If the two projects are independent and the cost of capital is 12 % which proj
(d) If the two projects are mutually exclusive and the cost of capital is 10% whic
(e) If the two projects are mutually exclusive and the cost of capital is 15% whic

(a) Initial outlay 50 million

year project M cummulativeproject cummulative
1 11 11 38 38
2 19 30 22 60
3 32 62 18 78
4 37 99 10 88

Project M
Recovered 30 million up to 2 year and unrecovered amt is 20 million
therefore to recovered 20 million how many month required
12 m=32 million so to recover 20 million 7.5 months
0.625 years
Payback pe2.63 years

So we will select project N based on payback period

( b) Year M PV@12% PVCF Cummulative

1 11 0.89285714 9.821429 9.821429
2 19 0.79719388 15.14668 24.96811
3 32 0.71178025 22.77697 47.74508 Unrecover
4 37 0.63551808 23.51417 71.25925
Pay back period
Year N PV@12% PVCF Cummulative
 1 38 0.89285714 33.92857 33.92857
2 22 0.79719388 17.53827 51.46684 Unrecovered amount
3 18 0.71178025 12.81204
4 10 0.63551808 6.355181

Payback pe

( C) M N
Initial outlay -50 -50
1 11 38
2 19 22
3 32 18
4 37 10
NPV 21.26 20.63
Accept all poject in case of independent project

( d) M N
Initial outlay -50 -50
1 11 38
2 19 22
3 32 18
4 37 10
NPV 25.02 23.08
In case of mutually exclusive project accept the project which has higher NPV so we reject project N

( e) M N
Initial outlay -50 -50
1 11 38
2 19 22
3 32 18
4 37 10
NPV 16.13 17.23
If discount rate change in that case Project N will accept and project M will reject( in case of mutually ex
which requires an initial outlay of Rs 50 million.The expected cash inflows from these projects ar

Points to remember
Independent projThe acceptance of one project does not effect the cash flow of other projec

Mutually exclusivTwo project are mutually exclusive then the acceptance of one project reje

cost of capital is 12%?

is 12 % which project should rhe firm invest in?
capital is 10% which project should the firm invest in?
apital is 15% which project should the firm invest in?

12

Project N
Recovered 38 million in 1st year and unrecovered amt is 12 million
to recoved 12 milliom how many months required
6.545455 months
0.545455 years
Payback pe 1.55 year
d on payback period

2.25492 12 months 23.52417

2.25492 1.150265 months
Pay back period 3.09 years Reject 0.095855 year
 Unrecovered amount 16.07143
1.83 years
so we reject project N
ject( in case of mutually exclusive project)
12 months 17.53826530612
16.07142857143 10.99636 months
0.833333 years
Accept
Points to remember
Independent projThe acceptance of one project does not effect the cash flow of other projec
Mutually exclusivTwo project are mutually exclusive then the acceptance of one project reje
ws from these projects are

ffect the cash flow of other project

he acceptance of one project reject the other project

ffect the cash flow of other project

he acceptance of one project reject the other project

Capital outlay 100000
life of project 5 years
Salvage value NIL
Tax rate 30%
Estimated annual profit before depreciation
Year (i) Pay back period
1 20000 Year Profit befo
2 22000 1 20000
3 28000 2 22000
4 30000 3 28000
5 50000 4 30000
Compute:- 5 50000
(i) Payback period
(ii) ARR
(III) NPV @ 10%
(IV) PI
(V) IRR
Use SLM Method for Depreciation

( ii)

(iii)
Year
0
1
2
3
4
 5

(iv)

(v )
Year
0
1
2
3
4
5
 •Average/Accounting Rate of Return
•(Annual Average Earnings After Tax/Average Investment) x 100
•Annual Av. Earnings after Tax = Earnings after depreciation and tax/Total peri
•Av. Investment (each year) = (Op. Investment + Cl. Investment)/2
•Av. Investment (for Project Period) = (Av. Investment 1 + Av. Investment2 + …
•Investment includes Working Capital
In case SLM for Depreciation is used Av. Investment = Working Capital + Salvag

Depreciati PBT tax@30% PAT Cash flow Cumulative CF (ii) ARR

20000 0 0 0 20000 20000
20000 2000 600 1400 21400 41400
20000 8000 2400 5600 25600 67000
20000 10000 3000 7000 27000 94000
20000 30000 9000 21000 41000 135000

Depreciation(SLM) (Original cost-salvage value)/useful life

20000

Up to 4th year recovered amt 94000

Unrecovered amt 6000

12m = 41000
for 6000 1.756098 months
0.146341 years
Payback period 4.15 years

Year PAT Average P 7000

1 0 Average investment 50000
2 1400
3 5600 ARR 14%
4 7000
5 21000

NPV @10% NPV= PV of cash inflows- Outflow

Cash flowsPV @ 10%
-100000
20000 18181.8181818182
21400 17685.9504132231
25600 19233.6589030804
27000 18441.3632948569
 41000 25457.7742454253
Total 99000.565038404
NPV -999.4
NPV -999.43 =H43+NPV(10%,H44:H48)
NPV is negative so reject the project

Profitability index 0.99

PI < 1 Reject the project

IRR Use trail and error method

Cash flows
-100000 PV @5%
20000 19047.619047619
21400 19410.4308390023
25600 22114.2425224058
27000 22212.9668193808
41000 32124.5728252068
Total 114909.832053615
NPV 14909.8320536147

LR 5% 14909.83
HR 10% -999.4
IRR 9.69% (approx) by trial and error method
9.65% =IRR(H61:H66)
ment) x 100
ciation and tax/Total period of Project
nvestment)/2
nt 1 + Av. Investment2 + …..Av. Investment n)/n

= Working Capital + Salvage Value + (Original Cost – Salvage Value)/2

Bright Matels Ltd is considering two different investment proposals, A & B.The details are as under:

Proposal A(₹) Proposal B(₹)

Investment cost 9500 20000
Estimated Income
Year 1 4000 8000
Year2 4000 8000
Year 3 4500 12000

Suggest the most attractive proposal on the basis of the NPV method considering that the future incomes are disco
uture incomes are discounted at 12%.Also find out the IRR of the two proposal
Initial Cash outflows=
Subsequent cash inflows:-
Terminal Cash inflows
Basic Principles for calculation of cash flows
Cash flows from the point of view
Cost of new plant+Installation exp+other capital expenditure+Additio
PAT+Depreciation+Financial charges(1-t)-Repairs (if any)-Capital exp
Annual Cash inflow+Working capital released+Scrap value of the pro
1. All relevant cash flows are considered.
2. Cash flows are considered on after- tax basis.
3.Cash flows are considered on incremental basis.
4.Tax saving is considered as an inflows.
5.Sunk costs are ignored( as these are not incremental)
6. Opportunity costs are considered ( as these are sacrificed)
7. Additional working capital required for a project is considered as a
At the end of life of project,these funds(blocked in working capital) a
8.Unless given otherwise,inflows are assumed to have occurred at th
9.In Replacement decisions,savings in costs are considered as inflows
10.Allocated overhaeds are not outflows( as these are not increment
Capital budgeting propsal are considered and evaluated from the po
 apital expenditure+Additional working capital-Tax benefits on account of capital loss on sale of old plant (if any)-salvage value of old plant

Repairs (if any)-Capital expenditure(if any)

sed+Scrap value of the proposal(if any)

incremental)
hese are sacrificed)
a project is considered as an outflow( as the funds are blocked for the life time of the project).
ocked in working capital) are released back and are considered as Terminal inflows.
med to have occurred at the end of the year and outflows are assumed to have occurred in the beginning of the year.
s are considered as inflows on the after- tax basis.
as these are not incremental and are being already recovered elsewhere

and evaluated from the point of view of the firm

any)-salvage value of old plant+Tax liability on account of capital gain on sale of oldplant (if any)
A replacement decision occurs when one asset is proposed to be replaced with another
For example:-
An existing machine is proposed to be replaced in order to enhance the production.
In order to evaluate a replacement decision,the incremental net investment(cash outflow)
For this purpose incremental cash inflows may be defined as the cash inflows of the new a
laced with another

he production.
stment(cash outflow) and the incremental cash inflows,that result from the replacement action are to be as
h inflows of the new asset LESS the cash inflows of the existing asset.
nt action are to be ascertained
ABC ltd whose required rate of return is 10% is considering to replace one of its plants by the new plant.

Particular
Present book value/cost
Remaining life (years)
Depreciation(p.a)
Salvage value(current)
Profit before depreciation and tax(annual)
Tax rate
Capital Gain/Loss

Initial outflow
Cost of proposed plant
current scrap value of existing plant
Net cash outflow

Subsequent annual cash inflows(incremental)

Profit before depreciation and tax(annual)
Dep
PBT
Tax @40%
PAT
Dep
Cash inflow
Incremental cash inflows

NPV
PVIFA
Initial outflow
NPV
is 10% is considering to replace one of its plants by the new plant.The relevant data for the existing plant as well as the proposed plant are

Existing Plant Proposed plant

24000 54000
6 6
4000 9000
20000 -
8000 15000
40% 40%
NIL NIL

54000
20000
34000

Existing Proposed Incremental

8000 15000 7000
4000 9000 5000
4000 6000 2000
1600 2400 800
2400 3600 1200
4000 9000 5000
6400 12600 6200

6200 ₹ 27,002.62 6200*4.355

34000
₹ -6,997.38
as the proposed plant are as follows:-
 XYZ Ltd in considering an investment proposal for which the relevant information is as follows:

Particular
Purchase price of the new asset
Installation costs
Increase in working capital in year Zero
Scrap value of the new assets after 4 years
Revenue from new asset( Annual )
Cash expenses on new asset(annual)
Current book value(old assets)
Present scrap value (old assets)
Revenue from old assets( annual)
Cash expenses on old(annual)
Planning period, 4 years
Depreciation on new assets:- 92% the cost s to be depreciated in the ratio of 5:8:6:4 over 4 years.
Existing asset is depreciated at a rate of ₹ 100000 p.a
Evaluate the replacement of old assets given that tax rate is 40% on both revenue as well as capital gains/losses an
Solution:- Calculation of Initial cashoutflow
Purchase price of new assets
Installation cost
Working capital required
Sale of old assets
Tax on capital gain on old assets
Total Initial outflow

Subsequent cash inflows for 4 year

Particulars
Revenue
Cash expenses
Depreciation*1
PBT
Tax@40%
PAT
Add Depreciation
Annual cash flow from new assets
Cash flow from old assets*2
Incremental Cash flows
Terminal value*3

Cash flows
PV of cash flow @ 10%
Total PV of cash flow
Initial cash outflow
NPV
Proposal should be accepted
 Amt (₹)
1000000
200000
250000
350000
2150000
950000
400000
500000
1925000
1125000

as capital gains/losses and cost of capital is 10%

1000000
200000
250000
-500000 Book value(old assets 400000
40000 Sale of old assets 500000
990000 Capital gain 100000
Capital gain tax @40 40000

Year 1 Year2 Year 3 Year 4

2150000 2150000 2150000 2150000
950000 950000 950000 950000
240000 384000 288000 192000 Working Notes:-
960000 816000 912000 1008000 1 Calculation of depreciation on new assets
384000 326400 364800 403200 Cost of new assets
576000 489600 547200 604800 Depreciation(92% of cost)
240000 384000 288000 192000
816000 873600 835200 796800 Yearly dep
520000 520000 520000 520000 1 240000
296000 353600 315200 276800 2 384000
498400 3 288000

296000 353600 315200 775200

269091 292231 236814 529472
1327609
990000 4 192000
337609
2 Calculation of cash flows from old assets
 Revenue from old assets
Cash exp
Depreciation
PBT
Tax @40%
PAT
Add: Dep
Cashflows

3 Calculation of Terminal cash flows

Salvage value
Book Value (8% of 912000)
Gain on sale
Tax @ 40%
Net cash inflows
Working capital released
Total
eciation on new assets
1200000
1104000 This amount is to be depreciated over next 4 year in the ratio of 5:8:6:4

flows from old assets

 1925000
1125000
100000
700000
280000
420000
100000
520000

minal cash flows

350000
96000
254000
101600
248400
250000
498400
 XYZ is interested in assessing the cash flows associated with the replac
.It has a remaining life of five years after which its salvage value is expe
The new machine costs ₹ 400000.It is expected to fetch ₹ 250000 after
The tax rate applicable to the firm is 50%.Find out the relevant cash flo

Old machine New machine

Book value 90000 Cost 400000
Sale value 90000 Life of ew machine
Dep 20 (%) salvage value 250000
Dep 33.33%
Saving due to new machine in cost 10
Step I Initial cash ouflow
Cost of new machine 400000
Sale value of old machin -90000
Total cash outflow 310000

1 Calculation of Depreciation
Depreciation on new machine
Depreciation Rate (33.33% WDV)
Year Dep CB Incremental dep
1 400000 133320 266680 115320
2 266680 88884 177796 74484.44
3 177796 59259 118536 47739.26
4 118536 39508 79028 30292.15
5 79028 26340 52688 18967.28
Depreciation on old machine
year DepreciaCB
1 90000 18000 72000
2 72000 14400 57600
3 57600 11520 46080
4 46080 9216 36864
5 36864 7372.8 29491.2
 with the replacement of an old machine by a new machine.The old machine bought
ge value is expected to be nil.It is being depreciated annually at the rate of 20%(WDV
h ₹ 250000 after five years when it will no longer be required.It will be depreciated an
elevant cash flows for this replacement decision.(Tax on capital gain/loss to be ingor

5 years

achine in cost 100,000

Step II
Savings in manufacturing cost 100000 100000 100000
Incremental Depreciation *1
Net incremental saving(PBT)
Incrementa Tax 50%
Incremental profit(PAT)
Add:-Increment dep
Incremental cash inflows
Sale of new machine
Cash inflows
Sbsequent cash inflows
Year 1 Year 2 Year3
115320 74484 47739
-15320 25516 52261
-7660 12758 26130
-7660 12758 26130
115320 74484 47739
107660 87242 73870
107660 87242 73870

III Terminal cash inflows Cash inflows of Rs 250000 at the end o

Total cash inflow at the end of 5th year
old machine bought a few years ago has a book value of ₹90000 and it can be sold for
he rate of 20%(WDV)
ill be depreciated annually at the rate of 33.33%(WDV).The new machine is expected
ain/loss to be ingored)

Example
Old machine Manufacturing cost
New machine manufacturing cost
Incremental cash inflows/saving

Year4 Year5
100000 100000
30292 18967
69708 81033
34854 40516
34854 40516
30292 18967
65146 59484
250000
65146 309484

250000 at the end of 5th year when new machine will be scrapped
the end of 5th year(59484+250000= 309483.64
can be sold for ₹ 90000.It can be sold for ₹90000

ine is expected to bring a saving of ₹100000 in manufacturing cost.

250000
150000
100000
 ABC Ltd is considering to install a machine co
of ₹ 2000000 in the first year and the sales a
the cash flows generated by the machine giv
1. The machine is depreciated as per straight
2. The additional working capital is required

Initial cash outflows:-

Machine cost 500000
Installation c 150000
Working capit 100000
Total outflo 750000

Working note:-
1 Calculation of Depreciation
Machine cost 500000
Installation c 150000
Salvage valu 250000
Depreciation 40000
Remaining lif 10
 2 Calculation of working capital

Years end Sales

End of 1 st year or beginning of 1 2000000.0
end of 2nd year or beginning of 3 2 2100000.0
3 2205000.0
4 2315250.0
5 2431012.5
6 2552563.1
7 2680191.3
8 2814200.8
9 2954910.9
10 3102656.4
o install a machine costing ₹500000 with an additional investment of ₹ 150000 for its
year and the sales are expected to grow at 5 % p.a. for the remaining life of the mac
d by the machine given that:
ciated as per straight line method
g capital is required in the beginning of the year and is fully salvageable year 10

Subsequent cash flows(year-wise)

Year ending Sales PAT (10% of
1 2000000 200000
2 2100000 210000
3 2205000 220500
4 2315250 231525
5 2431013 243101.25
6 2552563 255256.31
7 2680191 268019.13
8 2814201 281420.08
9 2954911 295491.09
10 3102656 310265.64
Incremental salesAdditional WC Note:- As per the information
100000 5000
105000 5000 5250
110250 5250 5513
115763 5512.5 5788
121551 5788.13 6078
127628 6077.53 6381
134010 6381.41 6700
140710 6700.48 7036
147746 7035.5 7387
155133 7387.28 0
 of ₹ 150000 for its installation.The salvage value at the end of year 10 is estimated a
ning life of the machine.The profit after tax is expected at 10% of the sales while the

eable year 10

Depreciatiion Additional WoSalvage valueWorking capitCash flows

40000 5000 0 0 235000
40000 5250 0 0 244750
40000 5513 0 0 254988
40000 5788 0 0 265737
40000 6078 0 0 277024
40000 6381 0 0 288875
40000 6700 0 0 301319
40000 7036 0 0 314385
40000 7387 0 0 328104
40000 0 250000 155133 755398
er the information given in the question,the additional working capital for a year dep
ar 10 is estimated at ₹ 250000.The machine is estimated to generate a sales revenue
the sales while the working capital requirement are expected to be 5% of the sales.F

Terminal Value
ash flows Salvage value 250000
Working capit 155133
Regular cash 350266
Terminal valu 755398

Terminal value
apital for a year depend upon the sales of the year and its required in the beginning
 ate a sales revenue
be 5% of the sales.Find out
d in the beginning of the year.
A company proposes to manufacture a new product by installing a machine costing Rs 30 Lakhs .The machine has a
The scrap value of the machine at the end of its life is expected to be Rs 6 lakhs.The project will require infusion of
at the end of year 5.It is also estimated that a sum of Rs 3 will have to be spent in the first year of operations as pro

Year 1 2 3 4 5
Cash flow(Rs) 11 14 18 17 9

The company tax rate is 30% and the cost of capital is 15%.Evaluate the proposal and advise the management whet

Sol Depreciation schedule

Year Cost Dep @20%WDV
1 30 6 24
2 24 4.8 19.2
3 19.2 3.84 15.36
4 15.36 3.072 12.288
5 12.288 2.4576 9.8304

Salvage value
WDV 9.8304
Salvage value 6
Net loss 3.8304
Tax shield 1.14912
Total inflow 7.14912

Schedule of operational cash flows

Particular 0 1 2 3
Cash flow before dep and tax 11 14 18
Dep 6 4.8 3.84
PBT 5 9.2 14.16
Promotional exp 3 0 0
Net profit before tax 2 9.2 14.16
Tax @30% 0.6 2.76 4.248
PAT 1.4 6.44 9.912
Add:- Dep 6 4.8 3.84
Cash inflow from operations 7.4 11.24 13.752
Initial outloy -30
Working capita -5
Salvage value
Net cash flow 7.4 11.24 13.752
PV @15% 0.869565 0.756144 0.657516
PV of cash flow 6.434783 8.499055 9.042163
Total PV of cash flow 40.845823785339
NPV 5.84582378533898
Since the project yield a positive NPV of cash flow it is feasible to accept the project
akhs .The machine has a useful life of 5 years and will depreciate at 20% per annum based on WDV.
will require infusion of fund of Rs 500,000 for additional working capital.This amount will be fully recovered
ear of operations as promotional expenditure.The project will generate the following net cash flows before depreciation and tax

e the management whether the machine should be installed or not

4 5
17 9
3.072 2.4576
13.928 6.5424
0 0
13.928 6.5424
4.1784 1.96272
9.7496 4.57968
3.072 2.4576
12.8216 7.03728

5
7.14912
12.8216 19.1864
0.571753 0.497177
7.330791 9.539032
t the project
depreciation and tax
The Bombay Petroleum Ltd (BPL) has a retail outlet of petrol, diesel and petrole
lead petrol and one for diesel. Free air filling is carried out for vehicles buying fu
value as the underground tank will be completely corroded and unfit for reuse.
The BPL sells petrol and diesel @ Rs 23 and Rs 10 per litre respectively. The exis
percent as commission on sales. For petrol pump Commission on sales is the on
Due to a manifold increase in traffic, the existing pumps are not able to meet th
additional pumps for diesel and petrol at a cost of Rs 10,00,000 together with a
is same as of the existing pumps. The additional sales of petrol and diesel are ex
of the installation of the new pump, the operating cost would increase by Rs 24
additional costs are estimated to be: insurance @ 1 per cent of the cost of the p

Bombay Petroleum Ltd pays 35 per cent on tax on its income. Depreciation will
The management of BPL seeks your advice on the financial viability of the expa

Initial cost
Cost of new pump 1000000
Additional working capital 500000
Total outflow 1500000
Subsequent cash inflows (Incremental cash flows)
Years 1
Revenue (Commission)
Petrol 184000
Diesel 40000
Total Revenue 224000
Less:- Cost
Salary -24000
Insurance cost 1% of cost -10000
Maintenance cost -12000
Power cost -13000
Depreciation *1 -100000
PBT 65000
Tax 35% 22750
PAT 42250
Add:-Depreciation 100000
Cash flows 142250
Working capital recovered
Annual cash flows 142250
PV of Cash flow@ 12% 127008.928571429
Total PV 964730.844086793
PV of cash outflow -1500000
NPV -535269.155913207
Since NPV is negative so reject the project
 of petrol, diesel and petroleum products. Presently, it has two pumps exclusively for petrol, on
ed out for vehicles buying fuel from the outlet. The pumps have a useful life of 10 years with no
orroded and unfit for reuse.
er litre respectively. The existing annual sale is, petrol 5 lakh litres and diesel 2 lakh litres. Its ear
ommission on sales is the only source of revenue.
mps are not able to meet the demand during peak hours. The BPL is contemplating installation
s 10,00,000 together with additional working capital of Rs 5,00,000. The useful life of the additi
es of petrol and diesel are expected to be 2 lakh litres and 1 lakh litres per annum respectively.
ost would increase by Rs 24,000 annually by way of salary of the pump operator. Other yearly a
per cent of the cost of the pump, maintenance cost, Rs 12,000 and power costs, Rs 13,000.

s income. Depreciation will be on straight line basis and the same is allowed for tax purposes.
nancial viability of the expansion proposal, assuming 12 percent required rate of return. Kindly

2 3 4 5 6 7 8

184000 184000 184000 184000 184000 184000 184000

40000 40000 40000 40000 40000 40000 40000
224000 224000 224000 224000 224000 224000 224000

-24000 -24000 -24000 -24000 -24000 -24000 -24000

-10000 -10000 -10000 -10000 -10000 -10000 -10000
 -12000 -12000 -12000 -12000 -12000 -12000 -12000
-13000 -13000 -13000 -13000 -13000 -13000 -13000
-100000 -100000 -100000 -100000 -100000 -100000 -100000
65000 65000 65000 65000 65000 65000 65000
22750 22750 22750 22750 22750 22750 22750
42250 42250 42250 42250 42250 42250 42250
100000 100000 100000 100000 100000 100000 100000
142250 142250 142250 142250 142250 142250 142250

142250 142250 142250 142250 142250 142250 142250

113400.83 101250.7 90402.45 80716.5 72068.28 64346.6759 57452.389
ively for petrol, one for non-
of 10 years with no salvage

2 lakh litres. Its earnings are 4

plating installation of
ful life of the additional pump
num respectively. As a result
ator. Other yearly associated
osts, Rs 13,000.

for tax purposes.

e of return. Kindly suggest.

9 10

184000 184000
40000 40000
224000 224000 Existin new pump
5 7 Petrol
-24000 -24000 2 3 Diesel
-10000 -10000
 -12000 -12000
-13000 -13000
-100000 -100000 1 Calculation of Depreciation as per SLM
65000 65000 100000
22750 22750
42250 42250
100000 100000
142250 142250
500000
142250 642250
51296.776 206787.31
as per SLM
Star Ltd. is considering the replacement of its existing machine with the new machine which would cost Rs. 90 Lakhs. The co
increase to 1,70,000 units if the new machine is bought. The selling price of the Product would remain unchanged at Rs. 200
Lakhs and the total estimated working capital required for the new machine is Rs. 6 Lakhs which will get released fully at th
The cost structure would be as follows:
Fixed cost excluding depreciation is Rs 10 Lakhs which will remain the same even after the new machine is bought.
Variable cost details of producing one unit of product with the existing and the new machine:
Unit Cost (Rs.)
Existing New  Machine
Particulars Machine
(1,60,000 (1,70,000 units)
units)
Direct Material 70 65
Direct Labour 45 40
Variable Overheads 55 50

The existing machine was bought 2 years ago for Rs. 70 lakhs, with total useful life of 7 years. It is having a Zero salvage valu
supplier of the new machine has offered to accept the existing old machine for Rs 40 Lakhs today.

The new machine has the life of 5 years and the salvage value of Rs 5 Lakhs at the end of its economic life.
Assume corporate tax rate at 40% and depreciation is to be charged on the straight line basis.
a) Determine the Net Cash Outflow required by the new machine.
b) If the company’s cost of capital is 10%, determine on the basis of NPV, whether the new machine should be purchased.

(a) Initial cash outflow

New machine cost 9000000
Additional working capital 300000
Net cash flow from old machine 4400000
Net cash outflow 4900000
Cash flow from old machine
Sale value of old machine 4000000
Current book value of old machine 5000000
Capital loss 1000000
Tax shield on capital loss 400000

Incremental cash flows

Existing Machine Old machine
Units sold 160000 170000
Selling price 200 200
Variable cost 170 155
Contribution 30 45
Contribution(₹) 4800000 7650000
Fixed cost 1000000 1000000
PBDT 3800000 6650000
Less:- Dep 1000000 1700000
PBT 2800000 4950000
Tax @40% 1120000 1980000
PAT 1680000 2970000
Add:-Dep 1000000 1700000
Cash flows 2680000 4670000

0 1
Incremental cash flows 1990000
Salvage value
Working capital recovered
Total cash flows -4900000 1990000
PV of Cash flow@10% 1809090.90909091
Total PV 8040402.7295701
NPV 3140402.7295701
NPV 3140402.73 =NPV(10%,E52:I52)+D52

Decision:-NPV of replacement decision is positive so we accept the proposal

1.61051
0.610510000000001
0.161051 3.7907867694085
ould cost Rs. 90 Lakhs. The company’s current production is 1,60,000 units and is expected to
remain unchanged at Rs. 200 per unit. Working capital invested for the existing machine is Rs. 3
h will get released fully at the end of the life of the machine.

machine is bought.

t is having a Zero salvage value after its useful life. Remaining useful life is of 5 years. The
ay.

onomic life.

chine should be purchased.

Depreciation amt Old machine)

Original cost 7000000
Salvage value 0
Useful life 7
Dep (SLM) 1000000

Deprecitaion amt(new machine)

Cost new machine 9000000
Salvage value 500000
Useful life 5
DEP (SLM) 1700000
 Incremental cash flows
1990000

2 3 4
1990000 1990000 1990000

1990000 1990000 1990000

1644628.09917355 1495116 1359196.78

52:I52)+D52

pt the proposal

=
Selling price 200
Working capital 3
Working capital 6
Fixed cost (excl 10 lakhs

variable cot

Existing 170
New machine 155
Existing machine
cost (2 years ago 70

useful life(existi 7

Remaining life (e 5 years

salvage value(ex 0
existing machine 40

New machine (use 5 year

Salvage value 5 lakhs

Tax rate 40%

Dep (SLM)

years
 5
1990000
500000
300000
2790000
1732370.49134
Real World Company Ltd. has been manufacturing a product by using machine C for the last two years. Machine C
Now the management of the company is thinking to replace this machine either by Machine A or by Machine B. Fo

Machinery C A
Original Cost (Rs.) 3,750,000
Resale value now (Rs.) 2,850,000
Purchase price of new machinery (Rs.) 4,500,000
Annual fixed cost (including depreciation) (Rs.) 2,300,000 2,700,000
Variable conversion costs per unit of Finished Goods(Rs.) 3 1.5
Production per hour (unit) 200 200
Salvage value of machines after useful life (Rs.) 250,000 375,000
Working Capital Required (Released fully at the end) 1,000,000 1,200,000

You are also provided with the following details:

Selling price per unit (Rs.) 20
Cost of materials per unit of Finished Goods (Rs.) 10
Annual operating hours 2,000
Working life of each of the three machines (as from now) 5 years

The company charges depreciation using straight line method. This Depreciation will be allowed under Income Tax
It is anticipated that an additional cost of Rs.2,00,000 p.a. would be incurred on special advertising to sell the extra
Assume tax rate of 30% and cost of capital 10%.
Assume same rate of tax on Capital gains or capital losses.
Determine on the basis of NPV, whether the new machine should be purchased or not and if yes, then which Mach

Given :
Machinery C A
Original Cost (Rs.) 3,750,000
Resale value now (Rs.) 2,850,000
Purchase price (Rs.) 4,500,000
Annual fixed cost (including depreciation) (Rs.) 2,300,000 2,700,000
Variable conversion costs per unit of Finished Goods(Rs.) 3 1.5
Production per hour (unit) 200 200
Salvage value of machines after useful life (Rs.) 250,000 375,000
Working Capital Required (Released fully at the end) 1,000,000 1,200,000

You are also provided with the following details:

Selling price per unit (Rs.) 20
Cost of materials per unit of Finished Goods (Rs.) 10
Annual operating hours 2,000
Working life of each of the three machines (as from now) 5 years
Solution to Q.1
Computation of yearly cash inflows
Machine C Machin A
Sales (units) 0 0
Selling price per unit (Rs) 20 20
Sales 0 0
Less: Costs
Material cost 0 0
Variable Conversion costs 0 0
Annual fixed cost 2,300,000 2,700,000
Additional cost (special advertisements)
Total Cost 2,300,000 2,700,000
Profit before tax -2,300,000 -2,700,000
Less: Tax @ 30% -690,000 -810,000
Profit after tax -1,610,000 -1,890,000
Add: Depreciation 500,000 825,000
Cash inflow p.a. -1,110,000 -1,065,000
Terminal cash flow- Salvage 250,000 375,000
Terminal cash flow- Working Capital 1,000,000 1,200,000
Incremental yearly cash flows 45,000
Incremental Salvage 5th Year end 125,000
Incremental Working Capital released 5th Year end 200,000

Net Cash flow from sale of Machine C after considering Capital Gains/loss on sale:
Re-Sale value 2,850,000 Inflow
Book value of Machine C ₹ 2,750,000
Capital Gains 100,000
Tax on Capital Gain @30% 30000 Outflow
Net Cash inflow on sale of Machine C 2,820,000 Net Inflow

Incremental Initial Outflow

Machine A
Incremental Cash Outflows to buy New machine after Selling ₹ 1,680,000
Machine C in the beginning
Incremental Working Capital required ₹ 200,000
Incremental Initial Outflow ₹ 1,880,000

PV of Cash flows
Machine A
Year Incremental Cash Flows PVCF
Incremental yearly cash flows 1-5 years 45,000 170,585
Incremental Salvage 5th Year end 125,000 77,615
Incremental Working Capital released 5th Year end 200,000 124,184
Total PVCI 372,385
PVCO ₹ 1,880,000
Incremental NPV NPV=(PVCI - PVCO) ₹ -1,507,615
Machine B should be purchased as incremental NPV ₹ -3,875,393
 st two years. Machine C was bought 2 years ago.
ine A or by Machine B. Following are the details given:

5,000,000
3,300,000
2.5
300
450,000
1,500,000

llowed under Income Tax Act.

vertising to sell the extra output of machine B.

d if yes, then which Machine?

5,000,000
3,300,000
2.5
300
450,000
1,500,000
 Machin B
0
20
0

0
0
3,300,000
200,000
3,500,000
-3,500,000
-1,050,000
-2,450,000
910,000
-1,540,000
450,000
1,500,000
-430,000
200,000
500,000

Machine B
₹ 2,180,000
₹ 500,000
₹ 2,680,000

Machine B
Incremental Cash Flows PVCF
-430,000 -1,630,038
200,000 124,184
500,000 310,461
Total PVCI -1,195,393
PVCO ₹ 2,680,000
₹ -3,875,393
Takata Limited is a leading automobile manufacturer in India.The company is having plans of manufacturing of Elec
However the entire operations of manufacturing EVs will be routed through a subisidiary company Sakata limited.
It has ambitious plans of affordable e-vehicles.The company will be undertaking assembly,manufacture,fabrication,
sales,after sales service ,marketing,promoting and/or servicing facilities
Accordingly, the initial capital investment of Rs.700 crs is estimated.
It includes cost of Land & factory building-Rs.300 crs,cost of Plant & Machinery-Rs.400 crs
The initial working capital requirement is estimated at Rs.100 crs.
The manufacuring costs for the EV are almost similar to petrol/deisel car. However the major component of manuf
The company at present is planning to import the batteries from Yagami Inc. ( a Japaneese company ) which attract
The project life is estimated as five years
The Sales volume and the estimated price per unit is as below
Year 1 2 3
Estimated Sale price (Amt 1,000,000 990,000 980,000
in Rs.per unit)
Estimated Sales volume 20,000 22,000 25,000

Costs as percentage of sale value are as follows:

Material costs 20%
Direct labor costs 15%
Battery costs 30%

Fixed overheads are expected to Rs.5 crs p.a

Advertisement and promotion expenses are estimated to be Rs.50 crs in the first year,
and year on year increase will be @ 10% pa for next two years and @ 5% pa increase for last two years.
The depreciation on building and plant and macnhinery is decided to be WDV basis @25% pa
The market value of building will be Rs.50 crs and plant and machinery will be Rs.100 crs at the end of fifth year.
Take into account the tax effects on sale of assets during the terminal year.
There will be additional working capital introduction at the end of third year amounting to Rs.50 crs.
Cost of Capital of the company is 9%. Corporate tax rate is 30%.
Required
Advise whether the company should go for electric vehicle production.Use Net Present Value method for your anal

1) Initial Investment
Amt in Crs
Land & Factory Buildin 300
Plant & Machinery 400
Total 700
Capital Investment 700
Working capital 100
Total 800

2) WACC 9.00%
3)
Year 1 2 3
Sales Volume 20000 22000 25000
Sales price 1,000,000 990,000 980,000
Sales Value 20,000,000,000 21,780,000,000 24,500,000,000
Sales Value(Rs.in Cr) 2000 2178 2450
Less:
Material Cost 400 436 490
Labour cost 300 327 368
Battery Costs 600 653 735
Advertising 50 55 61
Fixed Overheads 5 5 5
Depreciation 175 131 98
PBT 470 571 694
Less:Tax 141 171 208
PAT 329 400 485
Add:Depreciation 175 131 98
Operating cash flows 504 531 584
Salvage value
Release of WC
Total Cash flows 504 531 584
PV of cash inflows ₹ 2,422.00

Year Cash flows PV

0 Initial Outflows -800.00
3 additional WC ₹ -39
1-5 inflows ₹ 2,422
NPV 1,583.39

4) Depreciation
Year 1 2 3
Plant and machinery 400
Depreciation 100 75 56.25

Building 300.00
Depreciation 75.00 56.25 42.1875
Total Depreciation 175.00 131.25 98.44

Market value of building at the end of 5 the 50.00 Market value of plant and machinery at the
Book value at the end of 5th year 94.92 Book value at the end of 5th year
Capital Loss 44.92 Capital gain
Tax saving on gain 13.48 Tax payment on gain
Net inflow 63.48 Net Inflow
plans of manufacturing of Electric Vehicles(EV) .
iary company Sakata limited.
mbly,manufacture,fabrication,

e major component of manufacturing cost is the lithium battery.

neese company ) which attracts a high custom duty

4 5
950,000 960,000

27,000 30,000

for last two years.

crs at the end of fifth year.

ng to Rs.50 crs.

nt Value method for your analysis

4 5
27000 30000
 950,000 960,000
25,650,000,000 28,800,000,000
2565 2880

513 576
385 432
770 864
64 67
5 5
74 55
755 881
227 264
529 617
74 55
603 672
154.83
150
603 977

4 5

42.1875 31.640625

31.640625 23.73046875
73.83 55.37

plant and machinery at the end of 100.00

he end of 5th year 71.19
28.81
8.64
91.36
ABC Ltd has a capital budget of ₹ 2000000 for the year .It has before it the following 6 proposals for which the nece

Proposal Outlay ( ₹ ) NPV ( ₹) IRR

A 700000 300000 20%
B 250000 160000 17%
C 500000 200000 19%
D 200000 100000 17.50%
E 550000 450000 18%
F 750000 -250000 12%
2950000
Find out the ranking of the proposals given that
i) The projects are indivisible
ii) The projects are divisible
Also evaluate the ranking and make a final selection

Budget 2000000

Proposal Outflow NPV Ranking

A 700000 300000 2
B 250000 160000 4
C 500000 200000 3
D 200000 100000 5
E 550000 450000 1
F 750000 -250000 0
2950000
Note that from above table different techniques gives different ranking to different proposal
And the firm has to select out of these proposal so that the total outlay is within the budget constraints of ₹ 200000

(i) When project s are indivisible

Feasiblity set
Based on NPV Based on IRR
Project selected E,A,C,B A,C,E,D
Total outlay 2000000 1950000
NPV 1110000 1050000

The firm should select the proposal on the basis of feasibility set aooroach because it bring maximum

ii) The projects are divisible

Feasibility Set Approach (based on NPV)

Proposal Outlay Cummulative outlay
E 550000 550000
A 700000 1250000
C 500000 1750000
B 250000 2000000
Total NPV

General Appoach
If project are indivisible decision based on Feasibilityapproach(NPV)
If project are divisible decision based on profitability Index
 ollowing 6 proposals for which the necessary information is provided here under

•Indivisible Projects
•There are certain proposals which are

IRR Ranking PV of cash inflows PI Ranking

20% 1 1000000 1.428571 4
17% 4 410000 1.64 2
19% 2 700000 1.40 5
18% 3 300000 1.5 3
18% 3.1 1000000 1.818182 1
12% 5 500000 0.666667 0

different proposal
within the budget constraints of ₹ 2000000

Based on PI
E,B,D,A
1700000
1010000

y set aooroach because it bring maximum contribution in wealth of shareholder ₹1110000

Based on IRR Base on PI

NPV Proposal Outlay Cummulativ
NPV Proposal
450000 A 700000 700000 300000 E
300000 C 500000 1200000 200000 B
 200000 E 550000 1750000 450000 D
160000 D 200000 1950000 100000 A
1110000 B 50000 2000000 32000 C
Total NPV 1082000
 NPV

IRR
ain proposals which are indivisible.These proposals have a feature that either the proposal as a whole be taken in its tota

PV of cash inflows/Ou

Outlay Cummulativ
NPV
550000 550000 450000
250000 800000 160000
200000 1000000 100000
700000 1700000 300000
300000 2000000 120000
Total NPV 1130000
1. Aggregation of project or Feasibility Set approach
Under this approach the NPV of various proposal are put in different possible combinations and then that combination is selec
The following two points are worth
i) That total outlay of the combination is within the limits of capital rationing
ii) The total NPV of the combination is the highest among all the combinations

2.Analysis based on IRR

In case the firm wants to select the projects on the basis of their profitability,then the feasibility set approach may not be of m
In such a situation the incremental outlay analysis based on the IRR technique may be adopted
In this approach the following steps are required
i) Find out the IRR of the individual proposals and arrange them in descending order of their IRRs
ii) Then proceed to select all proposals from the highest IRR down,until the funds are exhausted ot the IRR of the proposal is le

3. Profitability index
The PI is yet another way of ranking different proposals on the basis of the return per rupee invested in the project
Under this method,the PI has been defined as the ratio of PV of cash inflows to PV of cash outflows of a proposal
PI of different proposals may be calculated and placed in decreasing order.
The firm may start from the top and go on accepting the proposals subject to that
i) funds are available and
ii) the PI is more than 1
then that combination is selected which has the maximum total NPV

set approach may not be of much relevance

ot the IRR of the proposal is less than the cut-off rate.

ested in the project

ws of a proposal
X Ltd has ₹ 90 lakhs available for investments.The following projects are considered along withtheir cost and NPV
Projects Cost (₹ lakhs) NPV ( ₹ lakhs)
1 10 2
2 12 3
3 23 3.68
4 14 2.8
5 15 9
6 16 4
7 22 3.3
8 25 10
9 13 2.08

Assume that the projects are divisible for the purpose of investment in parts if required.Suggest the most favourab

Budget constraints 90 lakhs

Total fund required 150

Selection based on PI method can be best used in Divisible project

Projects Cost (₹ lakhs) NPV ( ₹ lakhs) PV of cash inf

1 10 2 12
2 12 3 15
3 23 3.68 26.68
4 14 2.8 16.8
5 15 9 24
6 16 4 20
7 22 3.3 25.3
8 25 10 35
9 13 2.08 15.08

Project Outlay Cummulative outlay NPV

1 10 10 2
2 12 22 3
3 23 45 3.68
4 14 59 2.8
5 15 74 9
6 16 90 4
7 22 Reject
8 25 Reject
9 13 Reject
Total NPV 24.48

Combination of projects 1,2,3,4,5,6

ong withtheir cost and NPV

d.Suggest the most favourable combination.Also calculate the total net present value as per the combination suggested.

PI Ranking
1.2 4.2
1.25 3.2
1.16 5.1
1.2 4.1
1.6 1
1.25 3.1
1.15 6
1.4 2
1.16 5.2
A Company aims to invest in a project which has a life of 3 years, with capital outlay of ₹ 650 lakhs.scrap value at en
Depreciation is on SLM.Proposed loan to be taken for the project is ₹ 500 lakhs.Loan is repayable in 3 equal annual
the end of each year.The applicable interest rate for similar projects is 11% p.a.However,as the company has a good
they are ready to give a benefit of 1% to the company.Tax rate applicable to the project is 50%.
The estimated EBITDA number for the three years ara as follows:
Year 1 2 3
EBITDA (₹ in lakhs) 450 500 550
Calculate Debt Service Coverage Ratio(DSCR) and Interest Coverage Ratio ( ICR) for each of the three year & give yo
f ₹ 650 lakhs.scrap value at end of third year is ₹ 50 lakhs.
s repayable in 3 equal annual instalments payable at
ver,as the company has a good relationship with the bank.

ch of the three year & give your recommendations.

X Ltd has to select on e of the two projects A and B ,details of which are given below:

Particulars Project A Projects B

Costs 3000000 3000000
Life 6 years 10 Years
Annual cash flow 925000 717000

Applicable rate of discounting is 15% pa

You are required to advice the company regarding selection of one of the projects.

NPV Project A Project B

1 925000 717000
2 925000 717000
3 925000 717000
4 925000 717000
5 925000 717000
6 925000 717000
7 717000
8 717000
9 717000
10 717000
PV of cash inflows 3500646
NPV 500646 598457.105
500646

NPV basis Project B appears to be better but lives of two project is different .Therefore NPV can not be consider as
and decision should be based on equivalent annual method

Annualized NPV NPV of the project/applicable annuity factor

Applicable annuity fac ₹ 3.78448 ₹ 5.01877

PVIFA
Annualized NPV ₹ 132,289.28 ₹ 119,243.81
Select Project A
 Project X
0 -24000
1 14000
2 14000
3 14000
4
5
discount ra 15%

7965.15

PV cash inf ₹ 31,965.15

₹ 7,965.15

NPV ₹ 31,965.15

PV can not be consider as approrite basis and

₹ 3,500,646.49
Project Y
-44000
16000
16000
16000
16000
16000

9634.48
ABC Ltd is evaluating the following two mutually proposal

Particulars Projects X Projects Y

Outlay 40000 40000
Annual cash inflows 15000 16000
Life 4 years 7 years
Scrap value 5000 3000
Evaluate the proposals if the discount rate is 15%

Year X Y
0 -40000 -40000
1 15000 16000
2 15000 16000
3 15000 16000
4 20000 16000
5 16000
6 16000
7 19000

NPV 5683.44 27694.53

Annuity factor ₹ 2.85 ₹ 4.16
Annualized NPV ₹ 1,990.71 ₹ 6,656.67
Analysis of Lease-Buy Decision

The decision may be taken on the basis of evaluation of both the options, for which the following steps may be requi

1. Identification of Relevant Cash Flows

First of all, the cash flows emanating from the lease option as well as the buying option is to be identified. In case o
In case of buying the assets, on the other hand, the firm assumes all the risk and benefit associated with the ownersh
The after tax cash flows emanating from the lease option are relatively easier to be identified. The lease option requir
1. Interest payment on the debt, which are tax deductible.
2. Principal repayment of the debt, which is not tax deductible.
3. Tax savings accruing from the depreciation of the asset.
4. Any other operating expenses arising as a consequence of buying the assets.
5. Any salvage value at the end of assets life.

2. Analysis of Incremental Cash Flows

After identification, the cash flows are to be analyzed for each year for tax shield etc., under both the options. For this
1. The discount rate used to evaluate the cash flows should be the after tax cost of debt. It may be noted that the le
1. However, it is also argued that the after tax weighted average cost of capital i.e., kg and not the after tax cost of

The evaluation procedure for a lease-buy decision can be summarized as follows:

1. Compute the net present value of the asset’s cash flows if the asset is purchased.
2. Compute the net present value of the cash flows generated for the firm by the asset if it is leased.
3. Compare the NPV (buying option) with the NPV (leasing option). The option with the higher NPV is superior and t
e following steps may be required.

on is to be identified. In case of lease, the firm receives benefits from using the assets but has no claim on its residual salvage value, which
t associated with the ownership including the salvage value, if any. It may also incur the costs of maintaining the asset. The firm also has to p
ntified. The lease option requires only cash outflows in the form of the lease rental payment which is to be considered on an after tax basis. T

nder both the options. For this purpose, the present value of the stream of after tax cash outflows associated with each option must be calcu
bt. It may be noted that the lease payment and interest payment create similar commitment for the firm. Consequently, they should be tr
g and not the after tax cost of debt i.e., kd , should be used to discount the net cash flows under the buying option because funding for the

et if it is leased.
he higher NPV is superior and the other should be rejected.
residual salvage value, which is reserved for the lessor in most of the cases. The lessee firm has to make lease payments and also to meet
he asset. The firm also has to pay the interest on the funds borrowed to finance the asset, together with the repayment as per schedule. It m
sidered on an after tax basis. The after tax cash flow of lease rental may be taken as equal to the difference between the lease rental and the

with each option must be calculated. This is because the cash flows occur at different point of time. However, there is a difference of opinion
onsequently, they should be treated similarly, in terms of risk, for purposes of estimating discount rates. Because the discount rate for deb
option because funding for the purchase option in fact comes from mingled funds raised from different sources and cannot be associated
se payments and also to meet all or some of the maintenance expenses. The lease payments and all such expense payment associated wit
epayment as per schedule. It may be noted that in case of buying the assets, depreciation, maintenance expense, and interest are all deductib
tween the lease rental and the tax benefit. However, the cash flows associated with borrowings are more difficult to obtain due to the need t

here is a difference of opinion about the rate of discount being used to find out the present values. These are:
ause the discount rate for debt is the after tax cost of borrowings for the firm, the discount rate for the lease payment should also be afte
ces and cannot be associated with the anyone particular type of security. The same overall weighted average cost of capital should be use
pense payment associated with the leased assets are tax deductible for the lessee. The lessee cannot claim depreciation, as he is not the o
se, and interest are all deductible.
ult to obtain due to the need to identify both the interest and the depreciation associated with the asset. The calculation of cash outflow ass

e payment should also be after tax cost of debt.

e cost of capital should be used to discount the cash flows of the leasing option.  
depreciation, as he is not the owner.

calculation of cash outflow associated with borrowing has two steps. The first is to determine the annual interest components and the depre
est components and the depreciation and the second is to determine the cash outflow, which is equal to interest payment less tax shield on
est payment less tax shield on account of interest and depreciation plus principal repayment. The cash flows associated with the buying optio
ssociated with the buying option may be enumerated as follows:
A firm can purchase for ₹ 2500 an asset having life of 5 years after which its salvage value is ₹500.The firm provides
per year and will raise its expected operating expenses(not including depreciation) and interest by ₹ 700 per year.T
The firm can also lease the asset for a yearly rental of ₹ 650.The incremental revenue will be same at ₹1500 per yea

Two proposal
1. Buying option
2. Leasing option
To evaluate both option calculate NPV

Computation of NPV of Buying Option

Year Revenue Operating Depreciati PBT Tax @ 50%PAT Depreciati Cash flow
1 1500 700 400 400 200 200 400 600
2 1500 700 400 400 200 200 400 600
3 1500 700 400 400 200 200 400 600
4 1500 700 400 400 200 200 400 600
5 1500 700 400 400 200 200 400 600
5 Salvage value 500
Total cash flow
Initial cost
NPV

Computation of NPV of Leasing Option

Year Revenue Exp Lease RentPBT Tax @50% PAT/Cash PV @ 10% PV of cash flows
1 1500 600 650 250 125 125 0.909091 113.6364
2 1500 600 650 250 125 125 0.826446 103.3058
3 1500 600 650 250 125 125 0.751315 93.91435
4 1500 600 650 250 125 125 0.683013 85.37668
5 1500 600 650 250 125 125 0.620921 77.61517
Total cash flow 473.8483
Initial cost 0
NPV 474
alue is ₹500.The firm provides depreciation on straight line method.Purchasing and using the asset will increase the firm's expected reven
d interest by ₹ 700 per year.The corporate tax is 50% and the cost of capital of the firm is 10%.
will be same at ₹1500 per year and the increase in firm's expected non-depreciation expense is ₹ 600 per year only.Evaluate the proposal

Calculation Depreciation (SLM)

Cost 2500
PV @ 10% PV of Cash flow Salvage value 500
0.909091 545.4545 Life of machine 5
0.826446 495.8678 Dep 400
0.751315 450.7889
0.683013 409.8081
0.620921 372.5528
0.620921 310.4607
Total cash flow 2584.933 2274.48
-2500 310.45
84.93 2584.93

PV of cash flows As the NPV of the leasing option is higher at ₹ 474 than the NPV of the buying option ,the firm should lea
e firm's expected revenue by ₹1500

y.Evaluate the proposals.

tion ,the firm should lease the assets

ABC Ltd. needs an asset for which the following two options have been placed by the manufacturer.

1. The assets can be acquired on lease basis on a payment of annual lease rent of ₹ 15000 per annum for 4 years.
2. The assets is available of ₹ 50000 for which funds can be raised by the issue of 12% loan,which is to be repaid tog
The firm provides depreciation on straight line basis and the tax rate applicable is 30%.Which option should the firm

In this situation the decision is based on cash outflows.

In the case of Leasing

year Lease rent Tax saving Net cash outflow PV @ 8.4%PV of cash flow
1 15000 4500 10500 0.922509 9686.346863469
2 15000 4500 10500 0.851023 8935.744338993
3 15000 4500 10500 0.785077 8243.306585787
4 15000 4500 10500 0.724241 7604.526370652
Total cash 34469.9241589

In the case of Buying ( Borrow and Buy the assets)

Supplose Installment amount is
Borrow am 50000 50000=X*PVIFA(12%,4)
Interest ra 12% X
Term 4 year
Intallment ₹ 16,462

Bifurcation of annuity payment into interest and principal repayment

Year Installment OB Interest RepaymentCB
0 0 0 0 50000
1 ₹ 16,462 50000 6000 ₹ 10,462 ₹ 39,538
2 ₹ 16,462 39538.28 4744.5933821659 ₹ 11,717 ₹ 27,821
3 ₹ 16,462 27821.15 3338.5379701916 ₹ 13,123 ₹ 14,698
4 ₹ 16,462 14697.97 1763.7559087805 ₹ 14,698 ₹0

Year Installment Tas saving Tax saving on Dep Net cash oPV @ 8.4% PV of cash outflow
1 ₹ 16,462 1800 3750 ₹ 10,912 0.922509225092 ₹ 10,066.16
2 ₹ 16,462 1423.378 3750 ₹ 11,288 0.85102327038 ₹ 9,606.64
3 ₹ 16,462 1001.561 3750 ₹ 11,710 0.785076817694 ₹ 9,193.38
4 ₹ 16,462 529.1268 3750 ₹ 12,183 0.724240606729 ₹ 8,823.13
Total ₹ 37,689.31
e manufacturer.

15000 per annum for 4 years.

% loan,which is to be repaid together with interest in 4 equal annual installments.
%.Which option should the firm choose?

Discount ra 8.40%

Check table
PVIFA (12% ₹ 3.0373

upplose Installment amount is X

0000=X*PVIFA(12%,4)
₹ 16,462

Calculation of Depreciation
Cost 50000
Life 4
Dep(SLM) 12500

V of cash outflow

The cash outflows are lower in case of lease option therefore the firm should lease the assets instaead of buying
e assets instaead of buying it from borrowed fund
ABC Ltd is considering to acquire an additional computer to supplement its time sharing services.It has two options
i) To purchase the computer for ₹ 22,00,000,and
ii) To lease the computer on an annual rental ( payable at the end of the year) of ₹ 500000 plus 10% of gross revenu
The revenues from time sharing services are estimated at ₹ 22,50,000, ₹ 25,00,000 and ₹ 27,50,000 for 3 years.The
Annual operating cost (excluding depreciation and lease rent) is estimated at ₹ 200000 per annum and an additiona
lessee in case of lease).Funds for purchase are to be acquired at the rate of 16% and are repayble ₹ 500000, ₹ 85000
ng services.It has two options:

0000 plus 10% of gross revenue from time sharing services.An amount of ₹ 600000 is also payable at the end of year 3.
d ₹ 27,50,000 for 3 years.The computer has a salvage of ₹ 10,00,000 at the end of 3rd year.
0 per annum and an additional revenue expense of ₹ 200000 is payable for trainning in the beginning of the 1st year(both these costs are
are repayble ₹ 500000, ₹ 850000 and ₹ 850000 at the end of 3 year respectively.The firm pays tax at the rate of 50% and provides deprecia
1st year(both these costs are to be borne by the
of 50% and provides depreciation at SLM.
PQR Ltd has a machine which has been in operation for 2 years and its remaining estimated useful life is 4 years wit
The management is considering a proposal to purchase an improved model to similar machine,Which gives increase
Particulars Existing New
Purchase price 240000 400000
Estimated life(years) 6 6
Salvage value NIL NIL
Annual operating hours 2000 2000
Selling price per unit(₹) 10 10
Material cost per unit(₹) 2 2
Output per hours (units) 15 30
Labour Cost per hour(₹) 20 40
Consumable stores per year(₹) 2000 5000
Repairs & Maintenance per year(₹) 9000 6000
Working capital(₹) 25000 40000

The Company follows the WDV method of depreciation @ 25% and its subject to 35% tax.Should the existing mach
Assume that the company's required rate of return is 15%.

Initial Outflows:
Purchase price of new machine 400000
Additional WC 15000
Sale value of old machine -100000
Saving on capital loss tax -12250 Capital Gain/loss
Net outflow 302750

Subsequent Annual Incremental Cash inflows before taxes

Particular Existing New Incrementa
Annual operating hours 2000 2000
Output per hours (units) 15 30
Total output(units) 30000 60000
Selling price per unit(₹) 10 10
Total sale value 300000 600000 300000
Cost of production
Material cost 60000 120000 60000
Labour cost 40000 80000 40000
Consumable store 2000 5000 3000
R&M 9000 6000 -3000
Total exp 111000 211000 100000
Cash inflows before tax 189000 389000 200000

Determination of NPV 1 2 3 4
Incremental cash inflows before tax 200000 200000 200000 200000
Less:-Incremental dep 66250 49687.5 37265.63 27949.22
PBT 133750 150312.5 162734.4 172050.8
Tax @ 35% 46812.5 52609.38 56957.03 60217.77
PAT 86937.5 97703.13 105777.3 111833
Depreciation 66250 49687.5 37265.63 27949.22
Cash inflow 153187.5 147390.6 143043 139782.2
TV only wc release 15000
CF 153187.5 147390.6 143043 154782.2
PV @ 15% 133206.5 111448.5 94053.07 88497.24

TOTAL cash inflows 427205.3

Initial outflow 302750
NPV 124455.3
As the NPV of incremental cashflows is positive the existing machine should be replaced
 estimated useful life is 4 years with no salvage value at the end.Its current market value if ₹ 100000.
milar machine,Which gives increased output.The relevant particulars are as follows:

35% tax.Should the existing machine be replaced?

Capital Gain/loss WDV 2 yea 135000

Sale value -100000
Capital los 35000
Tax 12250

75000
225000
56250

Depreciation old machine Depreciation new machine

Year Cost Dep@ 25%CB Year Cost Dep@ 25%CB
1 240000 60000 180000
2 180000 45000 135000
3 135000 33750 101250 1 400000 100000 300000
4 101250 25312.5 75937.5 2 300000 75000 225000
5 75937.5 18984.38 56953.13 3 225000 56250 168750
6 56953.13 14238.28 42714.84 4 168750 42187.5 126562.5
66250
 49687.5
37265.63
27949.22
Trytonic Ltd. is considering a new project for manufacture of project video games involving a capital expenditure of
Year 1 2 3 4-Jun
Capacity Ut 33.33 66.67 90 100
The average price per unit of product is expected to Rs. 200 netting a contribution of 40 percent. The annual fixed c
At end of the third year an additional investment of Rs. 100 lakhs would be required for working capital. Terminal v

Initial cash outflow

Capital ex 600
Working ca 150
Additional 65.7516232431988
Total cost 815.751623243199

Year Capacity utilization No of units sold

1 33.33% 3.9996
2 66.67% 8.0004
3 90% 10.8
4 100% 12
5 100% 12
6 100% 12 SP 200
VC 120
Cont 80
Profit calculation
Year Contribution Fixed cost PBDT (C-FC) Depreciation calculation
1 320 240 80 Year Cost
2 640 360 280 1 600
3 864 480 384 2 400.02
4 960 480 480 3 266.6933
5 960 480 480 4 177.8044
6 960 480 480 5 118.5422
6 79.0321
Cash flw
Year PBDT Dep PBT Tax@35% PAT Dep Cash flw
1 80 200 -120 42.0042 -78 200 121.97
2 280 133 147 51.34687 95 133 228.69
3 384 89 295 103.2889 192 89 280.71
4 480 59 421 147.2582 273 59 332.74
5 480 40 440 154.1715 286 40 325.83
6 480 26 454 158.7805 295 26 321.22
6 TV 307.44
total

npv 271.8302
volving a capital expenditure of Rs. 600 Lakhs and working capital of Rs.150 lakhs. The capacity of the plants for an annual production of 1

f 40 percent. The annual fixed costs, excluding depreciation, are estimated to be Rs.480 Lakh per annum from the third year onwards for t
for working capital. Terminal value for the fixed assets may be taken at 10% and for the current assets at 100% for the purpose of your ca

tion calculation
Dep@33.33%WDV 307.55
199.98 400.02
133.3267 266.6933
88.88889 177.8044
59.26222 118.5422
39.51012 79.0321
26.3414 52.6907

PV Terminal value
106.0628 Sale of FA( 60
172.9188 BV 52.6907
184.5721 Capital Gai 7.309298
190.2462 Tax on CG 2.558254
161.9944 Relaese of 250 =150+100
138.872 307.4417
132.9156
1087.582
for an annual production of 12 lakh units and capacity utilization during 6-year life of the project is expected to be as indicated below:

m the third year onwards for the first and second year, it would be Rs. 240 lakh and Rs. 360 lakhs respectively. The average rate of depreci
0% for the purpose of your calculations, the recent amendments to tax laws with regard to balancing charge may be ignored. As a financia
d to be as indicated below:

y. The average rate of depreciation for tax purpose is 33.33% on the capital assets as per WDV. The rate of income tax may be taken at 35
e may be ignored. As a financial consultant what recommendation on the financial viability of the project would you make to the Trytonic L
ncome tax may be taken at 35%. The cost of capital is 15%
uld you make to the Trytonic Ltd.
A chemical company is considering replacing an existing machine with one costing Rs.65,000.The existing machine w
The new machine would cost Rs. 10,000 to install and would be depreciate over five years. The management believ
Year Existing M New Machine
(PAT)
1 2 2.16
2 1.5 1.5
3 1.8 2
4 2.1 2.4
5 2.2 2.3
If the company’s cost of capital is 15%, determine whether the new machine should be purchased

Initial cash outflow Calculation of Capital gain

Purchses o 65000 Sale of old 30000
Installation 10000 BV of old machine
sale of old -30000 Purchses pr 28000
Tax on capi 5000 Depreciati 8000 Depreciation on Old machine
Additional 10000 WDV as on 20000
60000 Capital Gai 10000
Tax on CG 5000

Subsequent CF if new machine is purchased

Existing New
Years PAT Dep Cash flow Year PAT Dep Cash flow Incrementa
1 200000 4000 204000 1 216000 14000 230000 26000
2 150000 4000 154000 2 150000 14000 164000 10000
3 180000 4000 184000 3 200000 14000 214000 30000
4 210000 4000 214000 4 240000 14000 254000 40000
5 220000 4000 224000 5 230000 14000 244000 20000
5 TV 15000

Terminal Value 15000 NPV

Sale of New machine 5000
WC relaese 10000
 65,000.The existing machine was originally purchased two years ago for Rs. 28,000 and is being depreciated by the straight-line method o
years. The management believes that the new machine would have a salvage value of Rs.5,000 at the end of year 5. The management also

be purchased

tion on Old machine 4000

Depreciation on New machine

PV @ 15% dep BV
22608.7 14000 1 75000 14000 61000
7561.437 2 61000 14000 47000
19725.49 3 47000 14000 33000
22870.13 4 33000 14000 19000
9943.535 5 19000 14000 5000
7457.651
90166.93
30166.93
by the straight-line method over its seven-year life period. It can currently be sold for Rs.30,000 with no removal costs.
year 5. The management also estimates an increase in net working capital requirement of Rs.10,000 as a result of expanded operations w
moval costs.
sult of expanded operations with the new machine. The firm is taxed at the rate of 50%. The company’s expected after-tax profits (in Rs.La
ected after-tax profits (in Rs.Lakhs) for next 5 years with existing machine and with new machine are given as follows:
. Modern Electronic wants to take up a new project of the manufacture if an electronic device which has go
·       Cost (in Rs. lakhs) of the project as estimated:
- Land: 2.00 [will be incurred at the beginning of year 1] Means 0
- Building: 3.00 [will incurred at the end of year 1]
- Machinery: 10.00 [will be incurred at the end of year 2]
- Working capital: 5.00 [will incurred at the Beginning of year 3] End of year 2
·       The project will go into production from the beginning of years 3 and will be operational for a p
Sales: 20
Variable cost: 8
Fixed cost [excluding deprec 4
·       Depreciation of assets: 2
·       At the end of the operational period, it is expected that the fixed assets can be sold for Rs. 5 Lak
·       Cost of capital of the firm is 10 % Applicable tax rate is 50%
You are required to evaluate the proposal by working out the net present value and advise the firm.

initial cost
Year cost PV@10%
0 2 land 2
1 3 building 2.727273
2 10 machinery 8.264463
2 5 WC 4.132231
IC 17.12397

Cash inflows
Sales 20 Year CF PV@10%
VC 8 3 5 3.756574
FC 4 4 5 3.415067
Dep 2 5 5 3.104607
PBT 6 6 5 2.82237
Tax @50% 3 7 5 2.565791
PAT 3 TV 7 10 5.131581
Dep 2 TV PV 20.79599
Cash flow p.a 5 IC 17.12397
NPV 3.672022
ronic device which has good market further details are given below:

g of year 1] Means 0

will be operational for a period of 5 years. The annual working results (in Rs. lakhs) are estimated as follows:

s can be sold for Rs. 5 Lakhs [ without any profit]

d advise the firm.

accepted
Lawton Enterprises is evaluating a project with the following characteristics:
a.      Fixed capital investment is $2,000,000.
b.     The project has an expected six-year life.
c.      The initial investment in net working capital is $200,000. At the end of each year, net working c
d.     The fixed capital is depreciated 30 percent in Year 1, 35 percent in Year 2, 20 percent in Year 3
e.      Sales are $1,200,000 in Year 1. They grow at a 25 percent annual rate for the next two years, an
f.      Fixed cash operating expenses are $150,000 for Years 1–3 and $130,000 for Years 4–6.
g.     Variable cash operating expenses are 40 percent of sales in Year 1, 39 percent of sales in Year 2
h.     Lawton’ s marginal tax rate is 30 percent.
i.       Lawton will sell its fixed capital investments for $150,000 when the project terminates and reca
j.       The project’s required rate of return is 12 percent.
k.     Calculate NPV

Working capital
WInitial cost years sales cumulative
0 200000
1 1200000 250000
Fixed capit 2000000 2 1500000 312500
Pv of wc 360012.4 3 1875000 343750
Total 2360012 4 2062500 378125
5 2268750 415937.5
6 2495625 415937.5

Cash flows
years sales Variable coFC PBDT Dep PBT Tax
1 1200000 480000 150000 570000 600000 -30000 -9000
2 1500000 585000 150000 765000 700000 65000 19500
3 1875000 712500 150000 1012500 400000 612500 183750
4 2062500 783750 130000 1148750 200000 948750 284625
5 2268750 862125 130000 1276625 100000 1176625 352987.5
6 2495625 948337.5 130000 1417288 0 1417288 425186.3
d of each year, net working capital must be increased so that the cumulative investment in net working capital is one-sixth of the
Year 2, 20 percent in Year 3, 10 percent in Year 4, 5 percent in Year 5, and 0 percent in Year 6.
ate for the next two years, and then grow at a 10 percent annual rate for the last three years.
0,000 for Years 4–6.
39 percent of sales in Year 2, and 38 percent in Years 3–6.

e project terminates and recapture its cumulative investment in net working capital. Income taxes will be paid on any gains.

WC PV@12@
200000 200000
50000 44642.86
62500 49824.62
31250 22243.13
34375 21845.93
37812.5 21455.83
0 0
PV 360012.4

PAT Cash flow Terminal CF PVCF Terminal value Calculation capital gain
-21000 579000 579000 516964.3 sale vaue 150000 BV
45500 745500 745500 594308 Tax on capi -45000 Sales Value
428750 828750 828750 589887.9 WC 415937.5 Capital gai
664125 864125 864125 549167.1 Total 520937.5
823637.5 923637.5 923637.5 524096.7
992101.3 992101.3 520937.5 1513039 766552.5
sum 3540977
IC 2360012
NPV 1180964 Accepted
g capital is one-sixth of the next year’s projected sales.

be paid on any gains.

Calculation capital gain

Depreciated 100% zero
150000
45000
OPTION I

year Lease rent Tax benefitNet cash o PV @10%

1 240000 72000 168000 152727.3
2 240000 72000 168000 138843
3 240000 72000 168000 126220.9
4 240000 72000 168000 114746.3
5 240000 72000 168000 104314.8
sum 636852.2

Leasing should be selected by leassee

(ii) Lessors Perspective

EBDT(Lease 240000
Dep 160000 (10L-2L)/5
PBT 80000
Tax @30% 24000
PAT 56000
Dep 160000
Cash inflo 216000

PVIFA @ 1 216000*PVIFA(12%,5)

Year Cash inflo Salvage TCF PV @12%

1 216000 216000 192857.1
2 216000 216000 172193.9
3 216000 216000 153744.5
4 216000 216000 137271.9
5 216000 200000 416000 236049.6
892117
Cost 1000000
NPV -107883 Option is not viable for lessor

-107905
 : PVIFA = [1 - 1/(1 + k)n ] / k

OPTION II Buy the machine by taking the loan

1000000= A (1+i)*(1-(1+i)^n/i)

Annual ins 247687.3 0.567427 4.037349

0.432573

Loan amortization table

Year InstallmentOB Interest Principal CB
0 247687.3 1000000 0 247687.3 752312.7
1 247687.3 752312.7 90277.53 157409.7 594903
2 247687.3 594903 71388.36 176298.9 418604.1
3 247687.3 418604.1 50232.49 197454.8 221149.3
4 247687.3 221149.3 26537.92 221149.3 8.44E-10

Tax benefit on interest & dep Dep 160000

Year Inteerst Dep Total Tax benefits@30%

1 90277.53 160000 250277.5 75083.26
2 71388.36 160000 231388.4 69416.51
3 50232.49 160000 210232.5 63069.75
4 26537.92 160000 186537.9 55961.38
5 160000 160000 48000

PV of Net cash outflow

Year Outflow Tax benefitSalvage Net outflo PV @10% PV
0 247687.3 0 247687.3 247687.3
1 247687.3 75083.26 172604 156912.7
2 247687.3 69416.51 178270.8 147331.2
3 247687.3 63069.75 184617.5 138705.9
4 247687.3 55961.38 191725.9 130951.4
5 0 48000 200000 -248000 -153988
667599.9
When COC is not given consider post tax cost of debt is to be taken as cost of capital 10.40%

OPTION I Leasing

Year LR Tax benef NCF(outfloPV @ 10.4%

1 100000 35000 65000 58876.81
2 100000 35000 65000 53330.45
3 100000 35000 65000 48306.56
4 100000 35000 65000 43755.94
SUM 204269.8

OPTION 1 is better

(ii) Lessor perspective BEP

Lease rent r 100000 161095.37 Year CF salvage NCF PV @14%
Dep 75000 75000 1 130962 130962 114878.9
PBT 25000 86095.366 2 130962 130962 100771
Tax @35% 8750 3 130962 130962 88395.61
PAT 16250 55961.988 4 130962 200000 330962 195956.1
Dep 75000 75000 500001.6
CF 91250 130961.99 Cost 500000
NPV 1.611422 Not viable from lessor per

(iii) Calculatio of minimum Lease rent for BEP

500000= X*PVIFA(14%,4)+PV of 200000

PVIFA 2.9137
PV of 200 118416.06
500000=X*2.9137+118416
381583.94
X 130962 BEP
 : PVIFA = [1 - 1/(1 + k)n ] / k

OPTION II To buy computer by taking loan

Calculation of installment
Loan amt 500000 Installment500000=A*PVIFA(16%,4)
Annual installmet 178686.3

Loan amortization table

Year InstallmentOB Int Principal CB

1 178686.3 500000 80000 98686.3 401313.7
2 178686.3 401313.7 64210.19 114476.1 286837.6
3 178686.3 286837.6 45894.02 132792.3 154045.3
4 178686.3 154045.3 24647.25 154039 6.264233

Tax benefits on Int and Dep

Year Interest Dep TOTAL Tax benefit@35%
1 80000 75000 155000 54250
2 64210.19 75000 139210.2 48723.57
3 45894.02 75000 120894 42312.91
4 24647.25 75000 99647.25 34876.54

PV of NCF
Year InstallmentTax benefitSalvage NCF PV@12@
1 178686.3 54250 124436.3 112714
2 178686.3 48723.57 129962.7 106630.3
3 178686.3 42312.91 136373.4 101349.7
4 178686.3 34876.54 -200000 -56190.24 -37825.49
282868.5
Not viable from lessor perspective

100
35
65 205962
100
Post tax cost of debt 8.40% Cosnsider as cost of capital

Cost of machine

Loan amount=Annual installmentXPVIFA(14%,5)*(1+0.14) Beginning

178858 3.913712 3.4331

Cost of ma 699998.8

Option I LEASING

Lease rent 25% of cost of machine

174999.7

Lease rent after tax 104999.8 Year LR PV @8.4%

1 104999.8 96863.3
PV of LR 104999.8*PVIFA(8.4%,5) 2 104999.8 89357.28
3 104999.8 82432.92
4 104999.8 76045.13
5 104999.8 70152.33
414851

Option I should be prefer

: PVIFA = [1 - 1/(1 + k)n ] / k

Option II- Take loan and buy)

Loan amortization table

Year Annual ins OP Interest @14% Principal
0 178858 699998.8 0 178858
1 178858 521140.8 72960 105898
2 178858 415242.5 58134 120724
3 178858 294518.4 41233 137625
4 178858 156893 21965 156893

Tax benefit on interest exp and dep

Year Interest Dep Total Tax benefit@ 40%

1 72960 135000.2 207960 83183.9427286906
2 58134 135000.2 193134 77253.6382506975
3 41233 135000.2 176233 70493.0911457853
4 21965 135000.2 156965 62786.0674461854
5 0 135000.2 135000 54000.0604286415

Present Value of Net cash outflow/inflow

Year Annual ins Tax benefitSalvage Net cash outflow

0 178858 178858
1 178858 83183.94 95674.0572713094
2 178858 77253.64 101604.361749303
3 178858 70493.09 108364.908854215
4 178858 62786.07 116071.932553815
5 0 54000.06 24998 -78998.0604286415
CB
521140.755358
415242
294518
156893
0

Depreciation calculation 135000.2

PV@8.4%
178858
 88260.20043479
86467.6762208
85074.77779297
84064.00685696
-52780.07676682
469944.5845387
Option I Take loan and Buy

1000000=A*PVIFA(13%,5)

PVIFA(13%,5) 3.5172

Annual installment 284317.0704

Loan Amortization table

Year Annual OB Interest Principal CB

1 284317.1 1000000 130000 154317 845683
2 284317.1 845683 109939 174378 671305
3 284317.1 671305 87270 197047 474257
4 284317.1 474257 61653 222664 251594
5 284317.1 251594 32707 251594 0

Tax benefit on interest and dep

Year Interest Dep Tax benefits year
1 130000 150000 98000 1
2 109939 127500 83103.5733 2
3 87270 108375 68475.6111 3
4 61653 92119 53820.2639 4
5 32707 78301 38852.834 5

Year Annual Tax benefit Sale of equi Net cash out PV @12%
1 284317.1 98000 186317.07 166354.52714
2 284317.1 83103.5733 201213.497 160406.16797
3 284317.1 68475.61112 215841.459 153631.68737
 4 284317.1 53820.26387 230496.807 146484.88757
5 284317.1 38852.83396 220296.859 25167.3771 14280.64563
641157.91568

Option II Lease finance

Lease rent (1-tax)

214500
214500*PVIFA(12%,5) 3.6048
773229.6

Option I is better
Calculation of Dep (WDV) Net cash flow from sale of equipment
Cost Dep @15%WDV
1000000 150000 850000 Sale value 100000
850000 127500 722500 WDV(BV) 443705.3
722500 108375 614125 Capital Los -343705
614125 92118.75 522006.3
522006.3 78300.94 443705.3 Tax benefit on cap Loss 120296.9

Net cash inflow

Sale value 100000
Tax benefit 120296.9
Net cash in 220296.9
Loan amortization

Year Annual ins OB Interest Principal CB

1 350000 1000000 150000 200000 800000
2 320000 800000 120000 200000 600000
3 290000 600000 90000 200000 400000
4 260000 400000 60000 200000 200000
5 230000 200000 30000 200000 0

Tax benefit on interst and dep

Year Interest Dep total Tax benefit@35%

1 150000 150000 300000 105000
2 120000 127500 247500 86625
3 90000 108375 198375 69431.25
4 60000 92118.75 152118.8 53241.56
5 30000 78300.94 108300.9 37905.33

PV of Net cash outflow

Year Annual ins Tax benefitTax benefitNet cash oPV @ 16%
1 350000 105000 245000 211206.9
2 320000 86625 233375 173435.6
3 290000 69431.25 220568.8 141309.1
4 260000 53241.56 206758.4 114190.8
5 230000 37905.33 155296.9 36797.81 17519.92
657662.4

Option II Lease

Lease rent 217100

PV of lease rent 710850.5 3.2743 PVIFA (16%,5)
Note:- When lease rental are paid in the beginning of the year than use annuity due formula for PV calculatio

824586.6
year Cost Dep @15%WDV Sale value 0
1 1000000 150000 850000 WDV(BV) 443705.3
2 850000 127500 722500 Capital Los -443705
3 722500 108375 614125
4 614125 92118.75 522006.3 Tax benefit on cap Loss 155296.9
5 522006.3 78300.94 443705.3
due formula for PV calculation