Capital Budgeting Problems:

1) Project Cost is Rs.30000/- and cash inflows are Rs.10000/-, the life of the project is 5 Years.
Calculate the payback period.

2) A Project Costs Rs.100000/- and yields an annual cash inflow of Rs.20000/- for 8 years.
Calculate its payback period.

3) A Project costs Rs.250000/- and yields an annual profit of Rs.50000/- after Depreciation
@12% P.A but before tax of 50%. Calculate the payback period.

4) A Project Cost of Rs.2000000/- and yields annually a profit of Rs.300000/- after

depreciation of 12.5% but before tax @50%. Calculate the Payback Period.

5) Uneven Cash-flows: Certain projects require an initial cash outflow of Rs. 25000/- The cash
inflows for six years are Rs. 5000/-, Rs. 8000/-, Rs. 10000, Rs.12000/-, Rs. 7000 and
Rs.3000/-.Calculate the payback period.

6) A Company wants to reduce its labour cost by installing a new machine. Two types of
machines are available in the market, Machine-A and Machine-B. Machine-A Costs
Rs.18000/- whereas Machine-B would cost Rs.15000/-. Both the machines can reduce the
annual labour cost by Rs.3000/-. You are required to calculate the payback period of both the
machines and recommend the best machine.

7) From the following particulars Compute:

1) Pay Back Period
2) Post Pay Back Profitability and Post Pay Back Profitability Index.
A) Cash Outflow Rs.100000/-
Annual Cash Inflow (After Tax Before Depreciation) Rs 25000/-
Estimated Life 6 years
B) Cash Outflow Rs.100000/-
Annual Cash Inflow (After Tax Depreciation) 20000/-
First Five Years = 20000/-
Next Five Years = 8000/-
Estimated Life = 10Years
Salvage Value = Rs. 18000

8) Swastika Limited Provides you with the following information:

A) Purchase price of Machine Rs. 190000/-
B) Installation Expenses: Rs. 10000/-
C) Useful life of Machine = 5 Years
D) Salvage value at the end of useful life = NIL
E) Tax Rate = 30%
Calculate the Pay Back Period:
a) If Earnings before depreciation and tax are Rs. 100000/-
b) If the earnings before Tax are Rs. 100000/-
c) If the earnings after tax are Rs. 100000/-
d) If the Annual Cash Revenues are Rs. 400000/- and Annual Cash Expenses are Rs.
300000/-.
e) If the operating income before tax is Rs. 100000/-
f) If the Cash flows before tax are Rs. 100000/ P.A
g) If the cash flows after tax are Rs. 100000/- PA
9) From the following information you are required to calculate ARR. An investment costing
Rs.2000000/- is expected to produce following profits:
Year Amount in Rupees
1 160000.00
2 320000.00
3 360000.00
4 120000.00

10) Consider the following two alternatives:

Particulars Continuation of Old Machine Installation of New Machine
Cost Price 20000.00 50000.00
Estimated Life of the
8 Years 10 Years
Machine
Estimated Cash Profits
10000.00 12000.00
Per Annum
Estimated Revenues
18000.00 24000.00
Per Annum
Scrap Value 4000.00 10000.00
Tax is charged @ 50%. From the information given above, calculate Accounting Rate of
Return.

11) A company has two alternative Proposals. The details are as follows:
Proposal- I Proposal- II
Automatic Machine Ordinary Machine
Cost of Machine Rs. 220000/- Rs. 60000/-
Estimated Life 5.5 Years 8 years
Estimated Sales PA Rs. 150000/- Rs. 150000/-
Costs:
Material 50000/- 50000/-
Labor 12000/- 60000/-
Variable Overheads 24000/- 20000/-
Compute the profitability of Proposals.

12) Machines ‘X’ and ‘Y’ are detailed below:

Particulars Machine-X Machine-Y
Cost 50000.00 50000.00
Annual Earnings after
depreciation and Taxes
1 Year 3000.00 11000.00
2 Year 5000.00 9000.00
3 Year 7000.00 7000.00
4 Year 9000.00 5000.00
5 Year 11000.00 3000.00
35000.00 35000.00
Depreciation has been charged on a Straight Line Basis and Estimated Life of both the
machines is five years. You are required to find out:
1) Average Rate of Return on machines ‘X’ and ‘Y’
2) Which machine is better from the point of view of Payback Period and why?
3) Calculate the average rate of return when the salvage value of Machine-X turns out to be
Rs.3000/- and when Machine-Y has Zero Salvage Value.
13) Alexa Limited provides you with the following information:
1) Purchase price of machine = Rs.80000/-
2) Installation Charges = Rs. 20000/-
3) Estimated Salvage value at the end of useful life = Rs.40000/-
4) Useful Life = 4 years
5) Working Capital Required = Rs. 10000/-
6) Annual Earnings before Depreciation and Tax = Rs. 65000/-
7) Tax Rate = 30%
Required: Calculate the Accounting Rate of Return if the method of depreciation is a) Straight
Line Method of Depreciation (SLM) b) Written Down Value Method if Rate is 20%.

14) Zinq Limited provides the following information:

1) Purchase Price of Each Machine = Rs. 600000/-
2) Working Capital = Rs. 300000/-
3) Useful Life of each machine = 5Years
4) Estimated Salvage value at the end of useful life = Rs. 100000/-
5) Method Of Depreciation = SLM
6) Tax Rate = 30%
7) Annual Earnings before Depreciation and Tax
Machine Year-1 Year-2 Year-3 Year-4 Year-5
Machine X 300000 300000 300000 300000 300000
Machine Y - 100000 200000 300000 1200000
Machine Z 500000 400000 300000 200000 -
Required: Suggest which one of the above machines should be purchased on the basis of
Accounting Rate of Return Method.

15) A company is contemplating purchasing a new mass storage unit for its computer facility.
It is expected to cost Rs.200000/-. Further the company estimates Rs.20000/- as permanent
working capital. The projected net cash inflows from the proposed investment project are as
follows for each year of operation.
Year 1 2 3 4 5
Net Cash Inflows 50000.00 80000.00 100000.00 80000.00 60000.00
The company's cost of capital is 12%. Advise the company whether the project should be
accepted or rejected.Compute the Net Present Value of the Project.
16) Following are the expected cash inflows of a company. The Cost of Capital is 10% of the
scrap value. The scrap value at the end of fourth year is 2000/-
Years Cash Out-Flows Cash Inflows
0 10000.00 -
1 2000.00 3000.00
2 5000.00
3 5000.00
4 5000.00
Calculate the Net Present Value.
17) Form the following information calculate the net present value of the two projects and
suggest which of the two projects should be accepted at a discount rate of 10%
Project-X Project-Y
Initial Investment Rs. 20000/- Rs. 30000/-
Estimated Life 5 Years 5 Years
Scrap Value Rs. 1000 /- Rs. 2000/-
The Profits before depreciation and after Taxation (Cash Flows) are as follows:
Year-1 Year-2 Year-3 Year-4 Year-5
Project-X 5000 10000 10000 3000 2000
Project-Y 20000 10000 5000 3000 2000
Note: The following are the Present Value factors.
Year 1 2 3 4 5 6
Factor 0.909 0.826 0.751 0.683 0.621 0.564

18) The following are the cash inflows and cash outflows of a project:
Year Cash Outflows Cash Inflows
0 175000 -
1 50000 35000
2 - 45000
3 - 65000
4 - 85000
5 - 50000
The salvage value at the end of 5 years is Rs. 50000/-. Taking the cut off rate as 10% calculate
the Net Present Value.
Year 1 2 3 4 5
Factor 0.909 0.826 0.751 0.683 0.621

19) Vivek Engineering is planning an investment in a new project. The investment budget of
the company is 280000.00. The company has following two investment alternatives:
Particulars Year Project-P Project-Q
Initial Investments 0 280000.00 280000.00
Cash Inflows (Rs) 1 40000.00 200000.00
2 80000.00 160000.00
3 120000.00 80000.00
4 180000.00 40000.00
5 240000.00 40000.00
Compute the NPV@10% Cost of Capital and suggest which project is profitable for the
company?
20) Indo Industries Limited provides you with the following information:
1) Purchase price of New Machinery =Rs. 1000000/-
2) Installation Expenses = Rs. 150000/-
3) Workers Training Expenses Incurred to put the Asset to use = Rs. 50000/-
4) Subsidy from the Government = 60% of the Purchase Price
5) Working Capital = Rs. 300000/-
6) Useful Life of Machine = 5Years
7) Book Salvage Value at the end of Useful Life = 10% of the purchase Price
8) Cash Salvage Value at the end of Useful Life = Rs. 120000/-
9) Method of Depreciation = Straight Line Method
10) Tax Rate = 30%
11) Cost of Capital = 10%
Required: Advise the company whether the machinery should be purchased or not on the
basis of NPV in the following cases:
Case A: If the Earnings before Depreciation and Tax are Rs. 500000/- Per Annum.
Case B: If the Earnings before Depreciation and Tax are for 1st Year Nil, For 2nd Year Rs.
500000/-, for 3rd year Rs. 500000/-, for 4th Year Rs. 500000/- and for fifth year Nil.

21) Toss Industries Limited provides you with the following information:
1) Purchase price of New Machinery =Rs. 1000000/-
2) Installation Expenses = Rs. 150000/-
3) Workers Training Expenses Incurred to put the Asset to use = Rs. 50000/-
4) Subsidy from the Government = 60% of the Purchase Price
5) Working Capital = Rs. 300000/-
6) Useful Life of Machine = 5Years
7) Cash Salvage Value at the end of Useful Life = Rs. 120000/-
8) Rate of Depreciation = 20% on Written Down Value Basis
9) Tax Rate = 30%
10) Cost of Capital = 10%
11) If the Earnings before Depreciation and Tax are for 1st Year Nil, For 2nd Year Rs. 500000/-,
for 3rd year Rs. 500000/-, for 4th Year Rs. 500000/- and for fifth year Nil.
Required: Advise the company whether the machinery should be purchased or not on the
basis of NPV.

22) Blazers Limited provides you with the following Information:

1) Purchase price of machines = Rs. 600000/-
2) Working Capital = Rs. 300000/-
3) Useful life of each machine = 5years
4) Estimated Salvage Value at the end of Useful life = Rs. 100000/-
5) Actual Salvage Value realized at the end of Useful life = Rs. 120000/-
6) Method of Depreciation = Straight Line
7) Tax Rate = 30%
8) Cost Of Capital = 10%
9) Earnings before depreciation and tax:
Particulars Year-1 Year- 2 Year- 3 Year- 4 Year- 5
Machine-X 300000 300000 300000 300000 300000
Machine-Y - 100000 200000 300000 1200000
Machine-Z 500000 400000 300000 200000 -
Required: Which of the above machines should be purchased on the basis of Net Present
Value.
Note: Present Value (PV) factors @10% are as follows:
Year Year-1 Year-2 Year-3 Year-4 Year-5
PV Factor 0.909 0.826 0.751 0.683 0.621

23) A Company has to consider the following project with initial cash outflow of Rs.1000.00
 Years Year-1 Year-2 Year-3 Year-4
Cash Inflows (Rs) 1000.00 1000.00 2000.00 10000.00
Compute the Internal Rate of Return and comment on the project if the opportunity cost is
14%.
24) Project-X and Project-Y Costs Rs.50000/- and Rs.25000/- respectively. Their Cash Flows
are given below. You are required to find out the Internal Rate of Return for each project and
decide on that basis which project is more profitable?
Years Cash Inflows
Project-X Project-Y
1 5000.00 10000.00
2 15000.00 10000.00
3 30000.00 10000.00
4 20000.00 10000.00
5 10000.00 -
25) A Company is considering the following project with the initial Cash Outflow of
Rs.384000/-
Year Year-1 Year-2 Year-3 Year-4 Year-5
Cash Inflows (Rs) 150000.00 125000.00 100000.00 75000.00 50000.00
Compute the Internal Rate of Return and comment on the Project if the Opportunity Cost is
15%.
26) A Company invests Rs.5000/- in a project, which generates the following cash flows for
next 5 Years. The firm has a Cost of Capital of 10%. Calculate the Profitability Index and
advice the company should accept or Reject the Project.
Year Year-1 Year-2 Year-3 Year-4 Year-5
Cash Inflows (Rs) 2000.00 2000.00 2000.00 1000.00 1000.00

27) A top garment manufacturing company is considering a replacement of its existing cutting
machine with a new automatic machine to improve the productivity. The cost of its new
machine is 25 Lakhs. The Cost of company's capital is 10%. The incremental cash flows
projected during the five years period are estimated as follows
Year Year-1 Year-2 Year-3 Year-4 Year-5
Cash Inflows (Rs. In Lakhs) 2.50 5.00 8.00 10.00 12.50
PVF@10% 0.909 0.826 0.751 0.683 0.621
Comment on the suitability of the project by using NPV and PI.
28) From the following information of a private limited company suggest which of the
machine is to be purchased. Expected earnings after tax are given below. Each machine
requires investment of Rs.400000/-.

Years Cash Inflows

Machine-A Machine-B
0 (400000.00) (400000.00)
1 40000.00 120000.00
2 120000.00 160000.00
3 160000.00 200000.00
4 240000.00 120000.00
5 160000.00 80000.00
Cost of Capital is 10%. Calculate the Net Present Value and Profitability Index.

29) Private Limited company is planning an investment in a new project. The company has
following two investment alternatives:
Particulars Project-A Project-B
Investment 3000000.00 3000000.00
Useful Cycle 5-Years 6-Years
Cost of Capital 12% 12%
Cash Inflows at the end of years:
1 700000.00 800000.00
2 1000000.00 800000.00
3 900000.00 800000.00
4 800000.00 800000.00
5 400000.00 600000.00
6 - 200000.00
Find which project of the company should be selected and also advice on the basis of
1) Pay Back Period Method 2) Net Present Value Method.

30) A Company is considering an investment proposal to install a new machine. The project
will cost Rs.100000/- and will have 5 years of life with no salvage value. Tax Rate is 50%.
The Company follows a straight line method of depreciation. The earnings before depreciation
and tax (EBDT) as follows:
Year Year-1 Year-2 Year-3 Year-4 Year-5
EBDT (Rs) 20000.00 22000.00 28000.00 30000.00 50000.00
Evaluate the project using: 1) Pay Back Period Method 2) Profitability Index at 10%.

31) Shriram Industries Ltd., has the following investment proposal which requires an
investment of Rs.5300000/- and following incomes as cash inflows:
Year Cash Inflows
1 1600000.00
2 1800000.00
3 2000000.00
4 1500000.00
5 1500000.00
 6 1000000.00
Assume cost of Capital as 10%. Calculate Pay Back Period, Net Present Value and
Profitability Index.

32) A Company is considering an investment proposal to install a new grinding control at a

cost of Rs.50000/-. The facility has a life expectancy of 5 Years without any salvage value.
The firm uses SLM of depreciation and the same is used for tax purposes. The tax rate is
assumed to be 35%. The estimated cash flow before depreciation and tax (CFBDT) from the
investment proposal are as follows:
Year Year-1 Year-2 Year-3 Year-4 Year-5
CFBDT (Rs) 10000.00 10692.00 12769.00 13462.00 20385.00
Compute: 1) Payback Period 2) Average Rate of Return 3) NPV at 10% Discount Rate 4)
Profitability Index at 10% discount Rate.

33) The companies initial investment in a project was 100000/- and the expected cash inflows
during the project are as follows:
Year Year-1 Year-2 Year-3 Year-4 Year-5
Cash Inflows (Rs) 20000.00 30000.00 40000.00 50000.00 30000.00
The cost of capital is 12%. Calculate the following:
1) Net Present Value 2) Benefit Cost Ratio 3) Internal Rate of Return 4) Pay back Period.

34) Mr. Prathamesh has been retained as a management consultant by SPSS Softech an IT
company, to analyze two proposed capital investment Projects, Project-Y and Project-Z.
Project-Y is a sophisticated Working Capital and Inventory Control System based upon a
powerful personal computer, called a system server, and a PC Software specifically designed
for inventory processing and control in the retail business. Project-Z is a similar sophisticated
Working Capital and Inventory Control System based upon a powerful personal computer and
general purpose PC Software. Each process has a cost of Rs.10000/- and the cost of Capital for
both the projects is 12%. The projects expected net cash flows are as follows:
Years Expected Net Cash Flows
Project-Y Project-Z
1 6500.00 3500.00
2 3000.00 3500.00
3 3000.00 3500.00
4 1000.00 3500.00
1) Calculate each projects Nominal Pay Back Period, Net Present Value (NPV), Internal Rate
of Return (IRR) and Profitability Index (PI).
2) Should both projects be accepted if they are interdependent?

35) Sunrise India Limited is evaluating a proposal to acquire an lathe machine for its assembly
department. The equipment cost is 680000 plus the company would have to pay a 5% Sales
Tax on the purchase and spend Rs.20000/- for freight and installation. The equipment has a
useful life of 10Years and is expected to produce a cost savings of Rs.157500/- per year. There
is no salvage value. The company's policy is not to fund any capital project whose internal rate
of return is below the company’s 16% cost of Capital.
Required:
1) Compute the Pay Back Period on the Project.
2) Compute the Net Present Value of the Project.
3) Find the Internal Rate of Return to the Nearest Percent.
36) The expected cash flow of a project are as follows:
Year Cash Inflows
0 -100000.00
1 20000.00
2 30000.00
3 40000.00
4 50000.00
5 30000.00
The cost of capital is 12%. Calculate the following:
2) Net Present Value 2) Benefit Cost Ratio 3) Internal Rate of Return 4) Pay back Period.

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