TYBMS SEM V F.M. New Problems + Solution @ Capital Budg. [F.

M]1

Q.1 Solution) p
Year
1
2
3
4
5

NPV
NPV

=
=
=

Year
1
2
3
4
5

NPV
NPV

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=
=
=

Project A
CIF
PV@10%
1000
0.909
2000
0.826
3000
0.751
4000
0.683
5000
0.621
15000
PVCIF

PVCIF
909
1652
2253
2732
3105
10651

PVCIF PVCOF
10651 11000
(349)
Project B
CIF
PV@10%
2000
0.909
3000
0.826
5000
0.751
3000
0.683
2000
0.621
15000
PVCIF

PVCIF
1818
2478
3755
2049
1242
11342

PVCIF PVCOF
11342 11000
342

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TYBMS SEM V F.M. New Problems + Solution @ Capital Budg. [F.M]2

Year
1
2
3
4
5

NPV
NPV

=
=
=

Project B
CIF
PV@10%
3000
0.909
4000
0.826
3500
0.751
2500
0.683
0.621
2000
15000
PVCIF

PVCIF
2727
3804
2628.5
1707.5
1242
11609

PVCIF PVCOF
11609 11000
609

Recommendation:The company is recommended to select Project C, since the NPV of Project is higher.

Q.2 Solution)
(1)

M/s Gulab & Co.

Initial Outlay
Pay Back Period
Annual Cash Inflow
Rank
1,00,000
III
A
=

25,000
70,000
II
B
=

20,000

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4 Years
3.5 Years

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TYBMS SEM V F.M. New Problems + Solution @ Capital Budg. [F.M]3

(2)

IV

IV

Net Present Value

Year
A
1 10
B
18
C
1 20
D
1 10
E
1 20
Rank
I
IV
V
II
III

NPV
A
B
C
D
E

=
=
=
=
=
=

30,000
6,000
50,000
15,000
50,000
12,000

5 Years

3.33 Years

4.17 Years

CIF
25,000
20,000
6,000
15,000
12,000

PV@10%
5.1790
4.6586
6.3345
5.1790
6.3345

PVCIF
1,29,475
93,172
38,007
77,685
76,014

PVCIF
1,29,475
93,172
38,007
77,685
76,014

=
=
=
=
=

PVCOF
1,00,000
70,000
30,000
50,000
50,000

29,475
23,172
8,007
27,685
26,014

(3) Profitability Index.

PVCIF
PI
PVCOF
Rank
IV

III

II

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1,29,475
1,00,000
93,172
70,000
38,007
30,000
77,685
50,000
76,014
50,000

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1.29

1.33

1.27

1.55

1.52

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TYBMS SEM V F.M. New Problems + Solution @ Capital Budg. [F.M]4

Q.3) Betterglass Co. Ltd. is evaluating two mutually exclusive projects. For each project the
depreciable value is equal to net investment. Straight line depreciation (No Salvage Value) over
a six year life is used in each case. The firms has 10% cost of capital.

Q.3 Solution)
Project A
CIF
Depn
=
NPAT
32,000 20,000
=
12,000
1
,
20
,
000

0
Depn =
20,000
6
O.C Scrap
Avg. Invst
=
Scrap W .C
2
1,20,000 0
=
0 0
2
=
60,000
Avg. NPAT
x 100
(a) ARR based on Avg. Invst. =
Avg. Inst.
12,000
=
x 100
60,000
Year
16

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TYBMS SEM V F.M. New Problems + Solution @ Capital Budg. [F.M]5

=
(b) Pay back Period

=
=
=

(c) NPV
Year
16

Annuity/
PV @ 10%
4.355

CIF
32,000
NPV

20%
Initial Outlay
Annual CIF
1,20,000
32,000
3.75 years

=
=
=

PVCIF
139360

PVCIF PVCOF
1,29,360 1,20,000
19,360
Project B

CIF
Depn
44,000 28,000
48,000 28,000
52,000 28,000
40,000 28,000
30,000 28,000
28,000 28,000

Year
1
2
3
4
5
6
Depn

Avg. NPAT =
Avg. Invst. =
=
=

NPAT
16,000
20,000
24,000
12,000
2,000
0
.
74,000

1,68,000 0

28,000
6
74,000

12,333
6
O . C Scrap
Scrap W.C
2
1,68,000 0
0 0
2
84,000

ARR based on Avg. Invst.

(b) Pay back Period
Cost
Year
CIF
1
44,000
2
48,000
3
52,000
4
40,000

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=
=
=
=
=
=
=

12,333
x 100
84,000
=
14.68%
=
1,68,000
CCIF
PV@10%
44,000
0.909
92,000
0.827
1,44,000
0.751
1,84,000
0.683
=

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PVCIF
39,996
39,696
39,052
27,320

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TYBMS SEM V F.M. New Problems + Solution @ Capital Budg. [F.M]6

5
6

30,000
28,000

2,14,000
2,42,000

P.B. Period
(c) N.P.V

=
=
=

0.621
0.564
PVCIF

18,630
15,792 .
1,80,486

12 40,000

24,000
?
3 Yrs 7.2months.
3 Yrs +

=
PVCIF PVCOF
1,80,486 1,68,000
12,486

EXTRA PRACTISE PROBLEMS

Q.4) A project of Rs.20,00,000 yielded annually a profit of Rs.3,00,000 after depreciation at
12% & is subject to income tax at 50%. Calculate pay back period. Cash inflows of a certain
project along with cash outflows are given below:

Salvage value Re. 40,000 at the end of 5 years.

The cost of capital is 10%.
The PV of Re. 1 @ 10% p.a. is given below:
Year
PV Ratio

1
0.90909

2
0.82645

3
0.75131

4
0.68301

5
0.62092

Calculate net present value on the basis of discounted cash flows at 10% discounting factor.
Offer your comments whether the project should be accepted or not.

Q.5) WX Ltd. has a machine which has been in operation for 3 year. Its remaining estimated
useful life is 8 year with no salvage value in the end. Its current market value is Rs. 2,00,000.
The company is considering a proposal to purchase a new model of machine to replace the
existing machine. The relavant information are as follows :

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TYBMS SEM V F.M. New Problems + Solution @ Capital Budg. [F.M]7

The company follows the straight line method of depreciation. The corporate tax rate is 30 per
cent and WX Ltd. does not make any investment, if it yields less than 12 per cent. Present value
of annuity of Rs. 1 at 12% rate of discount for 8 years is 4.968. Present value of Rs. 1 at 12% rate
of discount, received at the end of 8th year is 0.404. Ignore capital gain tax. Advise WX Ltd.
Whether the existing machine should be replaced or not.

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