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Solution 1

A)

Calculation of pay back period:

Year
0
1
2
3
4
5
P.B.P.
B)

PROJECT A
Cash flow Cumulative
cash flow
-20000
-20000
8000
-12000
8000
-4000
8000
4000
8000
12000
8000
20000
2YEARS AND 6 MONTHS

Year
0
1
2
3
4
5

PROJECT B
Cash flow Cumulative
cash flow
-20000
-20000
12000
-8000
6000
-20000
4000
2000
10000
12000
10000
22000
2YEARS AND 6 MONTHS

Calculation of Accounting Rate of Return


PROJECT A
Cash flow Depreciaton P.B.T.
Taxation P.A.T.
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
1
8000
4000
4000
2000
2000
2
8000
4000
4000
2000
2000
3
8000
4000
4000
2000
2000
4
8000
4000
4000
2000
2000
5
8000
4000
4000
2000
2000
Total
10000
Average profit
2000
Average investment
10000
A.R.R.
20
Year

PROJECT B
Cash flow Depreciaton P.B.T.
Taxation P.A.T.
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
1
12000
4000
8000
4000
4000
2
6000
4000
2000
1000
1000
3
4000
4000
0
0
0
4
10000
4000
6000
3000
3000
5
10000
4000
6000
3000
3000
Total
11000
Average profit
2200
Average investment
10000
A.R.R.
22
Year

C)

Calculation of internal rate of return

Year

PROJECT A
Cash flow Depreciaton P.B.T.
Taxation P.A.T.
N.C.F.
P.V.I.F.
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
@ 20%
0
-20000
-20000
1
1
8000
4000
4000
2000
2000
6000
0.833

2
3
4
5

8000
8000
8000
8000

Total
Hence, IRR

Year
0
1
2
3
4
5
Total

4000
4000
4000
4000

4000
4000
4000
4000

2000
2000
2000
2000

2000
2000
2000
2000
10000

6000
6000
6000
6000

0.694
0.579
0.482
0.402

15.71%

PROJECT B
Cash flow Depreciaton P.B.T.
Taxation P.A.T.
N.C.F.
P.V.I.F.
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
(Rs.)
@ 20%
-20000
-20000
1
12000
4000
8000
4000
4000
8000
0.833
6000
4000
2000
1000
1000
5000
0.694
4000
4000
0
0
0
4000
0.579
10000
4000
6000
3000
3000
7000
0.482
10000
4000
6000
3000
3000
7000
0.402
11000

Hence, IRR
Decision: Select machine B

17.22%

P.V.
P.V.I.F.
P.V.
@ 20%
@ 10%
@ 10%
-20000
1
-20000
4998
0.909
5454

4164
3474
2892
2412
-2060

0.826
0.751
0.683
0.621

4956
4506
4098
3726
2740

P.V.
P.V.I.F.
P.V.
@ 20%
@ 10%
@ 10%
-20000
1
-20000
6664
0.909
7272
3470
0.826
4130
2316
0.751
3004
3374
0.683
4781
2814
0.621
4347
-1362
3534

Solution 2
Let us work out the present value of net running cost(after considering the tax benefit), add to it present value of investment.
The machine which gives the lowest sum should be selected. We will use annuity factor.
Machine A:
Running cash expense
Add: depreciation
Total expense
Less: Tax savings @ 50%
Net costs
Less: Depreciation
Net Cash flow

Rs. (p.a.)
32000
1000
42000
21000
21000
10000
11000

P.V. of net cash flow p.a. =

11000 x 6.1446
= Rs. 67590.6
Rs. 67590.6 + 100000
=Rs.167590.6

Total P.V.

Machine B:
Running cash expense
Add: depreciation
Total expense
Less: Tax savings @ 50%
Net costs
Less: Depreciation
Net Cash flow

Rs. (p.a.)
20000
15000
35000
17500
17500
15000
2500

P.V. of net cash flow p.a. =

2500 x 6.1446
= Rs. 15361.5
Rs. 15361.5 + 150000
=Rs.165361.5

Total P.V.

Decision: Select machine B

d to it present value of investment.

Solution 3
Techtronics Limited
Calculation of N.P.V.
Particulars \ Year

1. Capacity utilisation %
2. Production units
3. Contriubution per unit in Rs.
4. Capital expenditure Rs. In lakh
5. Working capital
6. Additional investment for W.C.
7. WDV of asset
8. Depreciation @ 33.33%
9. Annual Fixed Costs
10. Contribution Rs. (2x3)
11. PBT (10-8-9)
12. Tax rate @ 50%
13. PAT (11-12)
14. Operating cash flow (13+8)
15. Terminal cash flow
a. Fixed asset @ 10%
b. Working capital
16. Net cash flow (4+5+6+14+15)
17. P.V. I.F. @ 15%
18. Present Value (16x17)
19. NPV (sum of 18)

33.5
4020000
80

(Rs. In lakh)
3

66.23
90
100
100
7947600 10800000 12000000 12000000
80
80
80
80

-600
-150
600

600
200
240
322
-118
-59
-59
141

400
133
360
636
142
71
71
205

-100
267
89
480
864
295
148
148
236

-750
1
-750
143

141
0.869
122

205
0.756
155

136
0.657
90

178
59
480
960
421
210
210
270

119
40
480
960
440
220
220
260

270
0.571
154

260
0.497
129

(Rs. In lakh)
6
100
12000000
80

79
26
480
960
454
227
227
253
60
250
563
0.432
243

SOLUTION 4

M N Company

1. Statement of comparative Profitability


Particulars

Proposals
II
I
50000
100000
30000
60000
20000
40000
200000
300000
220000
340000
22000
34000
70000
95000
48000
61000
480000
610000
------------15000
480000
595000
48000
59500
310000
480000
48000x100 59500x100
310000
480000
= 15.48% = 12.4%

Buildings
Less: Disposable value
Plant & Installation less scrap value
Depriciation at 10% on the above
Annual Pre-depriciation Profits
Net Profit after depriciation
Total Profit for 10 years
Less: Sales Promotion in 2nd year
Average Annual Profit:
Investment i.e., Buildings, plant Installation & Working Capital
Return on Investment = Net Profit x 100%
Investment

2. Statement of Comparative Net Present Value.

Proposal I :
Present value of 10 years cah flow
For 8%
Present Value of:
Plant Scrap Value
Buldings Disposable Value
Working Capital
(Getting back at the end of 10 years)

Rs.
70,000 x 6.709

10000
30000

50000
90000 x 0.463
Total present Value
Less: Investment 3,10,000 x 1.00
N.P.V.

=
=

Proposal II:
Year
1
2
3
4
5
6
7
8
9
10

Cash Flow
95000
95000
95000
95000
95000
95000
95000
95000
95000
95000

x
x
x
x
x
x
x
x
x
x

Rs.
469630

P.V. factor at 8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463

=
=
=
=
=
=
=
=
=
=

Present Value
87970
68560
75430
69825
64695
59850
55385
51300
47500
43985

41670
511300
310000
201300

Plant Scrap Value, Buildings Disposable Value & Working Capital


15000 + 60000 + 65000 =
140000
x
0.463
Total Present Value
Less: Investment
480000
x
1.00
N.P.V.
Suggestion:
Proposal II should be undertaken as its N.P.V. is higher than Proposal I.

=
=
=

64820
689320
480000
209320

SOLUTION 5
A.

B.
Particulars\years
a, Initial investment
b. Salvage value
c. Current assets
d. Additional investment
e. Recovery of salvage value
f. Cash before tax
g. Depreciation on original investment (axa(i))
h. Depreciation on additional investment (dxa(ii))
i. Profit before tax (f-g-h)
j. Taxation @ 40 %
k. P.A.T. (i-j)
l. Operating cash flow (k+g+h)
m. Net cash flow (a+b+c+d+e+l)
n. P.V.I.F. @ 20%
o. P.V. of cash flow (mxn)
Net Present Value = sum of o

Depreciation calculation:
i. Company using sum of years digit method : 10 years
Year
1
2
3
4
Ratio
10/55
9/55
8/55
7/55
ii. For SYD method : 5 years
Year
1
2
3
4
Ratio
5/15
4/15
3/15
2/15
Calculation of cash flow:
0
1
2
3
4
-250000
-50000

-300000
1
-300000
-326.909

100000
45455

100000
40909

100000
36364

100000
31818

54545
21818
32727
78182
78182
0.833
65125

59091
23636
35455
76364
76364
0.694
52996

63636
25455
38182
74545
74545
0.579
43162

68182
27273
40909
72727
72727
0.482
35055

5
6/55

6
5/55

7
4/55

8
3/55

9
2/55

10
1/55

5
1/15
5

10
30000

-60000
100000
27273
72727
29091
43636
70909
10909
0.402
4385

100000
22727
20000
57273
22909
34364
77091
77091
0.335
25825

100000
18182
16000
65818
26327
39491
73673
73673
0.279
20555

100000
13636
12000
74364
29745
44618
70255
70255
0.233
16369

100000
9091
8000
82909
33164
49745
66836
66836
0.194
12966

50000
100000
4545
4000
91455
36582
54873
63418
143418
0.162
23234

55

SOLUTION 6
Particulars \ Year
1. Cost price
2. Market price of present machine
3. Workers Training
4. Machine inestment needed (1+2+3)
5. Working capital needed
6. Savings in running expenses
7. Depreciation SL Method
8. Investment allowance
9. P.B.T. (6-7-8)
10. Taxation @ 50% (50%x 9)
11. P.A.T. (9-10)
12. Operating cash flow(11+8+7)
13. Terminal flow
i. of machine
ii. Of working capital
14. Net cash flow (4+5+12+13(i)+13(ii))
15. PVIF @ 20%
16. PV (14X15)
17. NPV (sum of 16)

Comparative evaluation for Replacement of machine


0
1
2
3
4
-25.35
4.00
0.05
-21.30
-0.35
5.000
5.000
5.000
5.000
2.500
2.500
2.500
2.500
6.250
-3.750
2.500
2.500
2.500
-1.875
1.250
1.250
1.250
-1.875
1.250
1.250
1.250
6.875
3.750
3.750
3.750

-21.65
1.00
-21.65
1.96

13.125
0.833
10.933

3.750
0.694
2.603

3.750
0.579
2.171

3.750
0.482
1.808

5.000
2.500
2.500
1.250
1.250
3.750

3.750
0.402
1.508

(Rs. In lakhs)
7
8

10

5.000
2.500

5.000
2.500

5.000
2.500

5.000
2.500

5.000
2.500

2.500
1.250
1.250
3.750

2.500
1.250
1.250
3.750

2.500
1.250
1.250
3.750

2.500
1.250
1.250
3.750

2.500
1.250
1.250
3.750

3.750
0.194
0.728

0.100
0.350
4.200
0.162
0.680

3.750
0.335
1.256

3.750
0.279
1.046

3.750
0.233
0.874

Solution 7

Modern Enterprise Ltd.

Evaluation of Financial Liability of Proposal


Cash outflow :
Cost of new computer system
Less: Sale-proceeds of drawing office equipment and funiture
Total (A)
Cash inflow :
1. Savings in cost with new system
Reduction in design and draftmanship costs p.a.
Less: Maintainance cost of new system p.a.
Savings before tax p.a.
Less: Tax @ 50%
Net Savings after tax p.a.
Present value of net savings for 6 years @ 12%
(i)
(Rs. 2.50 lakhs x 4.108)
2. Tax savings
Tax savings at the end of 1st year from 100% written off of R&D expenses
Less: Tax 50%
Net Savings
Present value at the end of 1st year
(ii)
(Rs.17.50 lakh x 0.892)
3. Terminal value of computer
Expected sale value of computer at the end of 6th year
Present value at the end of 6th year @ 12%
(iii)
(Rs. 1.00 lakh x 0.506)
Total Present value of cash inflow
(i) + (ii) + (iii) = 10.27 + 15.61 + 0.506
Total (B)
Net present value (B) - (A) i.e., 26.386 - 26.00

(Rs. Lakhs)
35.00
9.00
26.00

12.00
7.00
5.00
2.50
2.50
10.27

35.00
17.50
17.50
15.61

1.00
0.506

26.386
0.386

SOLUTION 8

BS Electronics

Evaluation of the Financial Vialibility of the Proposal to Replace a Machine


(i) Incremental Investment/ Cash Outflow on New Machine
(Rs.)
Price of new machine
15,00,000
Less: present realisation from old machine
6,00,000
Net cash Outlay
9,00,000
(ii) Incremental Depriciation
Year
Cost/ WDV
1
2
3
4
5

9,00,000
6,75,000
5,06,250
3,79,687
2,84,765

(Rs.)
Depreciation at 25% p.a. on
W.D.V.
2,25,000
1,68,750
1,26,563
94,922
71,191

(iii) Incremental Savings/ Revenue


Year
Saving in operating
Increase in Revenue
costs
1
1,00,000
1,50,000
2
1,00,000
1,50,000
3
1,00,000
1,50,000
4
1,00,000
1,50,000
5
1,00,000
1,50,000

Increase in maintainance cost of


machine to be saved
------------------------------------------50,000
50,000
50,000

(iv) Statement showing computation of present value of cash Inflows


(Rs.)
Year
Total
Depriciation Taxable
After Tax
After Tax PVF @
Present
Savings
income
income
cash
10% value of
(Tax rate 50%) inflows
cash inflows
1 2,50,000
2,25,000
25,000
12,500 2,37,500
0.909 2,15,888
2 2,50,000
1,68,750
81,250
40,625 2,09,375
0.826 1,72,944
3 3,00,000
1,26,563 1,73,437
86,718 2,13,281
0.751 1,60,174
4 3,00,000
94,922 2,05,078
1,02,539 1,97,461
0.683 1,34,866
5 3,00,000
71,191 2,28,809
1,14,404 1,85,595
0.62 6,73,069
Net disposable value
9,00,000
Total present value of cash inflows
13,56,941
(v) Net present Value
PV of cash inflows
Less: Incremental Investment
Net present value
Advise:
Since NPV is positive, the proposal is viable

(Rs.)
13,56,941
9,00,000
4,56,941

Total savings before


depriciation
2,50,000
2,50,000
3,00,000
3,00,000
3,00,000

(Rs.)
Total savings before
depriciation
2,50,000
2,50,000
3,00,000
3,00,000
3,00,000

SOLUTION 9
A.

Beta Limited
Calculation of net present value of purchase of computer by availing loan

Particulars/Year
a. Investment
Rs. 50,000
b. Depreciation
c. Interest payment 15% of e
d. Principal repayment
e. Principal outstanding at the beginning of the year
f. Cost before tax (b+c)
g. Tax rate @ 40%
h. Cost after tax (f-g)
i. Terminal flow
j. Net outflow (h+d+i)
k. PVIF @ 9%
l. PV (kxj)
l. Net PV (sum of k)

10000.00
7500.00
10000.00
50000.00
17500.00
7000.00
10500.00

10000.00
6000.00
10000.00
40000.00
16000.00
6400.00
9600.00

10000.00
4500.00
10000.00
30000.00
14500.00
5800.00
8700.00

10000.00
3000.00
10000.00
20000.00
13000.00
5200.00
7800.00

10000.00
1500.00
10000.00
10000.00
11500.00
4600.00
6900.00
1547.00
20500.00 19600.00 18700.00 17800.00 18447.00
0.92
0.84
0.77
0.71
0.65
18798.50 16503.20 14436.40 12602.40 11990.55
74331.05

B.

Calculation of annual lease instalment

P.V. = LI (1-t) X PVIFAK,N


The lease instalment is tax admissible expenses
P.V. = LI (1-0.40) X PVIFA9%,5
74331.00 =
Hence, LI(1-0.40) =

19108.23

LI(1-0.40) x

3.89

y availing loan

SOLUTION 10

Elite Builders
Calculation of Present Value of Cash Outflow

Cost of construction
Add: Registration and other costs @ 2.5%
Present value of Initial outlay
Add: Present value of Repairs cost Year 14: Repair cost

24,00,000
60,000
24,60,000

(6 x 1000 x Rs. 400)

4,00,000
2,00,000
2,00,000

Less: Tax Saving @ 50%


Present value
Year 15: Repair Cost
Less: Tax Savings @ 50%

(2,00,000 x 0.26)

Present value
Total Present Value of Cash Outflows

(2,00,000 x 0.24)

52,000
4,00,000
2,00,000
2,00,000
48,000
25,60,000

Calculation of Present Value of Cash Inflows


Let us assume normal lease rentals for all 6 flats p.a. be L
6 to 10
11 to 15
L
1.2L
1.5L
3.79
2.35
1.46
3.79L
2.82L
2.19L
(3.79L + 2.82L + 2.19L)
8.8L
4.4L
4.4L

Years
Lease Rentals
Discount Factor (Cumulative)
Present Value
Total Present Value
Less: Tax @ 50%
Present Value of net cash Inflows

1 to 5

Present Value of Tax Savings on Construction cost written off


= Construction cost written off annually x Tax Rate x PVIFA(10%,15)
= Rs 24,60,000
x 50% x 7.6
15 Years
= Rs. 6,23,200
Present value of nominal value realised
= Nominal value x (1 - Tax rate) x PVIF(10%,15)
= Rs. 8,00,000 x (1 - 0.50) 0.24
= Rs. 96,000
At normal lease rental, Total present value of inflows = Present value of cash outflows
4.4L+ 6,23,200 + 96,000
= Rs. 25,00,000
4.4L
= Rs. 18,40,800
L
= Rs. 4,18,464
Hence, normal lease rental per flat

Rs. 4,18,464/6

Rs.69,727

SOLUTION 11

Gama & Co.

Working Notes
Calculation Initial Cash Outflow
Particulars

(Rs. Lakhs)
Machine
Zee

Machine cost
Cost of utilities
Total
Less: Salvage value of old machine
Salvage value of old utilities
Initial Net Cash Outflow

Chee
5.00
1.00
6.00

1.00
1.00
5.00

5.00
2.00
7.00
1.00
0.20

1.20
5.80

(i) Computation of NPV of two machines


(Rs. Lakhs)
Year
P.V.
Machine Zee
Machine Chee
@ 15%
Factor
Cashflow PV of
Cashflow PV of
cashflow
cashflow
0
1.00
5.00
5.00
5.80
5.80
1
0.87
1.00
0.87
2.00
1.74
2
0.76
1.50
1.14
2.10
1.60
3
0.66
1.80
1.19
1.80
1.19
4
0.57
2.00
1.14
1.70
0.97
5
0.50
1.70
0.85
0.40
0.20
Salvage Value
0.50
0.50
0.25
0.60
0.30
NPV
0.44
0.20
.
Analysis:
The net present values of both the machines are positive and hence, both of them are acceptable
under this method.
(ii) Computation of Discounted Payback Period
Year
Machine Zee
Machine Chee
P.V. of
Cumulative P.V. of
P.V. of
Cumulative P.V. of
cash flow
cash flow
cash flow
cash flow
0
5.00
5.8
1
0.87
0.87
1.74
1.74
2
1.14
2.01
1.60
3.34
3
1.19
3.20
1.19
4.53
4
1.14
4.34
0.97
5.50
5 (includes
Salvage value)
1.10
5.44
0.50
6.00
Discounted Payback Period
0.66 x 1
Machine Zee

4 years +

4.6 years

4.6 years

1.1
0.30 x 1
Machine Chee

4 years +
0.50

(iii) Computation of profitability Index

Profitability Index

Total P.V. of cash inflows


Initial cash outflow

Machine Zee

Machine Chee

Rs. 5.44 lakhs


Rs. 5.00 lakhs
Rs. 6.00 lakhs
Rs. 5.80 lakhs

Re. 1.088

Re. 1.034

Analysis:
The discounted payback period of both the machines and based on this it is difficult to select the
Machine. But, based on the profitability index method, the desirability factor of Machine Zee is higher.
Hence Machine Zee is recommended.