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    Numericals On Capital Budgeting

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    Revati Shinde
    The document contains 5 problems related to capital budgeting techniques. Problem 1 provides cash flows for a 5-year project and asks to calculate payback period, NPV at 10%, profitability index, and discounted payback period. Problem 2 gives cash flows for two mutually exclusive projects X and Y, and asks to calculate various metrics to evaluate the projects. Problem 3 gives pre-tax cash flows for two proposals A and B over 6 years, and asks to calculate payback period, NPV at 15%, average rate of return, and rank the proposals. Problem 4 provides details on a machine purchase project and asks to advise using NPV. Problem 5 gives details on an existing and new machine and asks whether the existing machine should

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    Numericals On Capital Budgeting

    Uploaded by

    Revati Shinde
    195 views3 pages
    The document contains 5 problems related to capital budgeting techniques. Problem 1 provides cash flows for a 5-year project and asks to calculate payback period, NPV at 10%, profitability index, and discounted payback period. Problem 2 gives cash flows for two mutually exclusive projects X and Y, and asks to calculate various metrics to evaluate the projects. Problem 3 gives pre-tax cash flows for two proposals A and B over 6 years, and asks to calculate payback period, NPV at 15%, average rate of return, and rank the proposals. Problem 4 provides details on a machine purchase project and asks to advise using NPV. Problem 5 gives details on an existing and new machine and asks whether the existing machine should

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    Numericals on Capital Budgeting

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    The document contains 5 problems related to capital budgeting techniques. Problem 1 provides cash flows for a 5-year project and asks to calculate payback period, NPV at 10%, profitability index, and discounted payback period. Problem 2 gives cash flows for two mutually exclusive projects X and Y, and asks to calculate various metrics to evaluate the projects. Problem 3 gives pre-tax cash flows for two proposals A and B over 6 years, and asks to calculate payback period, NPV at 15%, average rate of return, and rank the proposals. Problem 4 provides details on a machine purchase project and asks to advise using NPV. Problem 5 gives details on an existing and new machine and asks whether the existing machine should

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    195 views3 pages

    Numericals On Capital Budgeting

    Uploaded by

    Revati Shinde
    The document contains 5 problems related to capital budgeting techniques. Problem 1 provides cash flows for a 5-year project and asks to calculate payback period, NPV at 10%, profitability index, and discounted payback period. Problem 2 gives cash flows for two mutually exclusive projects X and Y, and asks to calculate various metrics to evaluate the projects. Problem 3 gives pre-tax cash flows for two proposals A and B over 6 years, and asks to calculate payback period, NPV at 15%, average rate of return, and rank the proposals. Problem 4 provides details on a machine purchase project and asks to advise using NPV. Problem 5 gives details on an existing and new machine and asks whether the existing machine should

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    NUMERICALS ON CAPITAL BUDGETING

    Problem: -1

    Anand Ltd. is considering investing in a project that is expected to cost Rs. 12,00,000 and have
    an effective life of 5 years. The projected cash inflows for this period are as follows.

    Year Amount
    1 3,00,000
    2 3,00,000
    3 4,50,000
    4 4,50,000
    5 7,50,000
    Total 22,50,000

    Calculate: -

    1) Pay Back Period


    2) Net Present Value @ 10% Rate of discount
    3) Profitability Index
    4) Discounted Pay Back Period at 10% rate of discount

    Problem: - 2

    A firm whose cost of capital is 10% is considering two mutually exclusive proposals, X and Y,
    the details of which are as follows.

    Particulars Proposal X Proposal Y


    Initial Investments 15,00,000 15,00,000
    Projected Cash Inflows
    1st Year 1,00,000 6,50,000
    2nd Year 2,50,000 6,00,000
    3rd Year 3,50,000 6,00,000
    4th Year 5,50,000 5,75,000
    5th Year 7,50,000 5,25,000
    Total 20,00,000 29,50,000

    Calculate: -

    1) Pay Back Period


    2) Net Present Value @ 10% Rate of discount
    3) Profitability Index
    4) Internal Rate of Return
    Problem: - 3

    Zenith Ltd. is examining two mutually exclusive proposals for new capital investment. The
    data on the proposals are as follows:

    Particulars Proposal A Proposal B


    Initial Cash Outflow 27,00,000 27,00,000
    Salvage Value Nil Nil
    Expected Life 6 Years 6 Years
    Depreciation Straight Line Method Straight Line Method
    Earnings Before Depreciation
    Rs. Rs.
    and Income-tax year
    1 6,50,000 9,75,000
    2 7,25,000 10,00,000
    3 8,75,000 11,00,000
    4 9,50,000 10,25,000
    5 9,00,000 9,50,000
    6 8,00,000 8,50,000

    The corporate income-tax rate is 30%. Calculate the following:


    1) Pay Back Period
    2) Net Present Value @ 15% Rate of discount
    3) Average Rate of Rerun

    Rank the proposals under each of the technique.

    Problem: - 4

    Yohaan Ltd. is considering to purchase a machine in order to produce a new project. It is


    expected that the new product will generate an annual profit of Rs. 15,00,000 pre year for first
    5 years. The material cost required for this production is expected to be Rs. 4,50,000 p.a. labour
    of Rs. 5,50,000 and other expenditure Rs. 1,50,000 p.a. The cost of the machine is Rs. 5,00,000
    with expected scrap value nil, with a life of 5 years. The company uses a straight-line method
    of depreciation. The income tax rate is 30% and the cost of capital is 12%. The machine will
    also require an investment of working capital of Rs. 75,000 which will be recovered at the end
    of the 5th Year.

    Advise the company about purchase of the machine by using net present value method.
    Problem: - 5

    An existing machine has been in operation for the last 2 years with remaining useful life of 10
    years. The management of the company is considering to replace it with an improved model
    which will result in greater productivity. The existing machine can be sold at a price of Rs.
    1,00,000. The relevant particulars are as follows: -

    Particulars Existing Machine New Machine


    Purchase price 2,40,000 4,00,000
    Estimated Life 12 Years 10 Years
    Salvage Value Nil Nil
    Annual Operating Hours 2,000 2,000
    Selling Price per unit 10 10
    Output per Hour 15 units 30 units
    Material cost per unit 2 2
    Labour cost per hour 20 40
    Consumable stores p.a. 2,000 5,000
    Repairs and Maintenance p.a. 9,000 6,000
    Working Capital 25,000 40,000

    The company follows the straight-line method of depreciation and is subject to 50% tax.
    Whether the present machine should be replaced? The cost of capital is 15%.

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