Illustration 22:

i s Maha Sweet would like to

setup a food-processing unit. The technology for processing
the
Is always on improvement and hence the proposed unit would become obsolete within tour years of
operation and would be scrapped. The company estimates to achieve sales of Rs. 50 Lakh in the
first year of operation. This will double every year. Net profit margin is 50%. Initial Outlay is Rs. 5

crores. Company will also pump-in initial working capital of Rs. 1 crore. Scrap value of the unit is
Rs. 1 crore. Depreciation on SLM basis.
Present Value table of Rs. 1 is as follows:
piol Be

26
Year 1 2
3
17% 0.855 0.731 4
| 18% 0.624 0.534
0.847 0.718
0.609 0.516
edate.aNPV
Calculate:.(a) NPV at 17% discounting rate. (6) NPV at 18% Discounting rate.
Solution:
(c) IRR.

Depreciation
Original Cost-Salvage Value
Estimated Life in Years
Rs. 5crore -Rs. 1crore
Depreciation =

4 Years
Rs. 1 crore p.a.
Particulars Years
(Rs.
1 3 4
Sales

Net Profit @50%

50,00,000100,00,000 200,00,000400,00,000
25,00,000 50,00,000 100,00,000 200,00,000
Add:Depreciation 100,00.000 100,00,000 100,00,000 100,00,000
Cash InfiowS
125,00,000 150,00,000 200,00,000 300,00,000
Analysis
Particulars Years (Rs. in Lakhs)
0 2 3
(0) Cost of Project 500) 100
2) Working Capital (100) 100
13) Cash Inflows 125 150 200 300
Total Cash Inflows 600) 125 150 200 500
17% 18%
Year CI
DF PV of CI DF PV of CI
1 125 Lacs 0.855 1,06,87,500 0.847 1,05,87,500
2 150 Lacs 0.731 1,09,65,000 0.718 1,07,70,000
3 200 Lacs 0.624 1,24,80,000 0.609 1,21.80,000
4 300 Lacs 0.534 1,60,20,000 0.516 1,54,80,000
4 200 LacsS 0.534 1,06 80.000 0.516 1,03,20.000
Gross PV of Cash Inflows 6,08,32,500 5,93,37,500
Less: PV Cash Outflows:
) Initfial Outlay 500,00,000
(i) Initial Working Capita 100,00.0000 600,00,000 600,00,000
NPV 8,32,500L (6.02,500)
Illustration 23:
The company has to select any one of the following two projects, the details of which are as
under:
Project A: Initial outlay Rs. 22 lakhs. Project life 7 years, annual cash flow each year Rs. 6
lakhs.
 Project B: Initial outlay Rs. 27 lakhs. Projeci life 7 years, annual cash flow each
each year
year Rs.
Re 7
lakhs.
The company's cost of capital is 10%. The finance manager tries to evaluate the options by
calculating the Net present value.
The present values of Re. 1 at 10% discount rate for next seven years are in the followinn
serial order:
wing
0.91,0.83, 0.75, 0.68, 0.82, 0.56, 0.51
You are required to recommend the project to the management of the company.
Solution:
Type: Constant Cash Inflows
NPV 10%
PVAF 10% Project A Project B
Year PV of CI Cash Inflows PV of CI
Cash Inflows
1 to 7 4.86 6,00,000 29,16,000 7,00,000 34,02.000
Less: Cost of Assets 22,00,000 27.00.00
Net Present Value 7,16,000 7.02.000
PVAF 10% = PVF 10% for 1to 7 years
4.86 0.91 +0.83 0.75 +0.68 +0.62 +0.56 +0.51
Suggestion: Based on NPV method, Project Ais suggested since it has a higher NPV.
Ans.: Project A is suggested based on NPV methods.
 e neW mache should be acquired.
Illustration 28:
Company Maharaja Private Limited is planning an investment in new project.
The investnent vestrment
aNernatives:
Dudget of the company is Rs. 30.00.000. The company has tollowing twoinvestmentProject
Particulars Project A B
Investment 30,00,000
30,00.000
Useful Life
5 Years
6Years
Cost of Capital 12% 12
Cash Inflows at the end of the year:
Year 1 7,00,000 8,00.00
Year 2 10,00,000 8,00.000
Year 3
9,00,000 8.00,00
Year 4 8,00,000 8,00.000
Year 5 4,00,000 6,00,.000
Year 6 2.00.000
Findwhich project the company should select on basis of: Net Present Value Method.
Discount factor 12% Year 4 Year 5 Year 6
Year 1 Year 2 Year 3
0.567 0.507
0.893 0.797 0.712 0.636
Solution:
Type: Annual Cash Infiows are Not constant
Net Present Value Method
Year PVF @ 12% Project A Project B3
CI PV of CI CI PVofC
0.893 7,00,000 6,25,100 8,00,000 7,14,400
0.797 i0,00,000 7,97,000 8,00,000 6,37,600
2
3 0.712 9,00,000 6,40,800 8,00,000 5,69,600
0.636 8,00,000 5,08,800 8,00,000 508,800
5 0.567 4,00,000 2,26,800 6,00,000 3,40,200
6 0.507 2,00,000 1,01,400
28,72,000
Gross PV of CI| 27,98,500
30,00,000
Less: Cost of Asset 30,00,000
NPV (2,01,500) (1.28,000)
Suggestion:
Based on NPV criteria both the projects are to be rejected as the NPV is negative.
 Copital Budgeting
YM"V" 267
tqlustration
Asha Ltd. is
29:
1,00,000 each and considering
have two
0P%. The projects willnave a life of 5mulually exclusive machines. Both require an n
wo mutually
years. The company's
o required rate of return is 10% and tax is
ected toto be
pected be generated h ated on a straight line basis. The net cash flows before taxes are
Year generated by the
projects as folloWs.
0 Machine A Machine B
40,000
40,000 60,000
40,000 30,000
5 40,000 20,000
Calculate Net Pre 40,000 50,000
Present Value and state 50.000
Solution: which machine shoulc
ould be purchased and why?

e Net Cash Flows Before Machine -A

a
40,000 Taxes| income Tax 50% | NPAT Depreciation Cash Inflows
40,000 20,000
20,000 20,000 40,000
40,000 20,000 20,000
20,000 20,000 40,000
40,000 20,000 20,000
20,000 40,0C0
40,000 20,000 20,000
20.000 40,000
20,000 20000 40,000
iNet Cash Flows Before Machine -B
60,000 TaxesIncome Tax 50%| NPAT Depreciation
30,000 Cash Inflows
30,000 15,000
30,000 20,000 50,000
20,000 15,000 20,000 35,000
10,000 10,000
50,000 20,000 30,000
25.000 25.000
50,000 20,000 45,000
25,000 25,000 20,000 45.000
Depreciation (SLM) p.a. OC-SV
EL
1,00,000
5
Rs. 20,0000
Net Present Value
ethine-A:
Year PVAF @10%
5 Annual CI Gross PV of Cl
3.791 40,000 1,51,640
Less: Cost of Asset 1,00,000
NPV 51,640
Value of PVAF @10% for 5th Year
ne-8:
ear
PVF 10% C PVCI
0.909 50,000 45,450
0.826 35,000 28,910
0.751 30,000 22,530
0.683 45,000 30,735
27,945
0.621 45,000
Gross PV of C 1,55,570
Less: Cost of Asset 1,00,000
NPV 55,570
 Mdclne
ne MLX 932 is to U00
Illustration 31: be purchased since the NPV is tive.
A project requires an initial cash outflow
follows: of Rs. 1o.00.000. It
generates a lo as
casn innow
a
Year end
Cash inflow (Rs. lakhs)
Its cost of capital is 10%. 2 5 5
PV Factor 10% is as Determine Net Present value
follows:
Year 1
3
0.909 0.826 0.751
5
Solution: 0.683 0.621
Type: Cash Inflows are not
Year constant.
PVF10% Cash Inflows PV of Cash
0.909
6,00,000 Inflows
0.826 5,45,400
3
0.751 3,00,000 2,47,800
4
0.683
2,00,000 1,50,200
5 5,00,000 3,41,500
Gross PV Cash Inflows 0.621 5,00,000 3,10,500
|Less: Initial Cash Outflows 15,95,400
Net Present Value 10,00,000
llustration 32: 5,95,400
Ami Ltd. is considering a
purchase of a machine X Calculate NPV from the
ntormation and advice about whether the machinery should be purchased ornot. following
Machine X'
Cost of Machine
Life of Machine 5,00,000
Profit after tax 5years
Year 1
20,000
Year 2 30,000
Year 3 40,000
Year 4
40,000
Year 5
45,000
Inecost of capital is 10%. PV factor10% are 0.909, 0.826, 0.751, 0.683, 0.621.
(ignore
ereciation).
Solution:
Year Computation of NPV (ignoring Depreciation)
1
Cash Inflows PVF 10% PV of Cash Inflows
20,000 0.909 18.180
2
30,000 0.826 24,780
 270 Vipul's Corporate inance (BM
3 40,000 0.751 30,040
40,000 0.683 27,320
5 45,000 0.621 27,945
Gross PV of Cash Inflows 1,28,265
Less: PV of Cash Outflows 5,00,C00
NPV (3,71,735)
Suggestion:
Since the NPV is negative company should not purchase the machine.
ll..dk 22
 40,000 0.751 30,040
40,000 0.683 27,320
45,000 0.621 27,945
Gross PV of Cash Intlows 1,28,265
Less: PV of Cash Outflows 5,00.C00
NPV (3,71,735)
Suggestion:
Since the NPV is negative company should not purchase the machine.

Illustration 33:
a new project
which requires an
A Company is considering the proposal of taking up to yield the
assets. The project is expected
investment of Rs. 400 lakh on machinery and other
following earnings (betfore depreciation and taxes)over the next 5years
Year 1 2 3 4
160160 180 180 150
Eanings(Rs. in lakhs) to be depreciated on straight
the additional capital is 12% and assets have
The cost of raising as zero. Income tax col
line basis. The scrap value at the end of
5 years period may be taken
(O
applicable to the company is 50%. management to take
value of the project and advice the
Required: Calculate the net present
appropriate decision.
Note: The present value of Re. 1 at different ratesof interest is as follows:
Year 12%
0.89
0.80
3 0.71
4 0.64
5 0.57

Solution: (Rs. in Lakhs

NPBT Tax 50% NPAT Cash Inflows =NPAT+De
Year NPBD&T Depreciation 80 40 40 120
160 80
40 40 120
160 80 80
100 50 50 130
180 80
50 50 130
4 180 80 100
70 35 35 115
5 150 80
Working Note:
Original Cost - Salvage Value
Depreciation (SLM) = Estimated Life

400-0
5
80
Net Present Value (NP Rs. inLa
Year CashInflows(Rs.) PVF @12% PV of CashInflows (Rs.
120 0.89 106.80
120 0.80 96.00
130 0.71 92.30
4 130 0.34 83.20
5 115 0.57 65.55
Gross PV of Cash Inflows 443.85
Less: PVo. "ash Outflows 400.00
Net Present Value (NPV) 43.85
 Illustration 35: (Nov. 17)
Bell Ltd. wants to invest in Project. Two options available
a are Project P anu Project Q.
Following are the details:
Particulars Project P Project QQ
Cost of Investment (Rs. 8,00,000 9,00,000
Cash flows: Year
1 30,000 40,000
272 Vipul's CorporateFir
Finance
2
(BM
40,000
3 50,000
4 60,000
5 80 06
90,000
Discounting Factor 15%
Year 1 2 3
5
P.V15% 0.870 0.756 0.658 0.572
0.497
Calculate Net Present Value for both the Projects and recommend which Project shodd
selected. be
Solution:
Computation of NPV for Project P and Project Q
Year PV 15% PROJECT P PROJECTO
CF PVCF @15% CF PVCF 015%
0.870 30,000 26,100 40,000 34,800
0.756 40,000 30,240 50,000 37,800
3 0.658 50,000 32,900 60,000 39,420
0.572 60,000 34,320 80,000 45,760
5 0.497 90,000 44,730 90,000 44,730
Presen: Value of Cash Flow (a) 1,68,290 2,05,570
Cost of Investment (b) 8,00,000 9,00,000
NetPresent Value (a-b)| (6,31,710) (6,94,430)
Suggestion:
NPV for both the Project is negative; hence both the Projects should be rejected.
(Nov. 17)
 13.89% (approx.)
Illustration 37: (Nov. 17)
ZEN Ltd. wants to invest in a Project. Two options available are Project A and Project B.
Folowing arethe details:
Particulars Project A Project B3
Cost of Investment (Rs.) 7,00,000 5,00,000
Cashfiows: Year
1 20,000 40,000
2 40,000 50,000
50,000 20,000
70,000 60,000
5 80,000 70,000
Discounting Factor10%
Year 2 3 5
P.V10% 0.909 0.826 0.751 0.683 0.621
Calculate Net Present Value for both the Projects and Recommend which Project should be
Hlected.
Solution:
Computation ofNPVfor Project Aand Project B -

PROJECTA PROJECT B
Year PV 10% CF PVCF @10% CF PVCF 10%
.909 20,000 18,180 40,000 36,360
2 0.826 40,000 33,040 50,000 41,300
3 0.751 50,000 37,550 20,000 15,020
0683 70,000 47,810 60,000 40,980
5 80,000 49,680 70,000 43,470
0.621 1,77,130
ent Value of (a) 1,86,260
Cosnt of InvestmentCash Flow (b) 7,00,000 5,00,000
Presend Value (a-b (5,13,740) (3,22,870)
uggestion: should be rejected.
I Of both the Project is negative; hence both the Projects (March 18)