CAPITAL BUDGETING

2022 2023 2024 2025

Sale (Growth - 10%) 300 330 363 399.3
Less Raw Material (40% of sales) 120 132 145.2 159.72
Less lab (10% of sales) 30 33 36.3 39.93
Less Other Exp (5% of sales) 15 16.5 18.15 19.965

Proft 135 148.5 163.35 179.685

2022 2023 2024 2025

Sale (Growth - 7%) 350 374.5 400.715 428.7651
Less Raw Material (30%) 105 112.35 120.2145 128.6295
Less lab (20%) 70 74.9 80.143 85.75301
Less Other Exp (6%) 21 22.47 24.0429 25.7259

Proft 154 164.78 176.3146 188.6566

 2026
439.23 Dis Rate 12%
175.692 Years 5
43.923
21.9615

197.6535 ₹ 581.54

2026
458.7786
137.6336 Dis Rate 12%
91.75572
27.52672

201.8626 ₹ 628.80
The Management of a Company has two alternative proposals under consideration. Project A requires a capital outlay of Rs. 1
Project A Rs. 4,00,000 per year and Project B Rs. 5,80,000 per year. The cost of capital is 10%. Show which of the two projects

The present values of Re. 1 of 10%, 18% and 20% to be received annually for 5 years being 3.791, 3.127 and 2.991 respectively
The Management of a Company has two alternative proposals under consideration. Project A requires a capital outlay of Rs. 1
Project A Rs. 4,00,000 per year and Project B Rs. 5,80,000 per year. The cost of capital is 10%. Show which of the two projects

The present values of Re. 1 of 10%, 18% and 20% to be received annually for 5 years being 3.791, 3.127 and 2.991 respectively

Project A Project B
Year Amount Year
0 -1200000 0
1 400000 1
2 400000 2
3 400000 3
4 400000 4
5 400000 5

DR 10%

PV ₹ 1,516,314.71 PV
Cash Outflow 1200000 Cash Outflow
NPV ₹ 316,314.71 NPV

Profitabilty Index 1.26 times Profitabilty Index

Amount Ivested
Abhishek 100 Shares

Harsh 200 Mutual Fund

uires a capital outlay of Rs. 12,00,000 and project ‘B” requires Rs. 18,00,000. Both are estimated to provide a cash flow for five years:
w which of the two projects is preferable from the view point of (i) Net present value method,

3.127 and 2.991 respectively.

uires a capital outlay of Rs. 12,00,000 and project ‘B” requires Rs. 18,00,000. Both are estimated to provide a cash flow for five years:
w which of the two projects is preferable from the view point of (i) Net present value method,

3.127 and 2.991 respectively.

Amount YOU 1800000

-1800000
580000 A 1200000
580000 B 1800000
580000
580000 C
580000 D

10%

₹ 2,198,656.33
1800000
₹ 398,656.33

1.22 times

After 1 year Net Profit More Profit (Rs.)

120 20

230 30
a cash flow for five years:
a cash flow for five years:

More Profit (%) Profitabilty Index (Times) PV of cash inflows

20% 1.2 times Cash outflows

15% 1.15 times

A Company is considering a proposal of installing a drying equipment. The equipment would involve a Cash outlay of Rs. 6,00,
that the company is allowed to charge depreciation on straight-line basis for Income-tax purpose. The estimated before-tax c

Before-tax Cash inflows (Rs. ‘000)

Year 1 2 3
240 275 210

The applicable Income-tax rate to the Company is 35%. If the Company’s opportunity Cost of Capital is 12%, calcul
return.

Cash Outflow 680000 680000

Years PBT Tax @35% PAT (PBT - tax)
1 240000 84000 156000
2 275000 96250 178750
3 210000 73500 136500
4 180000 63000 117000
5 160000 56000 184000

Years Cashflows
0 -680000
1 156000
2 178750
3 136500
4 117000
5 184000

IRR 4.41%
uipment. The equipment would involve a Cash outlay of Rs. 6,00,000 and net Working Capital of Rs. 80,000. The expected life of the proj
ht-line basis for Income-tax purpose. The estimated before-tax cash inflows are given below:

ws (Rs. ‘000)

4 5
180 160

If the Company’s opportunity Cost of Capital is 12%, calculate the equipment’s discounted payback period, payback period, ne

Adj - 1`(Added 80000 in cash outflow)

CAPITAL 680000

Adj - 2`(Added 80000 in cash inflows)

. The expected life of the project is 5 years without any salvage value. Assume

period, payback period, net present value, PI and internal rate of

FA 600000

4/1/2021 3/31/2022
WC 80000 Raw Material 500000 700000
Profit 200000

WC 500000
Profitability index =
X LTD is considering investment in either one of the two alternative projects both with life of 5 years and the following inform
Particular Project x (Rs.) Project y (Rs.)
COST OF PROJECT
( OUTFLOW)
Year 0 -100000 -80000 Disc
Year 1 30000 40000 Project
Year 2 30000 35000 PV of Cash Inflowa
Year 3 30000 30000 Cash out
Year 4 30000 25000 NPV
Year 5 30000 10000
PI
The expected rate of return is 10% p.a.
You are required to calculate the comparative profitability of the two projects by using Net Present Value Method and Profitab
15.24% 27.35%
 of 5 years and the following informations are given:

10% 10%
X Y
₹ 113,723.60 ₹ 111,113.25
100000 80000
₹ 13,723.60 ₹ 31,113.25

1.14 1.39

et Present Value Method and Profitability Index

INTERNAL RATE OF THE RETURN( IRR)
The IRR of the project is the rate at which the NPV = 0.

Lower rate + (difference in rate )

Accept / reject rule for project ?

>The project will be accepted
if the IRR of the project is greater than the cost of the capital

>The project will be be rejected

if the IRR of the project is less than the cost of the capital

IRR is calculated using the trial and the error method

The management of XYZ ltd has proposed to invest Rs 80,000 OF
NEW PROJECT A which will give earning for 5 years as follows:

years CFAT
1 30000
2 20000
3 30000
4 50000
5 30000

Calculate IRR OF PROJECT ?

IF DISCOUNTING RATE IS 10% AND 12%
Assume a company is reviewing two projects. Management must decide whether to move forward with one, both, or neither.

Project A Project A
Year Cash Flows
Initial Outlay = $5,000 0 -5000
Year one = $1,700 1 1700
Year two = $1,900 2 1900
Year three = $1,600 3 1600
Year four = $1,500 4 1500
Year five = $700 5 700
16.61%
Project B
Project B
Initial Outlay = $2,000 Year Cash Flows
Year one = $400 0 -2000
Year two = $700 1 400
Year three = $500 2 700
Year four = $400 3 500
Year five = $300 4 400
5 300
5.23%
ard with one, both, or neither. Its cost of capital is 10%. The cash flow patterns for each are as follows:
The Management of a Company has two alternative proposals under consideration. Project A requires a capital outlay of Rs. 1
provide a cash flow for five years:
Project A Rs. 4,00,000 per year and Project B Rs. 5,80,000 per year. The cost of capital is 10%. Show which of the two projects
The present values of Re. 1 of 10%, 18% and 20% to be received annually for 5 years being 3.791, 3.127 and 2.991 respectively
quires a capital outlay of Rs. 12,00,000 and project ‘B” requires Rs. 18,00,000. Both are estimated to

how which of the two projects is preferable from the view point of Internal Rate of Return
1, 3.127 and 2.991 respectively.
Payback Period
It is the time period in which the total investment in the project is recovered.

Cash Flow = Cash flow after tax and before depreciation

In case of mutually exclusively projects:

Project with lowest pay back period should be accepted

In case of equal cash flow :

Example 1
Particulars Machine A
Cost 800000
annual cash flow 40000

In case of unequal cash flow :

PBP= Completed years +

Example 2
The management of xy ltd has proposed to invest Rs 150000 in a new machine which will give earning fo
Year CFAT Cum Cashflows
1 60000 60000
2 40000 100000

3 40000
140000
4 36000 176000
5 30000 206000
6 25000 231000
ct is recovered.

uld be accepted

x 12month)

0 in a new machine which will give earning for six years as follows:

Minimum time req 3 years

Required Amount 10000
Amount earned at the end of
4th years 36000
Time required to earn 10000 3.333333 months
PBP 3yr + 3.33 months
 80000
X LTD is considering investment in either one of the two alternative projects both with life of 5 years and the following inform
Cum
Particular Project x (Rs.) Project y (Rs.)
Cash
Year 0 100000
Year 1 30000 40000 40000
Year 2 30000 35000 75000
Year 3 30000 30000 105000
Year 4 30000 25000 130000
Year 5 30000 10000 140000
Even Uneven

Minimum time req 2 years

Required Amount 5000
Amount earned at the
end of 3rd years 30000
Time required to earn 2 months

PBP 3.33 PBP 2years & 2 months

X LTD is considering investment in either one of the two alternative projects both with life of 5 years and the following inform
Particular Project x (Rs.) Project y (Rs.)
Year 0 100000 80000
Year 1 30000 40000
Year 2 30000 35000
Year 3 30000 30000
Year 4 30000 25000
Year 5 30000 10000
Eventhe comparative profitability
You are required to calculate Unevenof the two projects by using Net Present Value Method and PI meth
IRR
Cash Outlay 100000
Particular Project x (Rs.) Dis Factor PV Cum CF

Year 1 30000 0.909 27273 27273

Year 2 30000 0.826 24793 52066
Year 3 30000 0.751 22539 74606
Year 4 30000 0.683 20490 95096
Year 5 30000 0.621 18628 113724
 Minimum time req 4 years
Required Amount 4904
Amount earned during
5th year 18628
Time required to earn
4904 3.1592 Months

PBP 4 year + 3 months

80000
Particular Project Y (Rs.) Dis Factor PV Cum CF

Year 1 40000 0.909 36364 36364

Year 2 35000 0.826 28926 65289
Year 3 30000 0.751 22539 87829
Year 4 25000 0.683 17075 104904
Year 5 10000 0.621 6209 111113

Minimum time req 2 years

Required Amount 14711
Amount earned during
3rd year 22539
Time required to earn
14711 7.832 months

PBP 2 years + 8 month

5 years and the following informations are given:

5 years and the following informations are given:

resent Value Method and PI method. Also calculate

4 to 5 years
2 to 3 years
1. Compute pay back period
Particulars Machine A Machine B
Cost 400000 500000
Annual cash flow 40000 100000

2. The management of xy ltd has proposed to invest Rs 100000 in a new

machine which will give earning for six years as follows:
Years CFAT
1 30000
2 20000
3 20000
4 18000
5 18000
6 12000

Calculate pay-back period

Particular Project A (Rs.) Project B (Rs.)
Year 0 100000 80000
Year 1 30000 40000
Year 2 30000 35000
Year 3 30000 30000
Year 4 30000 25000
Year 5 30000 10000

The expected rate of return is 20% p.a.

You are required to calculate the comparative profitability of the two projects by using Net Present Value Method. Also calcula
Present Value Method. Also calculate IRR