Worksheet 18

1. The project cost Rs.5,00,000 and will have a life of 5 years and no salvage vaue. The comany’s
tax rate is 50% and uses straight line method of depreciation

Years 1 2 3 4 5
Net Income before 1,00,000 1,10,000 1,40,000 1,50,000 2,50,000
Dep & Tax

Calculate pay back period, Average rate of return and NPV at 12%
2. X Ltd has under consideration two mutually exclusive proposals for the purchse of new
equipment.
Particulars Machine X Machine Y
Net cash Outlay 1,00,000 75,000
Scrap Value Nil Nil
Life (years) 5 5
PBDT
1st year 25000 18000
2 30000 20000
3 35000 22000
4 25000 20000
5 20000 16000

PBDT – Profit before depreciation and Tax.

Assuming the tax rate to be 50% suggest the management the best alternatives using PV factor
@10% .Calculate pay back period and NPV.

3. XYZ is considering an investment proposal to install a new machine costing Rs.1,00,000. The
expected earnings after taxation are as follows

Year Inflow after tax

1 30,000
2 40,000
3 50,000
4 30,000
5 20,000
Evaluate the project under Pay back period, ROI, NPV and PI.

4. Good luck intends to implement a project costing Rs.50,000. The useful life of the project is 5
years. The expected cash inflows(Rs) of the projects are 20,000;12,000;15000;8000 and 5000.
Calculate the IRR.
5. From the following particulars relating to a project, calculate the R. The cost of the project is
Rs.50,000. The life of the project is 5 yrs and the following are the expected cash inflows of the
project.

Year cash Inflows

1 20,000
2 15000
3 10,000
4 15,000
5 8000

6. Five years back X Ltd acquired a machinery having life of 10 years for 500000 and has
depreciated to Rs.250000 with no salvage value. The company wants to replace this machine
by a machine costing Rs.8,00,000. The installation of new machine having a life of 6 years with
a scrap value of Rs.80000 and this results in a reduction of operating expenses to the extent of
Rs.90000 for 6 years. Tehe old machine can be sold for Rs.1,50,000. The cost of capital is 10%
The company is in 35% tax bracket. Under NPV method state whether old machine can be
replaced by new machine ? depreciation charged on straight line basis.

7. Rank the following projects in order of their desirability according to the pay back period
method and the NPV method (10%)

Project Initial Outlay (Rs.) Annual Cash Life in Years

Inflow(Rs.)
A 10,000 2500 5
B 8000 2600 7
C 4000 1000 15
D 10,000 2400 20
E 5000 1125 15
F 6000 2400 6
G 2000 1000 2