Capital Budgeting Solution1

CA PRAVIIN MAHAJAN SFM CLASSES 1/30, lalit park, laxmi nagar, near lalita park gurudwara
9354 720 515 metro pillar 24, new delhi
SOLUTION CAPITAL BUDGETING

Q1 Statement of Net cash Inflows
Amount Period factor PV

Purchase Price 8,00,000 0 1 800000
Initial working capital 1,50,000 0 1 150000
950000
Cash Inflows
Operating Cash inflows 261800 1-4e 3.312 867082
realised working capital 150000 4e 0.735 110250

salvage value 200000 4e 0.735 147000
1124332
Net Present Value 174332
Statement of operating cash inflows
Particulars Annual Depreciation =

PBDT 370000
depreciation -150000 8,00,000 − 2,00,000
PBT 220000 4
Tax -77000 = 1,50,000
PAT 143000
Depreciation 150000
293000
Opportunity cost
rent net of tax
48000 (1-0.35) 31200
Net operating cash inflow 261800
Since NPV of project is +ve so project should be accepted.
1
Q2 Statement of Net cash Inflows
Amount period factor present Value

Cash Outflow
Purchase Price 500000 0 1 500000

Initial Working Capital 80000 0 1 80000
One time opportunity cost (utilities) 25000 0 1 25000
Cash inflow
Annual operating cash inflows 172920 1e 0.87 150440
164520 2e 0.756 124377
157800 3e 0.658 103832
152424 4e 0.572 87186.5
148123 5e 0.497 73617.13
Terminal value
sale price 50000
tax saving on Cap loss 45536 95536 5e 0.497 47481.39
40%(163840 - 50000)
Tax saving on Cap loss 3277 (8192 x0.4) 3277 5e 0.497 1628.6
Realised value of working capital 32000 5e 0.497 15904
NPV 532.4
Statement of Net operating cash inflows
1 2 3 4 5
PBDT 310000 310000 310000 310000 310000
Depreciation Machine + utilities -105000 -84000 -67200 -53760 -43008
Rent -4800 -4800 -4800 -4800 -4800
opportunity cost -12000 -12000 -12000 -12000 -12000
PBT 188200 209200 226000 239440 250192
Tax 40%
PAT 60% 112920 125520 135600 143664 150115
Depreciation 105000 84000 67200 53760 43008
loss of cash flow from another product -45000 -45000 -45000 -45000 -45000
Operating cash inflows 172920 164520 157800 152424 148123
Since NPV is positive so project should be accepted
Note: Research and development cost is sunk cost, so ignored
2
Q3 statement of Net cash Inflow
Amount time PV factor Present Value

Cash Outflow
Purchase Price 700000
less sale of old machine 100000
Tax saving on Cap loss 120000 220000 480000 0 1 480000
0.4 (400000 - 100000)
Incremental working capital 90000 0 1 90000
PV of Cash outflow 570000

Cash Inflow
Annual operating cash inflow 212000 1e 0.833 176596
204400 2e 0.694 141854
198500 3e 0.579 114932
193932 4e 0.482 93475
190410 5e 0.402 76545
Terminal value - sale of new 280000
less tax on cap gain 0.4(280000-229376) 20250
259750
Loss of terminal value 70,000
tax saving on cap loss
107482 x 0.4 42993 112993 146757 5e 0.402 58996
Realisable value of working capital 90000 5e 0.402 36180
PV of cash inflow 698578
NPV 128578
Statement of annual Incremental operating Cash inflow
1 2 3 4 5
Incremental PBIT
230000 +30000+60000+
40000 + 30000 300000 300000 300000 300000 300000
incremental depreciation 80000 61000 46250 34382 26024
PBT 220000 239000 253750 265168 273976
Tax
PAT 132000 143400 152250 159100 164386
Depreciation 80000 61000 46250 34832 26024
Incremental operating cash inflow 212000 204400 198500 193932 190410
3
Statement of Depreciation
Depreciation Depreciation on
on old asset New Asset
Cost /BV 400000 700000
1yr -60000 -140000 80000
340000 560000
2yr -51000 -112000 61000
289000 448000
3yr -43350 -89600 46250
245650 358400
4yr -36848 -71600 34382
208842 286720
5yr -31320 -57344 26024
BV after life 177482 229376
Q4 Statement of Net Cash Inflows
Amount Time PV factor Present Value

Cash Outflow
Purchase Price 1080000 0 1 1080000
PV of cash outflow
Cash Inflow
Annual Operating cash Inflow 406250 1e 0.833 338406
731250 2e 0.694 507488
331250 3e 0.579 191794
Terminal Value 180000 3e 0.579 104220

Pv of cash Inflow 1141908
NPV 61908
Statement of annual operating Cash inflows
1 year 2 year 3 year Depreciation

Sales 1000000 2000000 800000
Mat, Lab, Oh -400000 -750000 -350000 1080000 − 180000
Rent 3
space taken on rent 12500 x 4 -50000 -50000 -50000
= 3,00,000 p.a
opportunity cost 12500 x 3 -37500 -37500 -37500
Depreciation -300000 -300000 -300000
PBT 212500 862500 62500
Tax 106250 431250 31250
PAT 106250 431250 31250
Depreciation 300000 300000 300000
406250 731250 331250
4
Q5 Company can invest 1,00,000 either in 0periodor at the end of 1st year or at end of 2nd year
Return on Bond = return on market = 14%
Risk Premium = 4%
Rf = 10%
NPV if project is commenced in 0 period
6,000 ( 10 − 6 )
0.10
- 1,00,000 = 1,40,000
NPV if project is commenced at the end of 1st year
8,000 ( 11 − 5)
[ 0.10
- 1,00,000 ] x 0.909 = 3,45,420
NPV if project is commenced at the end of 2nd year
5,000 ( 9−7.5)
[ - 1,00,000 ] x 0.826 = -20,650
0.10
Since NPV is highest if project is commenced after 1 year, so project should be deferred for 1 year
Q6 Statement of net cash inflows
Amount Time Pv Factor Present Value

Cash outflow
Purchase Cost 600000
Sale of old machine 100000
tax saving On CL
0.3(168884-100000) 20665 120665 479335 0 1 479335
incremental Working capital -50000 0 1 -50000

PV of Cash Outflow 429335
Cash Inflow
Incremental annual operating cash inflows 273400 1e 0.893 244146
316340 2e 0.797 252123
262550 3e 0.712 186936
286765 4e 0.636 182383
255778 5e 0.567 145026
Terminal value 240000
Tax on LTCG (13018)
(240000-196608)0.3 226982
less TV lost nil
tax saving on CL (74934)0.3 (22480) 204502 5e 0.567 115953
Realisable value of working capital -50000 5e 0.567 -28350
PV of cash Inflow 1098217
NPV 668882
5
Statement of Net operating Cash inflows
1 2 3 4 5
PBDT 350000 350000 350000 350000 350000
saving in repairs 70000 40000
Incremental depreciation -94667 -74467 -58497 -45883 -35928
PBT 255333 345533 291503 344117 314072
tax 30%
PAT 178733 241873 204052 240882 219850
depreciation 94667 74467 58497 45883 35928
Cash inflows 273400 316340 262550 286765 255778
Depreciation Depreciation Incremental depreciation

on old asset on New Asset
Cost/BV 275000
1yr -41250
233750
2 yr -35063
198687
3yr -29803
168884 600000
1yr -25333 -120000 94667
143551 480000
2yr -21533 -96000 74467
122018 384000
3yr -18303 -76800 58497
103715 307200
4yr -15557 -61440 45883
88158 245760
5yr -13224 -49152 35928
74934 196608
6
Q7
Amount time PV Factor Present Value

Incremental cost of B 50000 0 1 50000
Incremental Cash Inflow of B

Incremental PBDT 15000
Incremental Depreciation
(17000 -12000) -5000
Incremental PBT 10000
Tax 5000
PAT 5000
Depreciation 5000
Incremental CI 10000 1 - 8e 5.335 53350
Incremental Salvage Val of B 10000 8e 0.467 4670

Incremental NPV Of B 8020
Since Incremental NPV of B is positive so Machine B is better
Q8 STATEMENT OF NPV
Amount Period PV Factor Present Value
Incremental cash outflow
Purchase price 87,500
Sale of old 37,500 50,000 0 1 50,000
Incremental Working capital 12,500 0 1 12,500

PV of cash outflow 82,500
Incremental cash inflow

Operating cash inflow
Saving In Meantainance 12,500
Saving in operator salaries 50,000
Saving in defects 12,500
Additional depreciation
on old machine 2,500
on New machine 8,750 (6,250)
PBT 68,250
Tax 40% 27,300
PAT 40,950
depreciation 6,250 47,200 1- 10 e 4.192 1,97,862
Release of incremental WC 12,500 10e 0.162 2,025
PV of cash inflow 1,99,887
NPV @ 20% 1,17,387
Since NPV of replacement proposal is positive, so proposal should be accepted.

7
Q9 Statement of Incremental Operating cash flows
1 2 3 4
Incremental PBDT 42 – 7 35,00,000 35,00,000 35,00,000 35,00,000
Incremental depn 6,50,000 5,50,000 4,50,000 4,50,000
Incremental PBT 28,50,000 29,50,000 30,50,000 30,50,000
Incremental PAT 18,81,000 19,47,000 20,13,000 2013,000
Incremental depn 6,50,000 5,50,000 4,50,000 4,50,000
Incremental operating cash inflows 25,31,000 24,97,000 24,63,000 24,63,000
Incremental salvage value
Salvage value of new 8,00,000
Tax on cap gain5,00,000 x .34 1,70,000
Net salvage value 6,30,000
Salvage value of old aftr 4 yrs nil 6,30,000
Release of working capital 5,00,000
Incremental annual cash flows 25,31,000 24,97,000 24,63,000 35,93,000
Note :Question only demanded annual incremental cash inflows. So working of 0 period is not given
Q10 Statement of Equal Annual NPV (EANPV)

Product X Product Y
Amount period Factor PV Amount period factor PV
Cash outflow 40,000 0 1 40,000 60,000 0 1 60,000
Cash Inflow
operating CI 15,000 1 - 4e 2.855 42,825 16,000 1 - 7e 4.16 66,560
Scrap value 5,000 4e 0.572 2,860 3,000 7e 0.376 1,128
NPV @ 15% 5,685 7,688
Equal Annual NPV = NPV / Annuity factor = NPV / Annuity factor

5,685 / 2.855 7,688 / 4.160
1991 1,848
Since EANPV of Product X is higher, so product X should be accepted
8
Q11 a If No taxes
Machine X Machine Y
Amount Period Factor PV Amount Period Factor PV
Cash outflow
Purchase Price 5,50,000 0 1 5,50,000 4,00,000 0 1 4,00,000
operating CO 1,25,000 1-3e 2.402 3,00,250 1,50,000 1 - 2e 1.69 2,53,500
Total cash outflow 8,50,250 Total cash outflow 6,53,500
Equal annual cost = total cost / annuity factor = tota l cos t / a nnui ty fa ctor
8,50,250 / 2.402 6,53,500/ 1.69
3,53,976 3,86,686
Since EAC of Machine Y is lower so Machine Y is accepted.
b. If tax rate is 40% and machines are depreciated @ 20% p.a on WDV basis.
Statement of Equal annual cost
Machine X Machine Y
Amount PeriodFactor PV Amount PeriodFactor PV
Cash outflow
Purchase price 5,50,000 0 1 5,50,000 4,00,000 0 1 4,00,000
Op cash outflow 31,000 1 0.893 27,683 58,000 1 0,893 51,794
39,800 2 0.797 31,721 64,400 2 0,797 51,327
46,840 3 0.712 33,350
Total CO 5,92,754 5,03,121
Cash inflow
Terminal value 1,12,640 3 0.712 80,200 1,02,400 2 0.797 81,613
Net CO 5,12,554 4,21,508
Equal annual cost = Total cost / Annuity Total cost / Annuity
5,12,554 / 2.402 4,21,508 / 1.69
2,13,386 2,49,413
Since EAC of Machine X is lower, so machine x is accepted.
Statement of annual operating cost
Machine X Machine Y
Year1 Year 2 Year 3 Year 1 Year 2
Running cost 1,25,000 1,25,000 1,25,000 1,50,000 1,50,000
Depreciation 1,10,000 88,000 70,400 80,000 64,000
toal cost 2,35,000 2,13,000 1,95,400 2,30,000 2,14,000
Saving in tax 94,000 85,200 78,160 92,000 85,600
cost after tax 1,41,000 1,27,800 1,17,240 1,38,000 1,28,400
less depn 1,10,000 88,000 70,400 80,000 64,000
Net op CO 31,000 39,800 46,840 58,000 64,400
9
Statement of depreciation
X Y
Cost 5,50,000 4,00,000
1 yr 1,10,000 80,000
4,40,000 3,20,000
2yr 88,000 64,000
3,52,000 2,56,000
3 yr 70,400 -
2,81,600
Cap loss 2,81,600 2,56,000
Tax savin 1,12,640 1,02,400
Q12 A B
Purchase Price 24,00,000 40,00,000
Life 20 yrs 15 yrs
Salvage value 4,00,000 4,00,000
Cost 9,60,000 9,60,000
Statement of Equal Annual Cost Of A

Purchase Price 24,00,000 0 1 24,00,000
Operating cost 9,60,000 1- 20e 8.514 81,73,440
Salvage value 4,00,000 20e 0.1486 (59,440)
Present value of cost 105,14,000
105,14,000
Equal Annual cost = 8.514
= 12,34,907
Annual Output 2500 x 60 x 200 = 300,00,000
12,34,907
Output cost /unit = 300,00,000
= 0.0412 / unit
Statement of Equal Annual cost of B

Purchase Price 40,00,000 0 1 40,00,000
Operating cost 12,00,000 1 – 15e 7.606 91,27,200
Salvage value 4,00,000 15e 0.2394 (95,760)
Present value of cost 130,31,440
130,31,440
Equal Annual cost = 7.606
= 17,13,310
Annual Output 2500 x 60x400 = 600,00,000
17,13,310
Output cost / unit = = 0.0287
600,00,000
Since cost/unit of Plant B is lower so it is advantageous to buy plant B
10
Q13 PV of Total Cash Outflow under System A
`
Initial Outlay 50,00,000
PV of Annual Operating Cost (1-6 years) 15,00,000 x 3.7845 56,76,750
Less: PV of Salvage Value ` 10,00,000 x 0.4323 (4,32,300)
1,02,44,450
Factor 3.7845
Equivalent Annual Cost (1,02,44,450/3.7845) 27,06,949
PV of Total Cash Outflow under System B
Initial Outlay 40,00,000

PV of Annual Operating Cost (1-4 years) 16,00,000 x 2.855 45,68,000
Less: PV of Salvage Value 5,00,000 x 0.5718 (2,85,900)
82,82,100
82,82,100
Equal Annual cost 2.855
29,00,911
Since Equivalent Annual Cost (EAC) is least in case of system A hence same should be opted
Q14 Statement of Net Present value of Cash Inflows

Amount period Factor PV
Cash Outflow
Purchase Price 14,00,000
Less sale of old 8,00,000
+ Tax sav on CL 89,600 8,89,600 5,70,400 0 1 5,70,400
Incremental Working capital -90,000 0 1 -90,000
Present value of Cash Outflow 4,20,400

Cash Inlow
Operating cash inflow 3,18,080 1 0.909 2,89,134
3,12,064 2 0.826 2,57,765
307,251 3 0.751 2,30,745
303,401 4 0.683 207,223
Incremental Terminal value 2,55,000
Less tax on CG 0.4 (1,00,990) 40,396 2,14,604 4 0.683 1,46,575
Release of WC -90,000 4 0.683 -90,000
NPV 6,21,402
Since NPV is positive, so replacement is feasible
11
Statement of net operating cash inflow Depreciation

Year 1 Year 2 Year 3 Year4 Cost of New 14,00,000
Incremental PBDT 4,80,000 4,80,000 4,80,000 4,80,000 BV of old 10,24,000
(calculate)
Incremental depn 75,200 60,160 48,128 38,502
Incremental BV 3,76,000
Incremental PBT 4,04,800 4,19,840 4,31,872 4,41,498 Depn 1 yr 75,200
tax 3,00,800
PAT 2,42,880 2,51,904 2,59,123 2,64,899 Depn 2 yr 60,160
Add depn 75,200 60,160 48,128 38,502 2,40,640
Incremental CI 3,18,080 3,12,064 3,07,251 303,401 Dep3 yr 48,128
1,92,512
Incremental TV 7,80,000 – 5,25,000 = 2,55,000
Dep 4th yr 38,502
Incremental BV after life = 1,54,010 Incremental BV 1,54,010
Incremental CG 1,00,990
Q15 Statement OF NPV
Amount Period Factor PV
Cash outflow
Purchase Price (New) 10,00,000

Installation cost 2,00,000
Less sale of old 5,00,000
- tax on CG 40,000 4,60,000 4,60,000 0 1 4,60,000
Increase in working capital 2,50,000 0 1 2,50,000

PV of cash outflows 7,10,000
Cash inflow
Operating cash inflows 2,96,000 1 0.893 2,64,328
3,53,600 2 0.797 2,81,819
3,15,200 3 0.712 2,24,422
2,76,800 4 0.636 1,76,049
Terminal value of old 3,50,000

Tax on CG
[3,50,000 – 0.08(12lac)] 0.4 1,01,600 2,48,400 4 0.636 1,57,982
Release of incremental WC 2,50,000 4 0.636 1,59,000
PV of cash inflows 12,63,600
NPV 5,53,600
12
Yr1 Yr 2 Yr 3 Yr 4
PBDT of New asset (21.5 – 9.5) 12,00,000 12,00,000 12,00,000 12,00,000

PBDT of old asset (19.25 – 11.25) 8,00,000 8,00,000 8,00,000 8,00,000
Incremental PBDT 4,00,000 4,00,000 4,00,000 4,00,000
Incremental depn 1,40,000 2,84,000 1,88,000 92,000
Incremental PBT 2,60,000 1,16,000 2,12,000 3,08,000
Tax 40% 1,04,000 46,400 84,800 1,23,200
PAT 1,56,000 69,600 1,27,200 1,84,800
+Depn 1,40,000 2,84,000 1,88,000 92,000
Incremental cash inflows 2,96,000 3,53,600 3,15,200 2,76,800
Statement of depn on new asset

92% of the BV is to be depreciated in the ratio 0f 5: 8 : 6: 4
92 % of 12,00,000 11,04,000
st
Depn 1 yr 11,04,000 x 5/23 = 2,40,000
Depn 2nd yr 11,04,000 x 8/23 = 3,84,000
rd
Depn 3 yr 11,04,000 x 6 / 23 = 2,88,000
th
Depn 4 yr 11,04,000 x 4 / 23 = 1,92,000
Q16 Statement of Net Present value of cash Inflows

Cash outflow
Purchase price 300 0 1 300
Initial working cap 30 0 1 30
PV of Cash outflow 330
Cash Inflow
Operating CI 126 1e 0.909 114.534
119 2e 0.826 98.294
139 3e 0.751 104.389
78 4e 0.683 53.274
terminal value nil
Release of WC nil
PV of Cash Inflow 370.491
NPV 40.491
13
Year 1 Year 2 Year 3 Year 4

Sales 400 500 500 300
Cogs op stock 30 30 40 30
purchases 120 160 140 70
closing stock 30 40 30 nil
-120 -150 -150 -100
wages -80 -140 -140 -120
overheads -40 -45 -45 -50
Depn -75 -75 -75 -75
PBT 85 90 90 -45
Tax
PAT 51 54 54 -27
Add Depn 75 75 75 75
add op.stock 30 30 40 30
less cl stock -30 -40 -30 nil
Operating CI 126 119 139 78
Q17 Statement of Net Present value of cash inflows

Cash outflow
Purchase price
depn x life
45,000 x 4 1,80,000 0 1 1,80,000
cash inflows
Operating cash inflows 31,900 1e 0.833 26,573
1,02,850 2e 0.694 71,378
1,03,500 3e 0.579 59,927
1,23,350 4e 0.482 59,455
52,400 5e 0.402 21,065
PV of Cash Inflows 2,38,398
NPV 58,398
14
Statement of operating Cash Inflows
year 1 year 2 year 3 Year 4 year 5

op stock - 1000 1000 1000
Production 10,000 9,000 9,000 8,000
Closing stock 1000 1000 1000
sales 9,000 9,000 9,000 9,000
Sales 2,88,000 2,88,000 2,88,000 2,88,000

Cost (1,40,000 + 65,000)/10,000 x 9000 1,84,500 1,84,500 1,84,500 1,84,500
PBDT 1,03,500 1,03,500 1,03,500 1,03,500
Add op stock nil 20,500 20,500 20,500
less cl stock -20,250 -20,500 -20,500 nil
Debtors -57,600 -57,600 -57,600 -57,600
nil 57,600 57,600 57600 57600
Creditors 6500 5,850 5,850 5,200
6,500 5,850 5850 5200
operating CI 31,900 1,02,850 1,03,500 1,23,350 52,400
Q18 Statement of NPV of Area A

Cash Outflow
Purchase price 100 0 1 (100)
Operating cash inflow (30) 1e 0.87 (26.1)
10 2e 0.76 7.6
30 3e 0.66 19.8
0 4e 0.57 -
40 5e 0.50 20
30 6e 0.43 12.9
40 7e 0.38 15.2
130 8e 0.33 42.9
180 9e 0.28 50.4
230 10e 0.25 57.5
NPV 100.2
Statement of operating cash Inflow
1 2 3 4 5 6 7 8 9 10
PBDIT -6 34 54 74 108 142 156 230 330 430
Depn -30 -30 -30 -30 -30 -30 -30 -30 -30 -30
Int -24 -24 -24 -24 -18 -12 -6 - - -
PBT -60 -20 0 20 60 100 120 200 300 400
Tax - - - - - 50 60 100 150 200
PAT -60 -20 0 20 60 50 60 100 150 200
Depn 30 30 30 30 30 30 30 30 30 30
-Debt principal - - - -50 -50 -50 -50 - - -
-30 10 30 0 40 30 40 130 180 230
15
Statement of NPV of Area B

Cash Outflow
Purchase Price 80 0 1 -80
Operating cash inflow -70 1e 0.87 -60.9
-70 2e 0.76 -53.2
-10 3e 0.66 -6.6
-50 4e 0.57 -28.5
-20 5e 0.50 -10
40 6e 0.43 17.2
100 7e 0.38 38
162 8e 0.33 53.46
150 9e 0.28 42
210 10e 0.25 52.5
NPV - 36.04
Since NPV is positive in Area A, So project should be located in Area A.
Q19 Statement of Cash flows

Cash Flow amount period Cumulative factor PV of Cumulative
Cash flow cash flow pv
Outflow 5,00,000 0 I 5,00,000
Inflow 90,000 1e 90,000 .909 81,810 81,810
2,00,000 2e 2,90,000 .826 1,65,200 247010
140000 3e 430000 .751 105140 352150
120000 4e 550000 .683 81960 434110
240000 5e 790000 .621 149040 583150
300000 6e 1090000 .564 169200 752350
500000 − 430000
i. Pay back period = 3 + 120000
= 3.583 years
5,00,000 − 434110
ii. Discounted pay back = 4 + 149040
= 4.442 years
iii. NPV = 81810 + 165200 + 105140 + 81960 + 149040
+ 169200 - 5,00,000
= 252350
752350
Iv Profitability Index = 5,00,000
= 1.5047
Iv IRR =
Pv of cash inflow @20% = 90,000 x .833 + 2,00,000 x .694
+ 140000 x .579 + 120000 x .482 + 240000 x .402 +
300000 x .335 = 549650
Pv of cash inflow @25% = 90,000 x .800 + 2,00,000 x .640
+ 140000 x .512 + 120000 x .410 + 240000 x .328 +
300000 x .262 = 478200
Forr diff of 5% change is 71450
49650
Change of 49650 diff is 20 + 71450
x 5 = 23.474%
16
Q20 IRR is the rate at which Present value of cash outflow is equal to present value of cash inflow.
Thus Present value of cash inflow at IRR is Present value of cash outflow or cost of project.
Cost of project = Present value of cash inflow at IRR
= 40,000 x 2.855
= 1,14,200
𝑃𝑉 𝑜𝑓 𝐶𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤 𝑎𝑡 𝑐𝑜𝑐
Profitability Index =
𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤 𝑎𝑡 𝑐𝑜𝑐
PV of cash inflow at coc = 1.064 x 1,14,200
PV of cash inflow at coc = 1,21,509
NPV = Present value of CI – Present value of cash outflow

= 1,21,509 - 1,14,200
= 7,309
PV of cash inflow = Annual cash inflow x Pv factor at coc

1,21,509 = 40,000 x factor
1,21,509
Factor at coc =
40,000
= 3.0377 ie 12%
𝐶𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤
Payback period = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤
1,14,200
= 40,000
= 2.855
Q21 Not Required
Q22 cash outflow ₹ 1,20,000

Cash Inflow ₹ 45,000
Life 4 years
Cost of capital 10%
NPV of project = PV of cash inflow - PV of cash outflow

= 45,000 x 3.17
= ₹ 1,42,650
i. Senstivity w.r.t cost of Project

It refers to changes in cost of project to reduce NPV of poject to 0 i.e %age change in
cost of project to reduce NPV of project to 0
PV of cash inflow - PV of cash outflow = NPV
1,42,650 – Cash Outflow = 0
Cash outflow = 1,42,650
Changes in cash outflow to reduce NPV of project to 0 is 1,42,650 – 1,20,000
= ₹ 22,650
22,650
% increase = 1,20,000 x 100 = 18.875 %
17
ii. Senstivity w.r.t cash inflow

It refers to changes in cash inlow to reduce NPV of poject to 0 i.e %age change in annual
cash inflow of project to reduce NPV of project to 0
PV of cash inflow – 1,20,000 = 0
PV of cash inflow = 1,20,000
1,20,000
Annual cash inflow = 3.17
= ₹ 37,855
Changes in cash inflow to reduce NPV of project to 0 is
45,000 – 37,855
= ₹ 7,145
7,145
% decrease = x 100 = 15.88 %
45,000
iii. Senstivity w.r.t cost of capital
It refers to changes in cost of capital to reduce NPV of poject to 0 i.e %age change in
cost of capital to reduce NPV of project to 0
Annual cash inflow x PV factor – Cash Outflow = 0
45,000 x PV factor - 1,20,000 = 0
1,20,000
PV factor = 45,000
= 2.667
Factor at 15% is 2.855 and at 20 % factor is 2.589
For difference of 5%, change in factor is 0.266
0.188
For change in factor of 0.188, diff in rate is 0.266
x 5 = 3.53%
Cost of capital to reduce NPV to 0 is 15 + 3.53 = 18.53%
Changes in cash outflow to reduce NPV of project to 0 is 18.53 – 10%
= 8.53%
8.53
% increase = 10
= 85.3 %
Since %age change in annual cash inflow is least to reduce NPV of project to 0, so
project is most sensitive to annual cash inflow.
Q23 Statement of NPV

Cash outflow
Purchase price 10,00,000 0 1 10,00,000
Cash Inflow
6,00,000 2 0.826 4,95,600
6,00,000 3 0.751 4,50,600
NPV 3,09,800
18
i. Senstivity to change in Selling price per unit

% change in selling price per unit to reduce NPV to 0
[ 20,000 (x – 40) 0.909 + 30,000 (x-40) 0.826 + 30,000 (x – 40) 0.751] - 10,00,000 = 0
65490 x = 36,19,600
X = 55.27
Change in selling price = 60 – 55.27
= 4.73
4.73
% change in selling price = 60
x 100
= 7.88%
ii. Senstivity to changes in unit cost

% change in cost per unit to reduce NPV to 0
PV of cash inflow – PV of cash outflow = NPV
[ 20,000 (x – 40) 0.909 + 30,000 (x-40) 0.826 + 30,000 (x – 40) 0.751] - 10,00,000 = 0
(60 – x) (65,490) = 10,00,000
X = 44.73
Change in unit cost = 44.73 – 40
= 4.73
4.73
% change in unit cost = 40
x 100 = 11.825 %
iii. Sensitivity to sale volume

% change in sales volume to reduce NPV to 0
Sale of 1 yr x
Sale of 2 yr 1.5 x
rd
Sale of 3 yr 1.5x
PV of cash inflow - PV of cash outflow = 0
(x)(20)(0.909) + (1.5x)(20)(0.826) + (1.5x)(20)(0.751) - 10,00,000 = 0
65.49 x - 10,00,000 = 0
10,00,000
X = 65.49
= 15,270
Sale of 1yr = 15,270
Sale of 2yr = 15,270 x 1.5 = 22,905
Sale of 3yr = 15,270 x 1.5 = 22,905
Total sale = 61,080
80,000 − 61,080
% change 80,000
= 23.65%
Iv sensitivity to Initial cash outflow

% change in cash outflow to reduce NPV to 0
PV of CI – PV of CO = 0
13,09,800 - x = 0
X = 13,09,800
13,09,800 − 10,00,000
% Change in Cash outflow = 10,00,000
x 100
% increase = 30.98%.
19
V Sensitivity to project life time

% age change in life of project to reduce NPV to 0
Cash inflow Factor Present value Cumulative PV
4,00,000 0.909 3,63,600 3,63,600
6,00,000 0.826 4,95,600 8,59,200
6,00,000 0.751 4,50,600 13,09,800
10,00,000 − 859,200
2 + 4,50,600
= 2.312 years.
3 − 2,312
% change = x 100 = 22.93%
3
Since %age change in selling price per unit is least to reduce NPV of project to 0, so
project is most senstive to selling price per unit.
Q24 1. Calculation of NPV

= - 50,00,000 + [2,00,000 ( 30 – 16.50) – 10,00,000] 3.605
= - 50,00,000 + [2,00,000 ( 13.50) – 10,00,000] 3.605
= - 50,00,000 + [ 27,00,000 – 10,00,000] 3.605
= - 50,00,000 + 61,28,500 = 11,28,500
Measurement of Sensitivity Analysis
(a) Sales Price:-
Let the sale price/Unit be S so that the project would break even with 0 NPV.
∴ 50,00,000 = [2,00,000 (S – 16.50) – 10,00,000] 3.605
50,00,000 = [2,00,000 S – 33,00,000 – 10,00,000] 3.605
50,00,000 = [2,00,000 S – 43,00,000] 3.605
13,86,963 = 2,00,000 S – ` 43,00,000
56,86,963 = 2,00,000 S
S = Rs 28.43 which represents a fall of (30 - 28.43)/30 or 0.0523 or 5.23%
(b) Sales volume:-
Let V be the sale volume so that the project would break even with 0 NPV.
∴ 50,00,000 = [V ( 30 – 16.50) – 10,00,000] 3.605
50,00,000 = [V ( 13.50) – 10,00,000] 3.605
50,00,000 = [ 13.50V – 10,00,000] 3.605
13,86,963 = 13.50V – 10,00,000
23,86,963 = 13.50V
V = 1,76,812 which represents a fall of (2,00,000 - 1,76,812)/2,00,000 or 0.1159 or 11.59%
(c) Variable Cost:-
Let the variable cost be V so that the project would break even with 0 NPV.
50,00,000 = [2,00,000( 30 – V) – 10,00,000] 3.605
50,00,000 = [ 60,00,000 – 2,00,000 V – 10,00,000] 3.605
50,00,000 = [ 50,00,000 – 2,00,000 V] 3.605
13,86,963 = 50,00,000 – 2,00,000 V
36,13,037 = 2,00,000V
V = 18.07 which represents a fall of (18.07 – 16.50)/16.50 or 0.0951 or 9.51%
20
(d) Value of expected sales volume

( 1,75,000 X 0.30) + ( 2,00,000 X 0.60) + ( 2,25,000 X 0.10) = 1,95,000
NPV = [195000 X ` 13.50 – ` 10,00,000] 3.605 – ` 50,00,000 = ` 8,85,163
Since, the expected NPV is positive project can be accepted. Further NPV in worst and
best cases will be as follows:
Worst Case:
[1,75,000 X 13.50 – 10,00,000] 3.605 – 50,00,000 = - 88,188
Best Case:
[2,25,000 X 13.50 – 10,00,000] 3.605 – 50,00,000 = 23,45,188
Thus there are 30% chances that the rise will be a negative NPV and 70% chances of
positive NPV. Since acceptable level of risk of Unnat Ltd. is 20% and there are 30%
chances of negative NPV hence project should not be accepted.

Purchase price 1000 0 1 (1000)
Recurring cost 400 1e 0.917 (366.8)
500 2e 0.842 (421)
Savings 1200 1e 0.917 1100.4
1400 2e 0.842 1178.8
NPV 491.4
Sensitivity to changes in Plant value
i.e % age increase in the value of plant to reduce NPV of project to 0
PV of Cash Inflow - Pv of cash out flow = 0
1100.4 + 1178.8 - 366.8 – 421 - x = 0
X = 1491.4
1491.4 − 1000
% age increase in value of plant = 1000
x 100 = 49.14 %
Sensitivity to changes in recurring cost

i.e % age increase in Recurring cost to reduce NPV of project to 0
4 5
1100.4 + 1178.8 - 9
x (0.917) - 9
x ( 0.842) - 1000 = 0
1279.2 – 0.408 x - 0.468 x = 0
1279.2
X = = 1460.27
0.876
1460.27 − 900
% age increase in recurring cost = 900
x 100 = 62.25 %
Sensitivity to changes in savings

i.e % age decrease in savings to reduce NPV of project to 0
12 14
26
x (0.917) + 26
x 0.842 - 366.8 – 421 – 1000 = 0
21
0.423x + 0.453x - 1787.8 = 0

0.876 x = 1787.8
X = 2040.867
2600 − 2040.867
% age decrease in savings = x 100 = 21.51 %
2600
Statement of sensitivity
% age increase in cost of plant 49.14 %
% age increase in recurring cost 62.25%
% age decrease in savings 21.51%
Project is most sensitive to changes in savings in project.
Q26 (i) Calculation of Tax Benefit on Depreciation/ Short Term Capital Loss
Year Opening WDV Depreciation Closing WDV Tax Shield

1 10,00,000 2,50,000 7,50,000 82,500
2 7,50,000 1,87,500 5,62,500 61,875
3 5,62,500 1,40,625 4,21,875 46,406
4 4,21,875 1,05,469 3,16,406 34,805
5 3,16,406 2,49,406* - 82,304
(ii) PV of cash outflow under Borrowing Option
Year Investment/Salvage Tax Benefit on Dep./STCL PVF@8.04% PV
0 (10,00,000) - 1.00
(10,00,000)
1 - 82,500 0.925 76,313
2 - 61,875 0.857 53,027
3 - 46,406 0.793 36,800
4 - 34,805 0.734 25,547
5 - 82,304 0.679 55,884
5 67,000 - 0.679 45,493
(7,06,936)
(iii) PV of cash outflow under Leasing Option
Year Lease Rental after Tax PVAF @ 8.04% PV

1-5 2,70,000(1-0.33) = (1,80,900) 3.988 (7,21,429)
(a) Since PV of cash outflows is least in case of Borrowing option hence it shall be
more advantageous to go for the same.
(b) (i) Sensitivity to Borrowing Rate can be calculated by determining the rate of
borrowing (post tax) at which PV of cash flows shall be equal under both options
i.e. IRR.
Let us discount the cash flow using discount rate of 10%. PV of cash outflow
under Borrowing Option
22
Year Investment/Salvage Tax Benefit on Dep. PVF@10% PV
0 (10,00,000) - 1.00
(10,00,000)
1 - 82,500 0.909 74,993
2 - 61,875 0.826 51,109
3 - 46,406 0.751 34,851
4 - 34,805 0.683 23,772
5 - 82,304 0.621 51,111
5 67,000 - 0.621 41,607
(7,22,557)
PV of cash outflow under Leasing Option
Year Lease Rental after Tax PVAF@10% PV
1-5 2,70,000(1-0.33) = (1,80,900) 3.79 (6,85,611)
NPV @ 8.04% = 7,06,936 – 7,21,429 = -14,493

NPV @ 10% = 7,22,557 – 6,85,611 = 36,946
− 14493
8.04 + x ( 10 - 8.04 ) = 8.59 %
− 14493 − 36946
Q27 Existing NPV

PV of cash inflow @ 15% - PV of cash outflow
[20,000 ( 2,000 – 1500) – 25,00,000 ] x 5.019 - 350 lac
= 75 lac x 5.019 - 350 lac
= 26.425 lac
a. Current IRR = 17%

Revised IRR
i. If initial outflow increase by 10%
i.e revised initial outflow 350 lac x 1.1 = 385 lac
IRR is the rate at which PV of cash inflow is equal to present value of cash outflow
PV of cash inflow at 15 % = ₹ 376.425 lac
PV of cash inflow at 14% = 75 lac x 5.22
= ₹ 391.5 lac
For difference of 1% , change in PV of cash inflow is (391.5 – 376.425) = 15.075
6.5
For change in PV of cash inflow of (391.5 – 385) 6.5, difference is x 1 = 0.431
15.075
IRR = 14 + 0.431
= 14.431 %
ii. If life of project is decreased by 10%

Revised life 10 x 0.9 = 9 years
IRR is the rate at which PV of cash inflow is equal to present value of cash outflow (350lac)
PV of cash inflow at 15 % = ₹ 75 x 4.772 = 357.9 lac
PV of cash inflow at 17% = 75 lac x 4.451 = 333.825
23

7.9
For change in PV of cash inflow of (357.9 – 350) 7.9 , difference is x 2 = 0.656
24.075
Revised IRR = 15.656 %
iii. If existing sales decrease by 10%, i.e revised sales 20,000 x 0.9 = 18,000 units
Annual cash inflows = 18,000 x 500 – 25 lac = 65 lac
PV of cash inflow at 15 % = ₹ 65 lac x 5.019 = 326.235 lac
= ₹ 367.25 lac
17.25
For change in PV of cash inflow of (367.25 - 350) 17.25, difference is x 3 = 1.262
41.015
IRR = 12 + 1.262
= 13.262 %
Iv If selling price is decreased by 10%, i.e revised selling price 2000 x 0.9 = 1800
Annual cash inflow = 20,000 x 300 – 25 lac = 35 lac
PV of cash inflow at 0.01% = 35 lac x 9.995
= ₹ 349.825
PV of Cash inflow at 0% = 35 lac x 10
= 350 lac
IRR is 0%
V If variable cost per unit is increased by 10% i.e Variable cost per unit is 1500 x 1.1 = 1650
Annual cash inflow = 20,000 x ( 2,000 - 1650 ) – 25 lac
= 45 lac
= ₹ 365 lac
For difference of 1% , change in PV of cash inflow is (365 – 347.49) = 17.51
15
For change in PV of cash inflow of (365 - 350) 15, difference is x 1 = 0.857
17.51
IRR = 4.857
Vi If fixed cost increases by 10%, ie revised fixed cost is 25 lac x 1.1 = 27.5 lac
Annual cash inflow = 20,000 x 500 - 27.5 lac
= 72.5 lac
PV of cash inflow at 15 % = ₹ 72.5 lac x 5.019 = 363.875 lac
= ₹ 302.835 lac
24
For difference of 2% , change in PV of cash inflow is (363.875 - 302.835) = 61.04

13.875
For change in PV of cash inflow of (363.875 - 350) 13.875, difference is x 2 = 0.909
61.04
IRR = 15.909 %
b. IRR is th rate at which NPV is 0

IRR of cash outflow 14.431
IRR of life 15.656
IRR of sales volume 13.262
IRR of selling price 0
IRR of variable cost 4.857
IRR of Fixed cost 15.909
Project is most senstive to Change in selling price. 10% reduction in selling price will
reduce IRR to 0
c. Above senstivity analysis is done form negative view point i.e cash outlflow increase, life
decrease, sales volume decrease, selling price decrease, variable cost increase, fixed cost
increase.
Value of senstivity analysis can be improved if analysis is done from positive point of view i.e
cash outflow decrease, , life increase, sales volume increase, selling price increase, variable
cost decrease, fixed cost decrease.
d. If another company provides the product at ₹ 1800 per unit.

Cash outflow = 10 lac
Annual cash inflow = 20,000 (2,000 – 1800) – 10 lac
= ₹ 30,00,000
Since investment in the project is 25 lac and if offer is accepted initial investment will be
recovered in first year i.e Payback period is less than 1 year, so offer should be accepted.

Cash outflows 500 0 1 500
Cash inflows (600 – 400) 200 1-5e 3.791 758.2
NPV 258.2
a. Senstivity to changes in cash outflow

% change in cash outflow to reduce cash outflow to 0
Present value of cash inflow – Present value of cash inflow = 0
758.2 - x = 0
X = 758.2
758.2−500
% change in cash outflow = 500
x 100 = 51.64%
25
b. Sensitivity of change in annual sales

Present value of cash inflow - present value of cash outflow = 0
(x – 400) (3.791) - 500 = 0
3.791 x - 1516.4 - 500 = 0
2016.4
X = = 532
3.791
600 − 532
% change in sales = 600
x 100 = 11.33%
c. Senstivity to change in operating cost.

% change in operating cost to reduce NPV to 0
Present value of cash inflow - Present value of cash outflow = 0
(600 – x) 3.791 - 500 = 0
2274.6 - 3.791x - 500 = 0
1774.6
X = = 468.11
3.791
468.11 − 400
Change in operating cost = 400
x 100 = 17.03%
Since %age change in operating cost is least to reduce NPV of project to 0, so project is
most senstive to change in operating cost.
Q29 Not Required

Cash outflow
Plant & machinery 100 lac 0 1 100 lac
Working capital 40 lac 0 1 40 lac
PV of Cash outflow 140 lac
Cash inflows
Operating cash inflows 37 lac 1e 0.893 33.041 lac
34.5 lac 2e 0.797 27.50 lac
32.624 lac 3e 0.712 23.23 lac
31.22 lac 4e 0.636 19.86 lac
30.16 lac 5e 0.567 17.10 lac
Terminal value 23.73 lac 5e 0.567 13.45 lac
Release of working capital 40 lac 5e 0.567 22.68 lac
PV of cash inflows 156.86 lac
NPV 16.86 lac
26
Year 1 Year 2 year 3 year 4 year 5

Sales 120 lac 120 lac 120 lac 120 lac 120 lac
Variable cost (60 lac) (60lac) (60 lac) (60 lac) (60 lac)
Fixed cost (15 lac) (15 lac) (15 lac) (15 lac) (15 lac)
depreciation (25 lac) (18.75lac)(14.06lac) (10.55lac) (7.91lac)
PBT 20lac 26.25 lac 30.94lac 34.45 lac 37.04 lac
tax 40%
PAT 12 lac 15.75 lac 18.564lac 20.07 lac 22.25lac
depreciation 25lac 18.75lac 14.06lac 10.55lac 7.91 lac
Cash flows 37 lac 34.5 lac 32.624 31.22 lac 30.16 lac
Cost 100 lac
Dep 1 yr 25 lac
75 lac
Dep 2 yr 18.75 lac
56.25 lac
Dep 3 yr 14.06 lac
42.19 lac
Dep 4 yr 10.55 lac
31.64 lac
Dep 5 7.91 lac
BV after 5 yrs 23.73 lac
b. i. NPV if selling price is reduced by 5%

If selling price is reduced by 5%, annual profit before tax will be reduced
Existing NPV - ( units x reduction in SP)(1 – tax rate) annuity factor
16.86 - (1 lac x 6 )(0.6)(3.605)
= 16.86 - 12.978
New NPV = 3.882 lac
12.978
If sp reduced by 5%, NPV will be reduced by x 100 = 76.98%
16.86
ii. NPV if variable cost is increased by 10%

If variable cost increased by 10%, PBT decreased by similar amount
Existing NPV – (units x increase in VC) (1-tax rate) annuity factor
16.86 – ( 1 lac x 6) (0.6)3.605
New npv = 3.882
12.978
If variable cost increases by 10%, NPV will be reduced by x 100 = 76.98%
16.86
iii. Cost of plant and machinery increases by 10%

NPV will be reduced by increase in cost of plant, increased by thepresent value of amount
of tax savings on additional depreciation and increased by additional scrap value
27
New NPV = Existing NPV - Increase in cost of asset + PV of tax saving on additional depn
. + PV of additional SV
= 16.86 – 10 lac + [ 2.5 x 0.893 + 1.875 x 0.797 + 1.406 x 0.712 +
1.055 x 0.636 + 0.791xx 0.567] 0.4 + 2.373 x 0.567
= 16.86 – 10 + 2.339 + 1.346
= 10.545
If cost of plant and machinery increase by 10%, NPV will decrease by 6.315 lac
6.315
NPV will be decreased by x 100 = 37.46 %
16.86
Q31 a. Statement of NPV

cash outflow
Purchase price 2,50,000 0 1 2,50,000
Cash Inflow
Operating cash inflow 87,000 1 - 5 e 4.329 3,76,623
NPV 1,26,623
Since NPV of project is positive, so Brain Ltd should manufacture agni.
Statement of operating cash inflow
Annual sales 10,000 x 22 2,20,000
Variable cost ( 4.5 + 5 + 2.5) 10,000 1,20,000
Fixed cost Rent 8,000
Manager salary 5,000 13,000
Profit per annum 87,000
b. i. Senstivity of project to product life

%age change in life of project to reduce NPV of project to 0.
year Cash inflow factor PV Cumulative PV
1 87,000 0.952 82,824 82,824
2 87,000 0.907 78,909 1,61,733
3 87,000 0.864 75,168 2,36,901
4 87,000 0.823 71,601 3,08,502
5 87,000 0.784 68,208 3,76,710
NPV will be 0 in the period PV of cash inflows equals cost of project

2,50,000 − 2,36,901
= 3 +
71,601
= 3.183 years
5 − 3.183
% change in Life to reduce NPV to 0 = x 100 = 36.34 %
5
28
ii. Senstivity of project to annual sales volume

%age change in sales volume to reduce NPV of project to 0
NPV = PV of cash inflow - PV of cash outflow
= annual qty ( SP – vc ) – FC - PV of cash outflow
0 = [qty ( 22 – 12) – 13,000] 4.329 - 2,50,000
0 = 43.29qty – 56,277 – 2,50,000
3,06,277
Qty = = 7,075
43.29
10,000 − 7,075
% decrease in sales quantity to reduce NPV to 0 x 100 = 29.25%
10,000
iii. Senstivity of project to material cost per unit

%age change in material cost per unit to reduce NPV to 0
NPV = PV of cash inflow - PV of cash outflow
= annual qty ( SP – vc ) – FC - PV of cash outflow
0 = [10,000 ( 22 – x ) – 13,000]4.329 - 2,50,000
0 = [2,20,000 – 10,000x – 13,000] 4.329 – 2,50,000
0 = 8,96,103 - 43,290 x – 2,50,000
6,46,103
X = = 14.93
43,290
Thus if VC / unit is 14.93 NPV is reduced to 0
14.93 − 12
%age change in material cost x 100 = 65.11 %
4.5
Statement of senstivity
Life of project 36.34%
Sales volume 29.25%
Material cost per unit 65.11 %
Q32 i. IRR is the rate at which Present value of cash inflow is equal to present value of cash
outflow. So present value of cash inflow at IRR is Cash outflow or cost of Project.
Cost of project = Annual cash inflow x annuity factor @ 16% for 5 years
= 57,500 x 3.274
= 1,88,255
2. IRR is the rate at which NPV Is 0
PV of cash inflow at 16% - PV of cash outflow = 0
Thus if cost of capital is 16%, NPV = 0
Senstivity of cost of capital is 60% i.e if present cost of capital increases by 60% NPV
will be 0. NPV is 0 at 16%
16
So present cost of capital is 1.6 = 10%
NPV = PV of CI at coc – PV of CO
= 57,500 x 3.791 - 1,88,255
= 2,17,982.5 – 1,88,255 = 29,727.5
29
3. Senstivity to fixed cost is 7.8416% i.e if Fixed cost increase by 7.8416% from present
level, NPV will be reduced to 0.
Current Annual cash inflow or PAT or PBT is ₹ 57,500 (since no tax, or no interest)
Annual cash inflow to reduce NPV to 0
PV of cash inflow at 10% - PV of cash outflow = 0
Cash inflow x 3.791 – 1,88,255 = 0
1,88,255
Anuual cash inflow = = ₹ 49,658
3.791
Thus if annual cash inflow reduced from 57,500 to 49,658, NPV is reduced to 0 and
Cash inflow will be reduced from 57,500 to 49,658 due to increase in fixed cost. Thus
increase in fixed cost to reduce NPV to 0 is (57,500 – 49,658) = ₹ 7842
Increase in Fixed cost to reduce NPV to 0 is 7.8416%. Thus increase in fixed cost
₹ 7842 is 7.8416%
7,842
Fixed cost before increase = = ₹ 1,00,000
.078416
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝑃𝑟𝑜𝑓𝑖𝑡
4. Profit volume ratio = x 100
𝑠𝑎𝑙𝑒𝑠
1,00,000 +57,500
Sales = 0.7
= ₹ 2,25,000
If PV ratio is 70%, variable cost ratio is 30%.
Variable cost is ₹ 60 / unit
60
Selling price = = ₹ 200 / unit
0.30
2,25,000
Annual unit sales = = 1,125 units
200
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
5. BEP in units = 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
1,00,000
= = 714 units.
200 − 60
Q34 a. Statement of NPV in real terms

Cash outflow 70 0 1 70
Cash inflow 30 / 1.05 28.571 1e 0.909 25.971
30 / (1.05) 2 27.211 2e 0.826 22.476
30/ (1.05) 3 25.915 3e 0.751 19.462
NPV - 2.091
30
Q35 Real cost of capital

( 1 + Nominal) = ( 1 + Real) ( 1+ inflation)
(1.09) = ( 1 + Real) ( 1.032)
1.09
Real rate = - 1
1.032
= 5.62 %
Annual cash inflow = 2,80,000
PV of cash inflow = 2,80,000 x 3.497
= 9,79,160
Statement of NPV in nominal terms

Amount period factor PV
Cash outflow 8,00,000 0 1 8,00,000
Cash inflow 2,80,000 (1.032) 2,88,960 1e 0.917 2,64,976
2,80,000 (1.032) 2 2,98,207 2e 0.842 2,51,090
2,80,000 (1.032)3 3,07,749 3e 0.772 2,37,583
2,80,000 (1.032) 4 3,17,597 4e 0.708 2,24,857
Present value of Cash inflows in nominal terms 9,78,506
NPV 1,78,506
Q36 i. Statement of NPV ( if no inflation)

amount Period Factor PV
cash outflow 24 lac 0 1 24,00,000
Cash inflow 8,40,000 1 – 4e 3.546 29,78,640
NPV 5,78,640
ii. Since cost of capital in real terms, so NPV also in real terms
Statement of NPV ( if there is inflation)

Cash outflow 24,00,000 0 1 24,00,000
Cash inflow 7,85,455 1 0.952 7,47,753
7,35,868 2 0.907 6,67,432
6,90,789 3 0.864 5,96,842
6,49,808 4 0.823 5,34,792
NPV 1,46,823
31

Year 1 year 2 year 3 year 4
PBDT 10 lac / 1.1 10 lac/ (1.1) 10 lac/(1.1)3
2 10 lac/(1.1)4
9,09,091 8,26,446 7,51,315 6,83,013
Depreciation 6,00,000 6,00,000 6,00,000 6,00,000
PBT 3,09,091 2,26,446 1,51,315 83,013
Tax (40%) 1,23,636 90,578 60,526 33,205
PAT 1,85,455 1,35,868 90,789 49,808
Depreciation 6,00,000 6,00,000 6,00,000 6,00,000
Cash flow 7,85,455 7,35,868 6,90,789 6,49,808
Q37 Statement of NPV (Money Terms)

Cash outflow 15,00,000 0 1 15,00,000
Cash Inflow 5,26,000 1e .877 4,61,302
7,02,124 2e .769 5,39,933
7,68,489 3e .675 5,18,730
NPV 19,965
Statement of Operating cash inflow
1e 2e 3e
Revenue 10,90,000 15,30,360 17,46,965
Cost 5,50,000 7,19,400 8,33,905
PBDT 5,40,000 8,10,960 9,13,060
Depn 5,00,000 5,00,000 5,00,000
PBT 40,000 3,10,960 4,13,060
PAT 26,000 2,02,124 2,68,489
Depn 5,00,000 5,00,000 5,00,000
Cash flow 5,26,000 7,02,124 7,68,489
Q38 Since cost of capital is in nominal terms, so NPV is ascertained in nominal terms
Statement of NPV

cash outflow
Purcase price 75,000 0 1 75,000
cash inflow 27,750 1 0.833 23,116

30,715 2 0.694 21,316
30,880 3 0.579 17,880
37,240 4 0.482 17,950
NPV 5,262
32
Statement of net operating cash inflows
year 1 year 2 year 3 year 4

sales 60(1.15)(1000) 69,000(1.15) 79,350(1.15) 91,252(1.15)
69,000 79,350 91,252 1,05,940
Material & v. OH 15(1.15)1,000 17,250(1.15) 19,838(1.15) 22,814(1.15)
17,250 19,838 22,814 26,236
labour 20(1.2)1,000 24,000(1.2) 28,800(1.2) 34,560(1.2)
24,000 28,800 34,560 41,472
cash inflow 27,750 30,715 33,880 37,240
Q39 Statement of NPV in Real Terms

Cash outflow 40,000 0 1 40,000
Cash inflow (50,000 – 35,000) 15,000 1 – 4e 3.170 47,550
NPV 7,550
Real rate for inflows

(1 + Nominal) = (1 + Real)(1+ inflation)
(1 .199) = (1+ Real)(1.09)
1.199
Real rate = -1
1.09
= 10%
Q40 Since discount rate is in money terms, so NPV is ascertained in Money terms
Statement of NPV
Amount Period Factor(18%) PV
Cash outflow
Purchase price 10,000 0 1 10,000
10,000 1 0.847 8,470
Cash Inflow
Operating cash inflows 9,000 1 0.847 7623
8,260 2e 0.718 5931
8503 3e 0.609 5178
Terminal value
4,000 ( 1.08)3 5039 3e 0.609 3069
PV of cash inflow 21,801
NPV 3331
33

Year 1 Year 2 Year 3
Cash inflows 25,000(1.08) 25,000(1.08)2 25,000(1.08)3
= 27,000 = 29,160 = 31,493
Cash outflows 18,000 19,000(1.1) 19,000(1.1)2
= 20,900 = 22,990
Net operating cash inflows 9,000 8,260 8,503
Q41 a. Statement of NPV in Money terms

Cash outflows 20,000 0 1 20,000
Cash Inflows 5,000 1e 0.847 4235

11,460 2e 0.718 8228
10,888 3e 0.609 6631
6281 4e 0.516 3241
Terminal value 2000 4e 0.516 1032

PV of cash inflows 23,367
Net present value 3,367

Cash Inflow 14,000 21,000 21,000 17,000
Cash outflows 9,000 9,000(1.06) 9000(1.06)2 9000(1.06)3
= 9540 = 10,112 = 10,719
5,000 11,460 10,888 6,281
Statement of NPV in Real terms
b. Amount Period Factor PV
Cash outflows 20,000 0 1 20,000
Cash inflow 4717 1e 0.898 4236

10,199 2e 0.807 8231
9140 3e 0.725 6627
4975 4e 0.651 3239
2,000
Terminal value (1.06)4 1584 4e 0.651 1032
NPV 3,363
34
Cash inflows 14,000/1.06 21,000/1.062 21,000/(1.06)3 21,000/(1.06)4

= 13,208 = 18,690 = 17,632 = 13,466
Cash outflow 9,000/(1.06) 9000/(1.06) 9,000/1.06 9,000/1.06

= 8491 = 8491 = 8491 = 8491
4,717 10,199 9,140 4,975
Q42 Assumed cost of capital is in real terms

Statement of NPV in Real terms
Cash Inflow 30/1.05 28.57 1 0.909 25.97
40/(1.05)2 36.28 2 0.826 29.97
40/(1.05)3 25.92 3 0.751 19.46
Net Present value 3.4
Q43 Not Required
Cash out flow 1,20,000 0 1 1,20,000
1
Cash inflow (coc) 33,700 1e 0.862 29,049
1.16
1
(1.16)(1.20)
39,504 2e 0.718 28,364
1
(1.16)(1.2)(1.22)
48,238 3e 0.589 28,412
1
(1.16)(1.2)(1.22)(1.2)
66,083 4e 0.491 32,447
1
(1.16)(1.2)(1.22)(1.2)(1.18)
83,849 5e 0.416 34,881
NPV 33,153

Year 1 Year 2 Year 3 Year 4 Year 5
Sales 2,000(60)(1.15) 1,38,000(1.20) 1,65,600(1.25) 2,07,000(1.4) 2,89,800(1.3)
= 1,38,000 = 1,65,600 = 2,07,000 = 2,89,800 = 3,76,740
Wages 2,000(20)(1.17) 46,800(1.22) 57,096(1.27) 72,512(1.42) 1,02,967(1.32)
= 46,800 = 57,096 = 72,512 = 102,967 = 1,35,916
Other 2,000(25)(1.15) 57,500 (1.2) 69,000(1.25) 86,250(1.4) 1,20,750(1.3)
= 57,500 = 69,000 = 86,250 = 1,20,750 = 1,56,975
33,700 39,504 48,238 66,083 83,849
35
Q45 statement of NPV (in money terms)

Cash outflow
Purchase price 12,00,000 0 1 12,00,000
Working capital 1,00,000 0 1 1,00,000
2,00,000(1.04)- 1 lac 1,08,000 1 0.862 93,096
3,00,000(1.04)2 – 2,08,000 1,16,480 2 0.743 86,545
3
4,00,000(1.04) – 3,24,480 1,25,465 3 0.641 80,423
5,00,000 (1.04)4 – 4,49,945 1,35,055 4 0.552 74,550
Present value of cash outflow 16,34,614
Cash inflow
Operating cash inflow 3,90,000 1e 0.862 3,36,180
3,75,900 2e 0.743 2,79,294
3,62,226 3e 0.641 2,32,187
3,55,183 4e 0.552 1,96,060
3,53,241 5e 0.476 1,68,413
(1,19,237) 6e 0.410 (48,887)
Terminal value 2,84,765 5e 0476 1,35,548
Release of Working capital 5,85,000 5e 0.476 2,78,460
Present value of cash inflow 15,77,255
NPV (57,359)

Year 1 year 2 Year 3 Year 4 Year 5 Year 6
PBDT 3,75,000(1.04) 3,90,000(1.04) 4,05,600(1.04) 4,21,824(1.04) 4,38,697(1.04) -
= 3,90,000 =4,05,600 = 4,21,824 = 4,38,697 = 4,56,245
Depn 3,00,000 2,25,000 1,68,750 1,26,563 94,922 -
90,000 1,80,600 2,53,074 3,12,134 3,61,323 -
Tax - 29,700 59,598 83,514 1,03,004 1,19,237
PAT 90,000 1,50,900 1,93,476 2,28,620 2,58,319 (119237)
Depn 3,00,000 2,25,000 1,68,750 1,26,563 94,922 . .
CF 3,90,000 3,75,900 3,62,226 3,55,183 3,53,241 (119237)
Q46 Statement of NPV (Machine X)

Year Cashflow CE factor Certain CF PV factor PV
0 (30,000) 1 (30,000) 1 (30,000)
1 15,000 0.95 14,250 0.952 13,566
2 15,000 0.85 12,750 0.907 11,564
3 10,000 0.70 7,000 0.864 6,048
4 10,000 0.65 6,500 0.823 5350
NPV 6528
36
Statement of NPV (Machine Y)

0 (40,000) 1 (40,000) 1 (40,000)
1 25,000 0.90 22,500 0.952 21,420
2 20,000 0.80 16,000 0.907 14,512
3 15,000 0.70 10,500 0.864 9072
4 10,000 0.60 6,000 0.823 4938
NPV 9942
Q47 Statement of NPV(Project X)

0 (3,40,000) 1 (3,40,000) 1 (3,40,000)
1 1,80,000 0.8 1,44,000 0.926 1,33,344
2 2,00,000 0.7 1,40,000 0.857 1,19,980
3 2,00,000 0.5 1,00,000 0.794 79,400
44,000 NPV (7,276)
Statement of NPV(Project Y)
0 (3,30,000) 1 (3,30,000) 1 (3,30,000)
1 1,80,000 0.9 1,62,000 0.926 1,50,012
2 1,80,000 0.8 1,44,000 0.857 1,23,408
3 2,00,000 0.7 1,40,000 0.794 1,11,160
1,16,000 NPV 54,580
Cash flows and discounting factors always have same parameter i.e if cash flows are risk
free, discounting factor is also risk free and if cashflow are risk adjusted, discounting
factor is also risk adjusted.
If risk adjusted discount rate is used, higher discount rate will be used for the project
having lower certainity.
Certainity of X 0.8 + 0.7 + 0.5 = 2
Certainity of Y 0.9 + 0.8 + 0.7 = 2.4
Since certainity of X is lower I.e risk of X is higher, so risk adjusted discount rate of X will
be higher.
Q48 Statement of NPV (Project M)

0 (8,50,000) 1 (8,50,000) 1 (8,50,000)
1 4,50,000 0.8 3,60,000 0.943 3,39,480
2 5,00,000 0.7 3,50,000 0.890 3,11,500
3 5,00,000 0.5 2,50,000 0.840 2,10,000
1,10,000 NPV 10,980
37
Statement of NPV (Project M)
0 (8,25,000) 1 (8,25,000) 1 (8,25,000)
1 4,50,000 0.9 4,05,000 0.943 3,81,915
2 4,50,000 0.8 3,60,000 0.890 3,20,400
3 5,00,000 0.7 3,50,000 0.840 2,94,000
NPV 1,71,315
a. NPV of N is higher of project N, so project N is better
b. Certainity of M 0.8 + 0.7+0.5 = 2
Certainity of N 0.9 + 0.8 + 0.7 = 2.4
Since certainity of M is lower I.e risk of M is higher, so risk adjusted discount rate of
M will be higher
Q49 Statement of NPV (Proposal A)
Cash outflow 50,000 0 1 50,000
Cash inflow
OP cash inflow 30,000 x 0.8 24,000 1 0.909 21,816
30,000 x 0.7 21,000 2 0.826 17,346
30,000 x 0.6 18,000 3 0.751 13,518
30,000 x 0.5 15,000 4 0.683 10,245
Terminal value 5,000 4 0.683 3415
NPV 16,340
Statement of NPV(Proposal B)
Cash outflow 50,000 0 1 50,000
Cash Inflow
Op cash inflow 18,000 x 0.9 16,200 1 0.909 14,726
36,000 x 0.8 28,800 2 0.826 23,789
24,000 x 0.7 16,800 3 0.751 12,617
32,000 x 0.4 12,800 4 0.683 8742
Terminal value 5,000 4 0.683 59,874
NPV 13,289
Q50 statement of risk adjusted NPV (A)
Risk adjusted rate associated with coefficient of variation of A I.e 0.4 is 12%
Cash outflow 1,00,000 0 1 1,00,000
Cash inflow 30,000 1-5e 3.605 1,08,150
NPV 8,150
statement of risk adjusted NPV (B)

Risk adjusted rate associated with coefficient of variation of B I.e 0.8 is 14%
Cash outflow 1,20,000 0 1 1,20,000
Cash inflow 42,000 1-5e 3.433 1,44,186
NPV 24,186
38
statement of risk adjusted NPV (C)
Risk adjusted rate associated with coefficient of variation of C I.e 1.2 is 16%
Cash outflow 2,10,000 0 1 2,10,000
Cash inflow 70,000 1-5e 3.274 2,29,180
NPV 19,180
Q51 Statement of PBDT p.a

Amount Probability Expected PBDT
2,00,000 0.20 40,000
4,00,000 0.40 1,60,000
6,00,000 0.40 2,40,000
4,40,000
Statement of annual cash inflows

Annual PBDT 4,40,000
Depreciation 2,00,000
2,40,000
Tax 35% 84,000
PAT 1,56,000
Depreciation 2,00,000
Cash inflow 3,56,000
Statement on NPV (if expansion of existing product)

Cash outflow 12,00,000 0 1 12,00,000
Cash Inflow
3,56,000 x 0.9 3,20,400 1-6e 4.623 14,81,209
NPV 2,81,209
Statement on NPV (if expansion of New product)

Cash outflow 12,00,000 0 1 12,00,000
Cash Inflow
3,56,000 x 0.85 2,84,800 1-6e 4.623 13,16,630
NPV 1,16,630
Q52 Risk adjusted discount rate = RF + Risk index ( ke - RF)

P1 = 10 + 1.8(15 – 10) = 19
P2 = 10 + 1 (15 – 10) = 15
P3 = 10 + 0.6 (15 – 10) = 13
39
Statement of NPV (Project 1)

Amount Period factor(19%) PV
Cash outflow 15,00,000 0 1 15,00,000
Cash Inflow 6,00,000 1-4 2.639 15,83,400
NPV 83,400
Amount Period factor(15%) PV
Cash outflow 11,00,000 0 1 11,00,000
Cash inflow 6,00,000 1e 0.870 5,22,000
4,00,000 2e 0.756 3,02,400
5,00,000 3e 0.658 3,29,000
2,00,000 4e 0.572 1,14,400
NPV 1,67,800
Cash outflow 14,00,000 0 1 14,00,000
Cash Inflow 4,00,000 1e 0.885 3,54,000
6,00,000 2e 0.783 4,69,800
8,00,000 3e 0.693 5,54,400
12,00,000 4e 0.613 7,35,600
NPV 2,13,800
Q53 Statement of expected cash flows

Year 1 Year 2
Cash flow Prob Expected CF Cash flow Prob Expected CF
1,00,000 0.3 30,000 1,40,000 0.5 70,000
80,000 0.5 40,000 70,000 0.3 21,000
10,000 0.2 2000 60,000 0.2 12,000
72,000 1,03,000
Statement of NPV
Cash outflow 1,40,000 0 1 1,40,000
Cash Inflow 72,000 1e 0.909 65,448
1,03,000 2e 0.826 85,078
NPV 10,526
40
Q54 Statement of Expected cash inflow

CF Prob Expcted CF CF Prob. Expected CF CF Prob Expected CF
12 .1 1.2 12 .1 1.2 18 .2 3.6
15 .2 3 18 .3 5.4 20 .5 10
18 .4 7.2 30 .4 12 32 .2 6.4
32 .3 9.6 40 .2 8 45 .1 4.5
21 26.6 24.5
Statement of NpV
Cash inflow 21 1e 0.935 19.64
26.6 2e 0.874 23.25
24.5 3e 0.816 20
NPV 22.89
Q55 Statement of Expected cash inflow

CF Prob Expected CF CF Prob Expected CF CF Prob Expected CF
1000 0.1 100 2000 0.2 400 1500 0.1 150
1500 0.2 300 2500 0.3 750 2200 0.1 220
2000 0.4 800 2700 0.2 540 2800 0.7 1960
2500 0.2 500 2800 0.3 840 3500 0.1 350
3000 0.1 300 . . . .
2,000 2,530 2,680
Statement of NPV
Cash Outflow 6,000 0 1 6000
cash inflow 2000 1e 0.870 1740
2530 2e 0.756 1913
2680 3e 0.658 1763
NPV (584)
Q56 Statement of standard deviation

P1 P2 .
2
CF Prob CFx prob(X) (X-X̅ ) P(X-X̅ ) CF Prob CFx prob(Y) (Y-Y̅) P(Y-Y̅)2
1,50,000 0.3 45,000 -55,000 9075 lac - 4,00,000 0.2 - 80,000 - 6,20,000 768800 lac
2,00,000 0.3 60,000 -5,000 75 lac 3,00,000 0.6 1,80,000 80,000 38,400 lac
2,50,000 0.4 1,00,000 45,000 8100 lac 4,00,000 0.1 40,000 1,80,000 32,400 lac
. . . . 8,00,000 0.1 80,000 5,80,000 3,36,400 lac
2,05,000 17,250 lac 2,20,000 11,76,000 lac
41
Standard deviation of P1 √17,250 𝑙𝑎𝑐 = 41,533.12

Standard deviation of P2 √11,76,000 𝑙𝑎𝑐 = 3,42,928.564
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛
Coeff of variation 𝑀𝑒𝑎𝑛
41,533.12
P1 2,05,000
= 0.2026
3,42,928.564
P2 2,20,000
= 1.5587
Q57 Statement of cash flow of project k

Cash Flows (K) Probability ̅̅̅̅
Expected Cash flows (𝐾) ̅̅̅̅
(K - 𝐾) ̅̅̅̅2
P(K - 𝐾)
11 0.10 1.1 -4 1.6
13 0.20 2.6 -2 0.8
15 0.40 6 0 0
17 0.20 3.4 2 0.8
19 0.10 1.9 4 1.6
𝐾̅ = 15 = 4.8
Statement of cash flow of Project S

Cash Flows (S) Probability ̅̅̅
Expected Cash flows (𝑆) (S - ̅̅̅
𝑆) P(S - ̅̅̅
𝑆)2
09 0.10 0.9 -8 6.4
13 0.25 3.25 -4 4
17 0.30 5.1 0 0
21 0.25 5.25 4 4
25 0.10 2.5 8 6.4
𝑆̅ = 17 = 20.8
Project K Project S
Variance ∑ P(X − ̅̅̅
𝑋)2 4.8 20.8
Standard deviation √∑ P(X − ̅̅̅
𝑋)2 2.191 4.561
𝑆𝐷 2.191 4.561
Coefficient of variance = 0.147 = 0.268
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛 15 17
ii. Project S is more riskier than Project K as Standard deviation of S is higher than K and co-
efficient of variance of S is also higher than that of K.
42
Q58 i. Statement of standard deviation

Project A . Project B .
2
NPV Prob P x NPV(X) (X-X̅ ) P(X-X̅ ) NPV Prob NPVx P(Y) (Y-Y̅) P(Y-Y̅)2
15000 0.2 3000 6000 72 lac 15,000 0.1 1500 6,000 36 lac
12,000 0.3 3600 3000 27 lac 12000 0.4 4800 3000 36 lac
6,000 0.3 1800 -3000 27 lac 6000 0.4 2400 -3000 36 lac
3,000 0.2 600 -6000 72 lac 3,000 0.1 300 - 6000 36 lac
X̅ 9000 Expcted NPV 198 lac Y̅ 9000 144 lac
ii. Standard deviation of Project A √198 𝑙𝑎𝑐 = 4449.719

Standard deviation of Project B √144𝑙𝑎𝑐 = 3794.73
𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤
Iii Profitability Index =
𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤
NPV = PV of CI - PV of CO
PV of CI = NPV + PV of CO
A = 9000 + 36,000 = 45,000
B = 9,000 + 30,000 = 39,000
45,000
PI of A = 1.25
36,000
39,000
PI of B = 1.30
30,000
Iv Since NPV of both project is same, so both projects yield equal reinvestible fund. Thus
both projects are equally recommended.
But since PI of project B is higher so according to PI method, project B is acceptable.
Also since risk of B is lower, yielding same NPV as of A, so B is acceptable.
Q59 i. Statement of NPV

Cash outflow 1,00,000 0 1 1,00,000
Cash Inflow
Operating cash inflow
20,000 x 0.1 + 30,000 x 0.7
40,000 x 0.2 31,000 1-5e 2.991 92,721
Terminal value 0 x 0.1 + 20,000 x0.7
+ 30,000 x 0.2 20,000 5e 0.402 8040
Net present value 761
43
ii. Worst case NPV will arise if annual cash inflows are 20,000. In this case NPV is
1,00,000 – 20,000 x 2.991 = (40,180)
Since probability of annual cash inflows of 20,000 is 0.1, so expected NPV in worst case
is (40,180) x 0.1 = 4018
Best case NPV will arise if annual cash inflows are 40,000. In this case NPV is
1,00,000 - [40,000 x 2.991 + 30,000 x .402] = 31,700
Since probability of annual cash inflow 40,000 is 0.2. So expected NPV in best case is
31,700 x 0.2 = 6340
iii. Worst case NPV will arise if annual cash inflows is 20,000. Probability of annual cash
inflows of 20,000 is 10%, so probability of worse case NPV is 10%
Q60 i. Statement of standard deviation of each year

Year 1 . Year 2 .
2
CF Prob CF x Prob(x) (X-X̅ ) P(X-X̅ ) CF Prob CF x Prob(Y) (Y-Y̅) P(Y-Y̅)2
60,000 0.2 12,000 -11,000 242 lac 50,000 0.2 10,000 -11,000 242lac
70,000 0.5 35,000 -1000 5 lac 60,000 0.5 30,000 -1000 5 lac
80,000 0.3 24,000 9000 243lac 70,000 0.3 21,000 9000 243lac
X̅ 71,000 490 lac Y̅ 61,000 490 lac
Standard deviation of Year 1 √490 𝑙𝑎𝑐 = 7000

Standard deviation of Year 2 √490 𝑙𝑎𝑐 = 7000
Statement of NPV of project

Cash outflow 1,00,000 0 1 1,00,000
Cash Inflow 71,000 1e 0.909 64,539
61,000 2e 0.826 50,386
NPV 14,925
Since cash flows of each year is perfectly correlated so standard deviation of project is PV of
standard deviation of each year
Year SD Factor PV
1 7000 0.909 6363
2 7000 0.826 5782
12145
Probability of negative NPV = NPV of project will be –ve if NPV = 0
𝑋 − 𝑋̅
Z =
𝜎
0 − 14,925
= = 1.23
12,145
= 0.3907
Probability of –ve NPV 0.5 – 0.3907 = 10.93%
44
b. If Cash flows of each year are independent, Sd of project is

Year SD factor PV PV2
1 7000 0.909 6363 40487769
2 7000 0.826 5782 33431524
73919293
SD = √73919293 = 8597.63
Probability of –ve NPV =
𝑋 − 𝑋̅
Z =
𝜎
0 − 14,925
= = 1.74
8597.63
= 0.4591
Probability of –ve NPV = 0.5 - 0.4591 = 4.09%
Q61 Statement of Standard deviation of each year

Year 1 . . Year 2 . . Year 3 .
CF P PxCF(X) (X-X̅ ) P(X-X̅ )2 CF P CF x P(Y) (Y-Y̅) P(Y-Y̅)2 CF P CF x P(Z) (Z-Z̅) P(Z-Z̅)2
1000 0.1 100 -2000 4lac 1000 0.2 200 -1400 3.92lac 1000 0.3 300 -1100 3.63lac
2000 0.2 400 -1000 2lac 2000 0.3 600 - 400 0.48lac 2000 0.4 800 -100 .04lac
3000 0.3 900 0 0 3000 0.4 1200 600 1.44lac 3000 0.2 600 900 1.62lac
4000 0.4 1600 1000 4lac 4000 0.1 400 1600 2.56lac 4000 0.1 400 1900 3.61lac
X̅ 3000 10 lac Y̅ 2400 8.40 lac z̅ 2100 8.90lac
Standard deviation of year 1 √10 𝑙𝑎𝑐 = 1000

Standard deviation of year 2 √8.40 𝑙𝑎𝑐 = 916.515
Standard deviation of Year 3 √8.90 𝑙𝑎𝑐 = 943.40
Statement of NPV
Cash inflow 3000 1e 0.935 2805
2400 2e 0.873 2095
2100 3e 0.816 1714
NPV 1614
Standard deviation of project

Year SD factor PV PV2
1 1000 0.935 935 874225
2 916.515 0.873 800 640000
3 943.40 0.816 770 592900
21,07,125
SD of project = √21,07,125 = 1451.59
45
𝑋 − 𝑋̅
Probability of 0 NPV = Z =
𝜎
0 − 1614
= = 1.11
1451.59
= 0.3655
Prob = 0.5 – 0.3655
= 0.1335 0r 13.35%
Probability of NPV greater than 0 = 1 – p(0)

= 1 – 0.1335
= 0.8665 or 86.65%
Probability of PI being 1 or less = PI is 1 when PV of CI is equal to PV of CO i.e when NPV = 0

= i.e 13.35
Probability of PI greater than 2 = 1 – PI of 2
𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤
PI = 𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤
𝑃𝑉 𝑜𝑓 𝐶𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤
2 = 5000
PV of CI = 10,000
NPV = 10,000 – 5,000
= 5,000
Probability of PI being means NPV 5000
𝑋 − 𝑋̅
Probability of NPV 5000 is = Z =
𝜎
5000 − 1614
= = 2.33
1451.59
= 0.4901
Probability of NPV 5000 = 0.5 + 0.4901
= 0.9901
Probability of NPV > 5000, or PI >2 = 1 – 0.9901
= 0.0099 or 0.99%
Q62 a. Statement of NPV

Cash outflow 1,20,000 0 1 1,20,000
Cash Inflow 44,000 1e .909 39,996
40,000 2e .826 33,040
40,000 3e .751 30,040
35,000 4e .683 23,905
30,000 5e 0.621 18,630
NPV 25,611
46
Statement of Standard deviation (assumed CF are independent)

Year SD Factor PV PV2
1 8800 0.909 7999 63984001
2 7600 0.826 6278 39413284
3 8000 0.751 6008 36096064
4 6000 0.683 4098 16793604
5 5000 0.621 3105 9641025
27,488 165927978
Sd of project = √165927978 = 12,881.30
b. Probability that project will have –ve NPV = NPV will be –ve if NPV is less tha 0
𝑋 − 𝑋̅
Probability of 0 NPV = Z =
𝜎
0 − 25,611
= = -1.988
12,881
= 0.4761
Probability of –ve NPV = 0.5 – 0.4761
= 0.0239 or 2.39%
c. Probability that NPV would be atleast 20,000 i.e 20,000 or more

𝑋 − 𝑋̅
Probability of NPV 20,000 = Z =
𝜎
20,000 − 25,611
= = - 0.436
12,881
= 0.1700
Probability of 20,000 or more = 0.5 + 0.1700
= 0.67
D Probability that NPV would be atleast 30,000 i.e 30,000 or more
𝑋 − 𝑋̅
Probability of NPV 30,000 = Z =
𝜎
30,000 − 25,611
= = 0.34
12,881
= 0.1331
Probability of NPV atleast 30,000 = 0.5 – 0.1331
= 0.3669
e. Probability of NPV between 20,000 and 30,000 = 0.17 + 0.1331

= 0.3031 or 30.31%
47
Q63 If project C is taken

Total return of ABC = 120 + 90 + 80 = 290
Total Standard deviation = √𝜎𝐴2 + 𝜎𝐵2 + 𝜎𝐶2 + 2𝑟𝜎𝐴 𝜎𝐵 + 2𝑟𝜎𝐶 𝜎𝐵 + 2𝑟𝜎𝐴 𝜎𝐶
= √702 + 402 + 322 + 2 𝑋 70𝑋40 𝑋 0.7 + 2𝑋 40 𝑋 32 𝑋 0.6 + 2 𝑋 32 𝑋 70 𝑋 0.7

= √4900 + 1600 + 1024 + 3920 + 1536 + 3136
= √16116 = 127
127
Coefficient of variation = 290
= 0.438
If project D is undertaken
Total return of ABD = 120 + 90 + 83 = 293
Total Standard deviation = √𝜎𝐴2 + 𝜎𝐵2 + 𝜎𝐷2 + 2𝑟𝜎𝐴 𝜎𝐵 + 2𝑟𝜎𝐷 𝜎𝐵 + 2𝑟𝜎𝐴 𝜎𝐷

= √702 + 402 + 402 + 2 𝑋 70𝑋40 𝑋 0.7 + 2𝑋 40 𝑋 40 𝑋 0.14 + 2 𝑋 40 𝑋 70 𝑋 0.3
= √4900 + 1600 + 1600 + 3920 + 448 + 1680
= √14148 = 118.94
118.94
Coefficient of variation = 293
= 0.406
If project E is taken
Total return of ABE = 120 + 90 + 80 = 290
Total Standard deviation = √𝜎𝐴2 + 𝜎𝐵2 + 𝜎𝐸2 + 2𝑟𝜎𝐴 𝜎𝐵 + 2𝑟𝜎𝐸 𝜎𝐵 + 2𝑟𝜎𝐴 𝜎𝐸
= √702 + 402 + 352 + 2 𝑋 70𝑋40 𝑋 0.7 + 2𝑋 40 𝑋 35 𝑋 0.2 + 2 𝑋 35 𝑋 70 𝑋 0.4

= √4900 + 1600 + 1225 + 3920 + 560 + 1960
= √14165 = 119.016
119.016
Coefficient of variation = = 0.410
290
Q64 Expected value of existing product lines icecream, cheese , yogurt = 16,000 + 20,000 + 10,000
= 46,000
Total Standard deviation = √𝜎𝑖2 + 𝜎𝑐2 + 𝜎𝑌2 + 2𝑟𝜎𝑖 𝜎𝑐 + 2𝑟𝜎𝐶 𝜎𝑌 + 2𝑟𝜎𝐼 𝜎𝑌

=
√80002 + 70002 + 40002 + 2 𝑋 8000𝑋7000 𝑋 0.9 + 2𝑋 7000 𝑋 4000 𝑋 0.84 + 2 𝑋 4000 𝑋 8000 𝑋 0.8
= √640 𝑙𝑎𝑐 + 490 𝑙𝑎𝑐 + 160𝑙𝑎𝑐 + 1008𝑙𝑎𝑐 + 470.4𝑙𝑎𝑐 + 512 𝑙𝑎𝑐
= √3280. 4 𝑙𝑎𝑐 = 18,111.87
Expected value of existing product lines icecream, cheese , yogurt , pudding

= 16,000 + 20,000 + 10,000 + 12,000
= 58,000
48
Total Standard deviation

=√𝜎𝑖2 + 𝜎𝑐2 + 𝜎𝑌2 + 𝜎𝑃2 + 2𝑟𝜎𝑖 𝜎𝑐 + 2𝑟𝜎𝐶 𝜎𝑌 + 2𝑟𝜎𝐼 𝜎𝑌 + 2𝑟𝜎𝑃 𝜎𝑌 + 2𝑟𝜎𝐼 𝜎𝑃 + 2𝑟𝜎𝑃 𝜎𝐶
=
√80002 + 70002 + 40002 + 90002 + 2 𝑋 8000𝑋7000 𝑋 0.9 + 2𝑋 7000 𝑋 4000 𝑋 0.84 + 2 𝑋 4000 𝑋 8000 𝑋 0.8
̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
2 𝑋 9000 𝑋 4000 𝑋 0.3 + 2 𝑋 9000 𝑋 8000 𝑋 0.4 + 2 𝑋 7000 𝑋 9000 𝑋 0.2
=
√640 𝑙𝑎𝑐 + 490 𝑙𝑎𝑐 + 160𝑙𝑎𝑐 + 810𝑙𝑎𝑐 + 1008𝑙𝑎𝑐 + 470.4𝑙𝑎𝑐 + 512 𝑙𝑎𝑐 + 216𝑙𝑎𝑐 + 576𝑙𝑎𝑐 + 252𝑙𝑎𝑐
= √5134. 4 𝑙𝑎𝑐 = 22659.2144
Q65 Evaluation of Project without utility

Project A Project B
CI Prob Expected CI CI Prob Expected CI
75000 0.6 45,000 52,500 1 52,500
25000 0.4 10,000
55,000
Since expected CI of A is higher than B, so A is better.
Evaluation of project with utility

Project A Project B
CI Utility Prob Expected utility CI Utility Prob Expected utility
75,000 12 0.6 7.2 52,500 10.2 1 10.2
25,000 6 0.4 2.4
9.6
Since expected utility of B is higher, so B is better.
Q66 Particulars Existing Bs New Bs

Expected return 12 16
SD 20 32
W 0.75 0.25
r = 0.25
shareholders utility = 100 R – variance

utility of XYZ of existing business = 100 x 12 - 202
= 1200 – 400
= 800
IF new business started with existing business
Expected return = 0.75 x 12 + 0.25 x 16
= 9+4
= 13
Variance = √𝑊12 𝜎12 + 𝑊22 𝜎22 + 2𝑟𝑊1 𝜎1 𝑊2 𝜎2
= √0.752 . 202 + 0.252 . 322 + 2 𝑋 0.25𝑋0.75 𝑋 20 𝑋 32 𝑋 0.25
= √225 + 64 + 60 = √349 = 18.69
49
Q67 Statement of expected utility

Project A Project B
CF utility Prob Expected utility CF utility Prob Expected utility
-15,000 -100 0.10 - 10 -10,000 -60 0.10 -6
-10,000 -60 0.20 -12 - 4000 -3 0.15 -0.45
15,000 40 0.40 16 15000 40 0.40 16
10,000 30 0.20 6 5000 20 0.25 5
5000 20 0.10 2 10,000 30 0.10 3
2 17.55
Since utility of B is higher, so B is better.

Cash outflow
less sale of old 2,00,000 13,00,000 0 1 13,00,000
Cash Inflow
3,18,125 2 0.826 2,62,771
2,99,844 3 0.751 2,25,183
2,86,133 4 0.683 1,95,429
2,75,850 5 0.621 1,71,303
2,56,887 6 0.564 1,44,884
Terminal value 1,50,000
sale of old TV - 1,50,000 6 0.564 84,600
PV of Cash Inflow 13,95,503
NPV 95,503

year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Incremental PBDT 3,50,000 3,50,000 3,50,000 3,50,000 3,50,000 3,50,000
incremental depn 3,25,000 2,43,750 1,82,813 1,37,109 1,02,832 39,625
Incremental PBT 25,000 1,06,250 1,67,187 2,47,168 2,47,168 3,10,376
Tax
PAT 17,500 74,375 1,17,031 1,49,024 1,73,018 2,17,263
Depn 3,25,000 2,43,750 1,82,813 1,37,109 1,02,832 39,624
operating cash In 3,42,500 3,18,125 2,99,844 2,86,133 2,75,850 2,56,887
50
Old asset New Asset
Cost 10,00,000 Op WDV of block 3,16,406
Dep 1 yr 2,50,000 Purchase 15,00,000
7,50,000 sale of old 2,00,000
2 yr 1,87,500 Depreciable WDV
5,62,500 of New machine 16,16,406
3 yr 1,40,625 Depreciable WDV
4,21,875 of old machine 3,16,406
4 yr 1,05,469 Incremental WDV 13,00,000
3,16,406 1 yr 3,25,000
9,75,000
2yr 2,43,750
7,31,250
3 yr 1,82,813
5,48,437
4yr 1,37,109
4,11,328
5 yr 1,02,832
op WDV of last yr 3,08,496
sale of new asset 1,50,000
sale 0f old asset - 1,50,000
1,58,496
Depn 6th yr 39,624
BV - no treatment 1,18,872
51

Cash outflow
sale of old 20,000 1,40,000 0 1 1,40,000
Cash Inflow 50,000 1e 0.833 41,650

46,500 2e 0.694 32,271
43,875 3e 0.579 25,404
41,906 4e 0.482 20,199
36,000 5e 0.402 14,472
Incremental TV 6000
tax saving 15,318 21,318 5e 0.402 8,570
NPV 2,566
Year 1 ar 2 Year 3 Year 4 Year 5

PBDT 60,000 60,000 60,000 60,000 60,000
Additional Depn 35,000 26,250 19,688 14,766 nil
PBT 25,000 33,750 40,312 45,234 60,000
Tax
PAT 15,000 20,250 24,187 27,140 36,000
Depreciation 35,000 26,250 19,688 14,766 nil
cash flow 50,000 46,500 43,875 41,906 36,000
Op WDV 40,000
Purchase 1,60,000 Op WDV 5th yr 44,296
Sale -20,000 Incremental Scrap
Depreciable WDV of New 1,80,000 value
Depreciable WDV of old -40,000 8000 - 2000 6000
Incremental WDV 1,40,000 capital loss 15,318
dep 1 35,000
1,05,000
dep 2yr 26,250
78,750
dep 3 yr 19,688
59,062
dep 4 yr 14,766
Op incremental WDV of 5 yr 44,296
52
Q70 Out of Model 1 and Model 2, machine with higher NPV will be selected
Statement of NPV of Model 1

Cash outflow
Purchase price 1,50,000 0 1 1,50,000
Working capital 50,000 0 1 50,000
PV of cash outflow 2,00,000
Cash Inflow
Operating cash inflow 78,125 1e 0.855 69,140
74,844 2e 0.783 58,603
72,383 3e 0.693 50,161
70,537 4e 0.613 43,239
65,000 5e 0.543 35,295
Terminal value nil
Tax saving on Cap loss 16,611 16,611 5e 0.543 9020
Release of working capital 50,000 5e 0.543 27,150
NPV 92,608
Statement of Net operating cash inflow

PBDT 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000
Depreciation 37,500 28,125 21,094 15,820 -
PBT 62,500 71,875 78,906 84,180 1,00,000
Tax 35% 21,875 25,156 27,617 29,463 35,000
PAT 40,625 46,719 51,289 54,717 65,000
+ Depn 37,500 28,125 21,094 15,820 --
Cash inflow 78,125 74,844 72,383 70,537 65,000
Op Wdv - Op WDV last year 47,461
Purchase 1,50,000 - sale value nil
Sale - - Capital loss 47,461
1,50,000 tax saving on CL 16,611
Yr 1 37,500
1,12,500
Yr 2 28,125
84,375
Yr3 21,094
63,281
Yr 4 15,820
Op WDV of last year 47,461
53
Statement of NPV of Model 2

Cash outflow
Purchase price 2,50,000 0 1 2,50,000
Working capital 70,000 0 1 70,000
PV of cash outflow 3,20,000
Cash Inflow
Operating cash inflow 1,19,375 1e 0.885 1,05,647
1,13,906 2e 0.783 89,188
1,09,805 3e 0.693 76,095
1,06,728 4e 0.613 65,424
97,500 5e 0.543 52,943
Tax saving on CL 27,686 5e 0.543 15,033
Release of WC 70,000 5e 0.543 38,010
PV of cash Inflow 4,42,340
NPV 1,22,340

PBDT 1,50,000 1,50,000 1,50,000 1,50,000 1,50,000
Depreciation (62,500) (46,875) (35,156) (26,367) -
PBT 87,500 1,03,125 1,14,844 1,23,633 1,50,000
Tax 30,625 36,094 40,195 43,272 52,500
PAT 56,875 67,031 74,649 80,361 97,500
Depn 62,500 46,875 35,156 26,367 -
1,19,375 1,13,906 1,09,805 1,06,728 97,500
Cost 2,50,000
Dep 1 62,500
1,87,500
Dep 2 46,875
1,40,625
Dep 3 35,156
1,05,469
Dep 4 26,367
Op wDV of last year 79,102
Salvage value nil
Cap loss 79,102
Tax saving on CL 27,686
54

Cash outflow
Sale of old 6,00,000 9,00,000 0 1 9,00,000
Cash Inflow 2,37,500 1 0.909 2,15,887

2,09,375 2 0.826 1,72,944
2,13,281 3 0.751 1,60,174
1,97,460 4 0.683 1,34,865
1,85,596 5 0.620 1,15,070
Terminal value 9,00,000 5 0.620 5,58,000
13,56,940
NPV 4,56,940
Statement of Net operating cash inflow
Saving in op cost 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000
Saving in repairs - - 50,000 50,000 50,000
Inc in revenue 1,50,000 1,50,000 1,50,000 1,50,000 1,50,000
PBDT 2,50,000 2,50,000 3,00,000 3,00,000 3,00,000
Depn 2,25,000 1,68,750 1,26,562 94,921 71,191
PBT 25,000 81,250 1,73,438 2,05,079 2,28,809
Tax 50% 12,500 40,625 86,719 1,02,540 1,14,404
PAT 12,500 40,625 86,719 1,02,539 1,14,405
Depn 2,25,000 1,68,750 1,26,562 94,921 71,191
Cash flow 2,37,500 2,09,375 2,13,281 1,97,460 1,85,596
Old machinery New machinery
Cost 10,00,000 Op WDV 4,21,875
1 yr 2,50,000 + purchase 15,00,000
7,50,000 - sale (6,00,000)
2 yr 1,87,500 13,21,875
5,62,500 - op WDV 4,21,875
3 yr 1,40,625 Incremental WDV 9,00,000
4,21,875 I yr 2,25,000
6,75,000 OP wdv 6 yr 2,13,576
2 yr 1,68,750 Sale of new 9,00,000
5,06,250 BV of block after sale
3 yr 1,26,562 6,86,426
3,79,688 (no tax treatment)
4 yr 94,921
2,84,767
5 yr 71,191
Op WDV 6 yr 2,13,576
55
Q72 Statement of Operating Cash Inflows

Incremental prodn 10,000 20,000 30,000 40,000 50,000
Incremental PBDT 1,50,000 3,00,000 4,50,000 6,00,000 7,50,000
Fixed cost 50,000 1,00,000 1,50,000 2,00,000 2,50,000
PBT 1,00,000 2,00,000 3,00,000 4,00,000 5,00,000
Tax 40%
PAT 60,000 1,20,000 1,80,000 2,40,000 3,00,000
Factor 0.87 0.76 0.66 0.57 0.49
PV 52,200 91,200 1,18,800 1,36,800 1,47,000
= 5,46,000
Statement of depreciable WDV of Block
OP WDV 10,00,000
Purchase Price X .
- Sale of old (5,00,000)
X + 5,00,000
Depreciable WDV of old (10,00,000)
Incremental WDV x – 5,00,000
NPV = PV of CI - PV of CO
𝑋 −5,00,000
4,53,000 = 5,46,000 + 0.40 x 3.35 - ( x – 5,00,000)
5
4,53,000 = 5,46,000 + (X - 5,00,000) 0.268 - X + 5,00,000
- 5,93,000 = 0.268x – 1,34,000 – x
- 5,93,000 = - 0.732x - 1,34,000
4,59,000
X = 0.732
= 6,27,050
Purchase price of asset to get NPV of 4,53,000 is 6,27,050
b. Statement of NPV
Cash outflow
Purchase price 6,27,050
Sale of old 5,00,000 1,27,050 0 1 1,27,050
Cash inflow 70,164 10.87 61,043

1,90,164 20.76 1,44,525
3,10,164 30.66 2,04,708
NPV 2,83,226
Since NPV is +ve at 15%, so finance managers contention is correct.
56
Statement of Operating cash inflows
Additional production 10,000 30,000 50,000
Additional contribution 1,50,000 4,50,000 7,50,000
Fixed cost 50,000 1,50,000 2,50,000
PBDT 1,00,000 3,00,000 5,00,000
Depreciation 25,410 25,410 25,410
PBT 74,590 2,74,590 4,74,590
Tax(40%)
PAT (60%) 44,754 1,64,754 2,84,754
Depn 25,410 25,410 25,410
Cash inflow 70,164 1,90,164 3,10,164
Q73 Year 2
(8,000)(0.5) B1
Year 1
Year 0 10,000 (0.4)
Purchase 12,000 (0.5) B2
Equipment B3
For 20,000 16,000(0.4)
12000 (0.6)
B4
20,000 (0.6)
Equipment npt purchased
Statement of NPV
Branch Joint Prob. NPV Expected NPV
1 0.4 x 0.5 = 0.2 10,000 x .893 + 8,000 x .797 – 20,000 (938.8)
= - 4,694
2 0.4 x 0.5 = 0.2 10,000 x .893 + 12000 x .797 – 20,000 (301.2)
= - 1506
3 0.6 x 0.4 = 0.24 12,000 x .893 + 16,000 x .797 – 20,000 832.3
= 3468
4 0.6 x 0.6 = 0.36 12000 x .893 + 20,000 x .797 - 20,000 2396.16
NPV 1988.46
Since NPV is +ve, so project should be accepted.
57
Q74 Year 2 B1
Year 1 12000(0.2)
16,000(0.3) B2
25,000(0.4)
22,000(0.5) B3
Make investment 30,000(0.6)
Year 0 cost 40,000 20,000(0.4) B4
25000(0.5) B5
30,000(0.1)
No investment B6
Statement of NPV
Branch Joint prob NPV Expected NPV
1 0.4 x 0.2 = .08 25,000 x .909 + 12000 x .826 – 40,000 - 589.04
= - 7363
2 0.4 x 0.3 = 0.12 25,000 x .909 + 16,000 x .826 – 40,000 -487.08
= - 4.059
3 0.4 x 0.5 = 0.20 25,000 x .909 + 22000 x .826 - 40,000 179.4
= 897
4 0.6 x 0.4 = 0.24 30,000 x .909 + 20,000 x .826 – 40,000 909.6
= 3,790
5 0.6 x 0.5 = 0.30 30,000 x.909 + 25000 x .826 – 40,000 2376
= 7,920
6 0.6 x 0.1 = .06 30,000 x .909 + 30,000 x .826 - 40,000 723
= 12,050 . .
NPV 3,111.88
b. outcome is worst if cash flow in first year is 25,000 and in 2nd year 12,000. NPV if worst
outcome is realised is -7363. Probability of worst case NPV is .08 ie 8%
c. Outcome is best if cash inflow in first year is 30,000 and in second year is 30,000. NPV if best
outcome is realised is 723. Probability of best case NPV is .06 or 6%.
d. Since expected NPV of project is +ve i.e + 3111.88, so project should be accepted.
58
Q75
Year 3 B1
2000(.3)
3000(.5) B2
Year 1 4000(.2) B3
6000 (.3) 4000(.3) B4

Year 0
Purchase 5000(.4) B5
Machine 6000(.3) B6
Cost 9000
6000(.2) B7
7000(.5)
B8
8000(.3) B9
Machine not purchase
Statement of NPV
Branch Joint Prob NPV Expected NPV
1 .3 x .3 = .09 6000 x .926 + 2000 x .857 - 9000 - 155.7
= - 1730
2 .3 x .5 = .15 6000 x .926 + 3000 x .857 - 9000 - 130.95
= - 873
3 .3 x .2 = .06 6000 x .926 + 4000 x .857 - 9000 - .96
= - 16
4 .4 x .3 = .12 7000 x .926 + 4000 x .857 - 9000 109.2
= 910
5 .4 x .4 = .16 7000 x .926 + 5000 x .857 - 9000 282.72
= 1767
6 .4 x .3 = .12 7000 x .926 + 6000 x .857 - 9000 314.88
= 2624
7 .3 x .2 = .03 8000 x .926 + 6000 x .857 - 9000 213
= 3550
8 .3 x .5 = .15 8000 x .926 + 7000 x .857 - 9000 661.05
= 4407
9 .3 x .3 = .09 8000 x .926 + 8000 x .857- 9000 473.76
= 5364 1767
59
c. life of project is 2 years. Company has option to abandaon after 1st year. In case of
abandonment ₹ 4500 will be realised
If cash inflow of 1st year is

6000 7000 8000
Amt realised at end of Amt realised at end of Amt realised at end
1st yr if 1st yr if of 1st yr
abandoned Not Abandoned Not abandoned Not
abandoned abandoned abandoned
4500 (2000 x .3 + 4500 4000x.3 + 4500 6000 x.2
3000 x .5 + 5000x.4+ 7000 x .5
4000 x .06) 6000x.3 3000 x .3
= 2900 = 5000 = 7100
PV at end of PV at end of PV at end of
1st yr = 1st yr= 1st yr=
2900 / 1.08 5000/1.08 7100/1.08
= 2685 = 4630 = 6575
Since amount realised at Since amount realised at Since amount realised at
end of 1st year in case of end of 1st year is higher if end of 1st year is higher if
abandonment is higher project is not abandoned project is not abandoned
so project should be so project should not be so project should not be
abandoned at end of 1st yr abandoned at end of 1st yr abandoned at end of 1st yr
Revised statement of NPV

1-3 prob of 6000
Is 0.3 (6000 + 4500 )0.3 – 9000 = 723 216.9
4 .4 x .3 = .12 910 109.2
5 .4 x .4 = .16 1767 282.72
6 .4 x .3 = .12 2624 314.88
7 .3 x .2 = .03 3550 213
8 .3 x .5 = .15 4407 661.05
9 .3 x .3 = .09 5364 473.76
2271.35
60
Q76
Evaluation
At Decision Point C:
The choice is between investing Rs 20 lacs for a perpetual benefit of
Rs 4 lacs and not to invest.
We shall determine the PV of Benefits in perpetuity (Capitalised Value) as follows:
4 𝑙𝑎𝑐
= = 40lac
0.10
Net Benefit = 40 lac - 20 lac = 20 lac
The preferred choice is to invest, since the capitalized value yields a net benefit of Rs 20 lacs.
At Decision Point D: The choice is between investing Rs 12 lacs, for a similar perpetual benefit of
Rs 1 lac, and not to invest shall be based on net benefit as computed above.
1 𝐿𝑎𝑐
= = 10 lac
0.10
Net Benefit = 10 lac - 12 lac = - 2 lac
Since, there is a negative benefit of Rs 2 lacs. Therefore, it would not be prudent to invest at this point.
At Outcome Point B:
Evaluation of EMV is as under (Rs in lacs).
Outcome Amount (Rs ) Probability Result (Rs)

Success 20.00 0.50 10.00
Failure 0.00 0.50 00.00
Net result 10.00
EMV at B is, therefore, Rs 10 lacs.
At Decision Point A: Decision is to be taken based on preferences between two alternatives. The first is
to test, by investing Rs 2,40,000 and reap a benefit of Rs 10 lacs. The second is not to test, and thereby
losing the opportunity of a possible gain.
The preferred choice is, therefore, investing a sum of Rs 2,40,000 and undertaking the test.
61
Q77
Oil found (.5) oil found 0.2

Drill till
2000ft 1
drill upto 0.25
D2 4000 oil found
2
Oil not
D1
Found (.5) oil not found 0.8
Drill upto
No drilling D3 6000 3
no drilling oil not 0.75
found
no drilling
Note - in question probability of finding and not finding oil is given only for 2000 ft.
probability of finding and not finding oil is not given at 4,000 and 4,000 ft. question gives
CUMULATIVE probablity of finding oil at 4,000 and 6000 ft. Thus prob of finding and not
finding oil at 4000 and 6000 ft is to be found.
Cumulative probability of = prob of finding + prob of not Prob of finding

Finding oil at 4000 ft oil at 2000 ft finding at 2000 ft at 4000 ft
0.6 = 0.5 + .5 (x)
.1
X =
.5
Prob of finding at 4000 = 0.2
Prob of not finding at 4000 = 1 – 0.2 = 0.8
Cumulative probability of = cum prob of finding + CUMUlATIVE prob of not Prob of finding
Finding oil at 6000 ft oil at 4000 ft finding at 4000 ft at 6i 000 ft
0.7 = 0.6 + 0.4 (X)
0.1
X = = 0.25
0.4
Prob of not finding oil at 6000 ft = 1 – 0.25 = 0.75
Note in question we know the cash inflow when oil is found, but we don’t
know cash inflow when oil is not found
Eg. We know cash inflow of 10 mil if oil is found at 2000 ft, but we don’t knw
cash inflow, when not find oil at 2000
There will be cash inflow when oil not found at 2000 because then we drill
further which may give cash inflow. Thus we get cash inflow at 4000 only if no
oil is found at 2,000.
We will have to start from 6000 ft because decision at 6000 ft is final ie no
further drilling option. If no oil found at 6000, vash inflow is 0
i.e we know cash flow of 8 milif oil found and 0 if not found at 6000.
So we use working backwards method
62
Expected cash inflow at outcome 3 3
Cash inflow if found oil x prob of finding oil + CI if no oil X prob of no oil
= 8 x 0.25 + 0 x 0.75
= 2 mil
Cash outflow at D3 i.e driiling at 6000 ft is (6mil – 5mil) 1mil
So net NPV at D3 = PV of expected CI at 6000 – PV of CO at 6000
= 2 mil - 1 mil
= 1 mil
Since npv +ve so drilling till 6000 is feasible
NOTE – thus if oil not found at 4000, drilling will be done at 6000 which give NPV of
1 mil. Thus if not find oil at 4000 ci is 1 mil
Expected Cash inflow at 4000 ft outcome 2 2

= 9 x 0.2 + 1 x 0.8
= 2.6 mil
Cash outflow at D2 i.e if drill done at 4000 is 1 mil (5mil – 4mil)
So net NPV at D3 = PV of expected CI at 4000 – PV of CO at 4000
= 2.6 mil - 1 mil = 1.6
Since NPV +ve so rilling till 4000 feasible
Expected Cash inflow at 2000 ft outcome 1

0.5 x 10 + 0.5 x 1.6 x 0.5 = 5.8
Cash outflow at D1 is 4 mil
So net NPV at 2000 ft is = PV of expected CI at 2000 – PV of CO at 2000
= 5.8 - 4
= 1.8
Since NPV +ve drilling till 2000 feasible
Thus drilling to be done till 2000 ft is to be done. If no oil found at 2,000, then drilling should be
done till 4000, as NPV at 4000 is also +ve. If oil not found at 4,000, drilling should be done till
6,000 as NPV at 6000 is also +ve
63
Q78 a. to determine timing of opening of goldmine, NPV realised if mine is opened today is to
be compared with NPV realised if mine is opened after 1 year.
(0.5)6500
D1
6000 (0.5) 5500(0.5)
5500 (0.5)
D2
Open mine 5500(0.5) 5000 (0.5)
D1
D1
4500(0.5)
D1
(0.5)4500 (0.5)5000 5500 (0.5)
D3
4500(0.5)
(0.5)4000 4500(0.5)
D1
3500(0.5)
Do not open mine
NPV if mine opened today

PV of CI - PV of CO
Note :To ascertain PV of cash inflow of each year , selling price of each year is to be ascertained
If current market price is ₹ 5000 / ounce, averge market price at end of first year is
5500 x 0.5 + 4500 x 0.5
= 2750 + 2250 = 5000
Average market price at the end of year 2 is
6000 x 0.5 x 0.5 + 5000 x 0.5 x 0.5 + 5000 x 0.5 x 0.5 + 4000 x 0.5 x 0.5
1500 + 1250 + 1250 + 1000 = 5000
Average market price at the end of 3rd year
6500 x 0.5 x 0.5 x 0.5 + 5500 x 0.5 x 0.5 x 0.5 + 5500 x 0.5 x 0.5 x 0.5 + 4500 x 0.5 x 0.5 x 0.5
+ 5500 x 0.5 x 0.5 x 0.5 + 4500 x 0.5 x 0.5 x 0.5 + 4500 x 0.5 x 0.5 x 0.5 + 3500 x 0.5 x 0.5 x 0.5
= 812.5 + 687.5 + 687.5 + 562.5 + 687.5 + 562.5 + 562.5 + 437.5
= 5000
Thus if current market price is 5000, average MP at end of each year is 5000 / ounce
Since cost per ounce is ₹ 4600 per ounce. So profit per ounce is ₹ 400
If 1000 ounce is produced each year, profit per year is 4,00,000
NPV if mine opened today = 4,00,000 x 2.487 - 10,00,000

= 9,94,800 - 10,00,000
= - 5200
Thus if mine opened today NPV is negative, so opening mine now is not feasible
NPV if mine opened after 1 year [ though mine opened after 1 yr but for
comparison NPV is to be ascertained at 0 period]
64
If current Market price is 5000 / ounce. Price after 1 year will be 4500 or 5500 per ounce.
Cost per ounce is 4600 per ounce. So if MP is 4500 per ounce, it will yield loss of 100 per ounce.
Opening mine will not be feasible
If price after 1 year is 5500, then average price in 2nd , 3rd , and 4th year is 5500 per ounce (like it was
5000 in 1st , 2nd,and 3rd year)
So profit per ounce each year is (5500 – 4600) = 900 / ounce
Cash inflow each year is 900 x 1000 = 9,00,000
NPV = 9,00,000 x 2.487 x 0.909 - 10,00,000 x .909 [ or 9,00,000 (.826 +.751 + .683)]
= 11,25,615
Expected NPV = NPV if price 4500 x prob of 4500 + NPV if price 5500 x prob of 5500
= 0 x 0.5 + 11,25,615 x 0.5
= ₹ 5,62,808.
Since NPV is +ve is mine is opened after 1 year, so mine should be opened after 1 year.
b. Value of abandonment option

- If mine is opened now, current MP is 5,000 / ounce
Year 3 6500 – 4600 = 1900

Year 2
6000 – 4600 = 1400 D4
Year 1 5500 – 4600 = 900
D2
5500 – 4600 = 900 5000 – 4600 = 400 5500 – 4600 = 900
D5
Open mine
Today 4500 – 4600 = -100
D1
4500 – 4600 = -100 5500 – 4600 = 900
D6
5000 - 4600 = 900 4500 – 4600 = - 100
D3
4000 – 4600 = -600 4500 – 4600 = -100
D7
Do not open mine 3500 – 4600 = - 1100
Since both outcomes from D7 is yielding loss, so branches of D7 should be scrapped i.e project should
be abandoned in 3rd year in case of D7. Thus expected NPV from D7 can be avoided.
= [ - 100 x 0.5x 0.5 x 0.5 + (-) 1100 x 0.5 x 0.5 x 0.5] 1000 x 0.751
= - 1,12,650
Thus if project is abandoned incase of D7 , loss of 1,12,650 will be reduced from Expected NPV of
- 5600
So expected NPV if project is abandoned at D7 - 5600 + 1,12,650 = 1,07,050
If goldmine is opened after 1 year, when price is 5500 (if price is 4500, mined will not be opened)
65
Year 3
Year 2 2400
1900 D4
Year 1 1400
D2
900 1400
1400
D5
Open mine
Today 400
D1
1400
400 900 D6
D3
400
-100 400
D7
Not to open mine -600
All branches are yielding net profit

Since net outcome from D7 is yielding loss, so D7 should be scrapped i.e project should
be abandoned in 3rd year in case of D7. Thus expected negative NPV from D7 can be avoided.
= [ 400 x 0.5x 0.5 x 0.5 + (-) 600 x 0.5 x 0.5 x 0.5] 1000 x 0.751
= - 17,075
Thus if project is abandoned incase of D7 , loss of – 17,075 will be reduced from NPV of
11,25,615
So NPV if project is abandoned at D7 11,25,615 + 17,075 = 11,42,690
expected NPV is 11,42,690 x 0.5 = 5,71,345
Thus if project can be abandoned at any stage, then it will be viable to open mine after 1 year, I.e decision
will remain same.
Value of abandonment or saving due to abandonment
5,71,345 – 5,62,808 = 8537 [ or 17,075 x 0.5 ] = 8,537
66
Q79
0.6
Cash inflows (30 mil)
Build
Plant 2 0.4
Success cash inflows (20 mil)
D2
0.7
Begin pilot Prodn
1
And test Marketing
D1
Faliure 0.3 Not to build plant
No action
Expected cash inflows at outcome 2 2
30 mil 7.469 224.07 0.6 134.442

20 mil 7.469 149.38 0.4 59.752 194.194
NPV of D2
PV of CI – PV of CO
194.194 - 150 = 44.194 mil
Since NPV is positive so company should build plant
Expected cash inflows at outcome 1 1
44.194 x 0.7 + 0 x 0.3 = 30 .94 mil

NPV of D1
30.94 - 20 = 10.94 mil
Since nPV is +ve so company should do pilot production and test marketing.
Thus company should do pilot production and if it is successful company should build plant and do .
production over next 20 years.
67
Q80
24,000 (0.2) B1
32,000 (0.3) B2
Make investment CI 50,000 (0.4)
80,000 44.000 (0.5) B3
CI 60,000 (0.6)
40,000 (0.4) B4
50,000 (0.5) B5
No investment 60,000(0.10) B6
Branch Joint probability NPV Expected NPV

1 0.4 x 0.2 = 0.08 50,000 x 0.909 + 24,000 x 0.826 - 80,000 - 1,178
= - 14,726
2 0.4 x 0.3 = 0.12 50,000 x 0.909 + 32,000 x 0.826 – 80,000 - 974
= - 8,118
3 0.4 x 0.5 = 0.20 50,000 x 0.909 + 44,000 x 0.826 – 80,000 359
= 1,794
4 0.6 x 0.4 = 0.24 60,000 x 0.909 + 40,000 x 0.826 – 80,000 1,819
= 7,580
5 0.6 x 0.5 = 0.30 60,000 x 0.909 + 50,000 x 0.826 – 80,000 4,752
= 15,840
6 0.6 x 0.1 = 0.06 60,000 x 0.909 + 60,000 x 0.826 – 80,000 1,446
= 24,100 NPV 6,224
b. outcome is worst if cash flow in first year is 50,000 and in 2nd year 24,000. NPV if worst
outcome is realised is -14,726. Probability of worst case NPV is .08 ie 8%
c. Outcome is best if cash inflow in first year is 60,000 and in second year is 60,000. NPV if best
outcome is realised is 24,100. Probability of best case NPV is .06 or 6%.
d. Since expected NPV of project is +ve i.e + 6,224, so project should be accepted.
68
Q81
12,000 (0.2) B1
16000 (0.3) B2
CI = 25,000 (0.4)
Invest in the 22,000 (0.5) B3
project
CO = 40,000 20,000 (0.4) B4
CI = 30,000 ( 0.6)
25,000 (0.5) B5
No investment
30,000 (0.1) B6
1 0.4 x 0.2 = 0.08 25,000 x 0.909 + 12,000 x 0.826 -40,000 = - 7363 - 589
2 0.4 x 0.3 = 0.12 25,000 x 0.909 + 16,000 x 0.826 - 40,000= - 4,059 - 487
3 0.4 x 0.5 = 0.20 25,000 x 0.909 + 22,000 x 0.826-40,000 = 897 179
4 0.6 x 0.4 = 0.24 30,000 x 0.909 + 20,000 x 0.826 – 40,000 = 3,790 909
5 0.6 x 0.5 = 0.3 30,000 x 0.909 + 25,000 x 0.826 – 40,000 = 7,920 2,376
6 0.6 x 0.1 = 0.06 30,000 x 0.909 + 30,000 x 0.826 – 40,000 = 12,050 723
3,111
b. outcome is worst if cash flow in first year is 25,000 and in 2nd year 12,000. NPV if worst outcome is
realised is -7363. Probability of worst case NPV is .08 ie 8%
c. Outcome is best if cash inflow in first year is 30,000 and in second year is 30,000. NPV if best outcome
is realised is 12,050. Probability of best case NPV is .06 or 6%.
d. Since expected NPV of project is +ve i.e + 3111, so project should be accepted
69
Q82
4000 (0.2) B1
10000 (0.6) B2
CI = 8000(0.3) 15000(0.2) B3
Purchase plant 13,000 (0.3) B4
CO = 20000 CI = 11,000 (0.4 15,000(0.4) B5
CI = 15,000(0.3) 16,000 (0.3) B6
16,000 (0.1) B7
Not purchase plant 20,000 (0.8) B8
24,000 (0.1) B9
Branch Joint prob NPv Expected NPV

1 0.3 x 0.2 = 0.06 8,000 x 0.909 + 4000 x 0.826 - 20000 = (9424) (565)
2 0.3 x 0.6 = 0.18 8,000 x 0.909 + 10000 x 0.826 – 20,000 = (4468) (804)
3 0.3 x 0.2 = 0.06 8,000 x 0.909 + 15000 x 0.826 - 20000 = (338) (20)
4 0.4 x 0.3 = 0.12 11,000 x 0.909 + 13000 x 0.826 - 20000= 1,290 159
5 0.4 x 0.4 = 0.16 11,000 x 0.909 + 15000 x 0.826 - 20000 = 2389 382
6 0.4 x 0.3 = 0.12 11,000 x 0.909 + 16000 x 0.826 - 20000 = 3215 386
7 0.3 x 0.1 = 0.03 15,000 x 0.909 + 16000 x 0.826 – 20000 = 6851 206
8 0.3 x 0.8 = 0.24 15,000 x 0.909 + 20000 x 0.826 – 20000 = 10155 2437
9 0.3 x 0.1 = 0.03 15,000 x 0.909 + 24000 x 0.826 – 20000 = 13,459 408
2589
70
Q83 Statement of NPV if project abandoned after 1 yr

Cash outflow 20,000 0 1 (20,000)
Cash Inflow 10,000 1 0.909 9090
14,000 1 0.909 12,726
PV of cash inflow 21816
NPV 1816
Statement of NPV if project abandoned after 2 yr
Cash outflow 20,000 0 1 (20,000)
Cash Inflow 10,000 1 0.909 9090
18,000 2 0.826 14,868
NPV 3958
Cash outflow 20,000 0 1 (20,000)
Cash Inflow 10,000 1 0.909 9090
8,000 2 0.826 6,608
12000 3 0.751 9012
NPV 4711
Cash outflow 20,000 0 1 (20,000)
Cash Inflow 10,000 1 0.909 9090
8,000 2 0.826 6,608
6000 3 0.751 4500
6000 4 0.683 4098
NPV 4302
Cash outflow 20,000 0 1 (20,000)
Cash Inflow 10,000 1 0.909 9090
8,000 2 0.826 6,608
6000 3 0.751 4500
4000 4 0.683 2732
2000 5 0.621 1242
NPV 4178
Since NPV is highest if project is abandoned after 3rd year. So project should be abandoned after 3rd
year.
71
Q84
130
100 80
60
𝑈 − ( 1 + 𝑟)𝑛
Probability of low price = 𝑈 − 𝐿
1.3 − 1.08 0.22
= 1.3 − 0.6
= 0.7
= 0.314
Probability of high price= 1 – 0.314 = 0.686
If After 1 year condition is favorable, project will not be abandoned, so abandonment value is 0.
If after 1 year condition is sluggish, project will be abandoned, so abandonment value is
80 – 60 = 20
Expected value of pay off = 0 x 0.686 + 20 x 0.314 = 6.28
Since expected pay off at year 1 is 6.28 crore. Present value of expected pay off will be:
6.28
= 5.81 crore
1.08
Thus the value of abandonment option (Put Option) is Rs 5.80 crore.
72
Q85
100 (0.3) B1
200 (0.5) B2
CI = 200(0.3) 300(0.2) B3
Make investment 200 (0.3) B4
CO = 300 CI = 300 (0.4) 300(0.5) B5
CI = 400(0.3) 400 (0.2) B6
300 (0.3) B7
No investment 400 (0.4) B8
500 (0.3) B9
Branch Joint prob NPV Expected NPV

1 0.3 x 0.3 = 0.09 200 x 0.893 + 100 x 0.797 – 300 = - 41.7 - 3.75
2 0.3 x 0.5 = 0.15 200 x 0.893 + 200 x 0.797 – 300 = 38 5.7
3 0.3 x 0.2 = 0.06 200 x 0.893 + 300 x 0.797 – 300 = 117.7 7.06
4 0.4 x 0.3 = 0.12 300 x 0.893 + 200 x 0.797 – 300 = 167.9 20.15
5 0.4 x 0.5 = 0.2 300 x 0.893 + 300 x 0.797– 300 = 207 41.4
6 0.4 x 0.2= 0.08 300 x 0.893 + 400 x 0.797 – 300 = 286.7 22.94
7 0.3 x 0.3 = 0.09 400 x 0.893 + 300 x 0.797 – 300 = 296.3 26.67
8 0.3 x 0.4 = 0.12 400 x 0.893 + 400 x 0.797 – 300 = 376 45.12
9 0.3 x 0,3 = 0.09 400 x 0.893 + 500 x 0.797 – 300 = 455.7 41.01
NPV 206.3
73
If cash inflow of 1st year is

200 300 400
Amt realised at end of Amt realised at end of Amt realised at end
1st yr if 1st yr if of 1st yr
abandoned Not Abandoned Not abandoned Not
abandoned abandoned abandoned
250 (100 x .3 + 250 200x.3 + 250 300 x.2
200 x .5 + 300x.5+ 400 x .5
300 x .2) 400x.2 500 x .3
= 190 = 290 = 7100
PV at end of PV at end of PV at end of
1st yr = 1st yr= 1st yr=
2900 / 1.12 5000/1.12 410/1.12
= 179 = 259 = 366.07
Since amount realised at Since amount realised at Since amount realised at
end of 1st year in case of end of 1st year is higher if end of 1st year is higher if
abandonment is higher project is not abandoned project is not abandoned
so project should be so project should not be so project should not be
abandoned at end of 1st yr abandoned at end of 1 yr abandoned at end of 1st yr
st
Revised statement of NPV
Prob NPV Expevted NPV
0.3 (200 + 250) 0.893 – 300 = 101.85 30.56

0.12 167.9 20.15
0.2 207 41.4
0.08 286.7 22.94
0.09 296.3 26.67
0.12 376 45.12
0.09 455.7 41.01
NPV 227.85
Q86 Since taxation is to be ignored, so depreciation is not to be considered
Cost of project is 200 crores, out of which 50 crores is financed by rquity and 150 crore by 15%
debt payable in 15 equal annual installments
Annual insallment
Annuity x factor at 15% a5 yrs = Loan amount
150 𝑐𝑟𝑜𝑟𝑒
Annuity = = 25.65 crore
5.847
Annual inflows = 50 crore - 0.05 x 200 = 40 crore
74
i. Equity IRR
It is the rate at which PV of cash inflow for eq share holders = Pv of cash outflow for
equity share holders.
Cash out flow 50 crores
Cash inflow
EBIT 40 crores
Installment 25.65 14.35 crores (since no tax, so tax saving .
on depreciation and tax is ignored
PV of cash inflows at 25% = 14.35 x 3.859 = 55.58 crores

PV of cash inflows at 30% = 14.35 x 3.269 = 46.90 crores
For diff of 5%, change in NPV is (55.58 – 46.90) = 8.68

For change in NPV of (55.8 – 50 ) = 5.8 crore, diff in rate is
5.8
8.68
x 5 = 3.341
Equity IRR = 25 + 3.341 = 28.341
ii. Project IRR

Cash outflow from Total fund point of view 200 crore
Cash inflow from total fund point of view 40 crore
PV of CI at 17% 40 x 5.324 = 212.94 crore

PV of CI at 19% 40 x 4.876 = 195.04 crore
For diff in 2%, change in NPV is ( 212.94 - 195.04) = 17.9

4.96
For change in NPV of 4.96, diff In rate is 17.9 x 2 = 0.554
Project IRR = 17.554 %
75
Q87 Balance sheet of project

Equity 80 Fixed assets 240
Term loan 150 Current assets 80
Non converti. Deb 50
Short term loan (BF) 40 . .
320 320
Statement of Cash inflow from point of view of equity

1 2 3 4 5
PBDIT (240 – 100) 140 140 140 140 140
Less Interest TL 20% 30 30 30 20 10
NCD 15% 7.5 7.5 7.5 7.5 7.5
STl 18% 7.2 7.2 7.2 7.2 7.2
Depreciation 60 45 33.75 25.31 18.98
PBT 35.30 50.3 61.55 79.99 96.32
Tax 55%
PAT 45% 15.89 22.64 33.85 35.99 43.34
Depn 60 45 33.75 25.31 18.98
Cash flow 75.99 67.64 67.6 62.3 62.32
Scrap value 56.96
Realisable value of WC 80
Repayment of loan TL - - (50) (50) (50)
Deb - - - - (50)
STL - - - - (40)
Cash flow for equity 75.99 67.64 17.6 12.3 59.28
Statement of cash inflow from Long tern fund point of view

1 2 3 4 5
CF from equity point of view 75.99 67.64 17.6 12.3 59.28
Repayment of loan TL - - 50 50 50
nCD - - - - 50
Interest net of tax TL 13.5 13.5 13.5 9 4.5
NCD 3.375 3.375 3.375 3.375 3.375
Cash flow from Long term
funds point of view 92.76 84.52 84.476 74.688 167.155
Statement of Cash inflow from total fund point of view

1 2 3 4 5
CF from long term fund 92.76 84.52 84.476 74.688 167.155
Interest on STL 3.24 3.24 3.24 3.24 3.24
Repayment of STL - - - - 40
Cash inflow from total fund 96 87.76 87.715 77.928 210.395
76
Statement of NPV from long term fund point of view

Amount Period factor 13.168% PV
Cash outflow Eq 80 0 1 80
TL 150 0 1 150
Deb 50 0 1 50
PV of cash outflow 280
Cash inflow 92.76 1 0.880 81.63
84.52 2 0.774 65.42
84.476 3 0.681 57.53
74.688 4 0.599 44.74
167.155 5 0.527 88.091
PV of cash inflow 337.441
NPV 57.41
Weighted average cost of capital

Ke = 25%
K(tl) = 20 ( 1- 0.55) = 9
K (NCD) = 15(1 – 0.55) = 6.75
80 150 50
Ko = 25 x + 9x + 6.75 x
280 280 280
= 7.143 + 4.821 + 1.205
= 13.168 %
Q88 Base NPV = PV of cash inflow @ 10% - PV of cash outflow

= 13 x 3.791 - 50
= 49.783 - 50
= - 0.717
Adjusted NPV = Base NPV + PV of tax saving on interest payment

= - 0.717 + 20 x 0.12 x 0.40 x 3.605
= 2.7438
Since adjusted NPV is +ve so accept the proposal.
Q89 Base NPV = PV of cash inflow @ 15% - PV of cash outflow

= 10 x 2.855 - 30
= 28.55 – 30
= - 1.45
Adjusted NPV = Base NPV + PV of tax saving on interest payment
= - 1.45 + 10 x 0. 20 x 0.35 x 2.588
= - 1.45 + 1.8116
= 0.3616
Since NPV is positive accept the proposal.
77
Q90 a. Base NPV = PV of cash inflow @ 15% - PV of cash outflow

2.95
= - 20
0.15
= 19.67 - 20
= - 0.33
b. Base NPV = PV of cash inflow - Pv of cash outflow

2.95 ( 1−0.3)
= - 20
0.15
= - 6.23 lac
Adjusted NPV = Base NPV + PV of tax savings on interest

0.12 𝑋 6 𝑋 0.3
= - 6.23 +
0.12
= - 6.23 lac + 1.8

= - 4.43 lac
Since NPV is –ve, so proposal is to be rejected
c. i. Project is acceptable if adjusted NPV is +ve i.e above 0

Minimum base NPV is Base NPV in excess of Base NPV when adjusted NPV is 0
Adjusted NPV = Base NPV + PV of tax savings on interest
0 = Base nPV + 1.80
Base NPV = 1.8
Thus Base NPV in excess of 1.80 is minimum base NPV
ii. IRR is the rate at which PV of cash inflow = PV of cash outflow

Annual cash inflow at base NPV when adjusted NPV is 0 is
Base NPV = PV of cash inflow - PV of cash outflow

𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤
1.8 = 0.15
- 20
Annual cash inflow = (20 + 1.8) x 0.15
= 2.73 lac
If annual cash inflow is 2.73 lac, base npv is 1.8 and adjusted NPV is 0
Minimum IRR is IRR above IRR at which base NPV is 1.8 and adjusted NPV is 1.8
IRR when base NPV is 1.8 and adjusted NPV is 0 is
PV of CI = PV of cash outflow
2.73
= 20
𝑟𝑎𝑡𝑒
2.73
Rate (IRR) = = 0.1365 or 13.65%
20
Thus Minimum IRR is IRR above 13.65%.
78
Q91 β Assets = 1.5

Required return of Project
= RF + β ( R M - RF )
= 9 + 1.5 ( 14 – 9)
= 16.5%
Base NPV = PV of cash inflow - PV of cash outflow
= (15 x 0.858 + 34 x 0.737 + 12 x 0.632 + 3 x 0.632) - 48
= - 0.592
Adjusted NPv = Base NPV + PV of tax savings on interest – Flotation cost
Funds raised from internal sources = 8

Funds raised frm right issue = 15
Funds raised from LTL = 25
Flotation cost of LT loan 1%

Funds used in project out of LTL raised = 99%
Funds used in project = 25 lac
25
LTL raised = 25.25 lac
0.99
Interest on lTL = 25.25 x 0.12 = 3.03 lac
PV of tax saving = 3.03 x 0.40 x 2.402
= 2.911
Flotation cost on LTL = 25.25 – 25
= 0.25 lac
Flotation cost on rights issue = 3%

Funds used in projects out of right issue = 97%
Funds used = 15 lac
15
Rights issue = 15.46
0.97
Flotation cost = 0.46 lac
Adjusted NPV = (0.592) + 2.911 - (0.25 + 0.46) [ Flotation cost can be

taken net of tax]
= 1.609
Since NPV is +, project should be accepted.
Q92 Not Required

Q93 Not Required
79
Q94 a. If projects are divisible, decisions are to be taken on the basis of Profitability index
Statement of Ranking on the basis of profitability Index

Project Profitability index Ranking NPV
1 1.22 I 3,00,000 x 0.22 = 66,000
2 0.95 NA -
3 1.20 II 3,50,000 x 0.20 = 70,000
4 1.18 III 4,50,000 x 0.18 = 81,000
5 1.20 II 2,00,000 x 0.20 = 40,000
6 1.05 IV 4,00,000 x 0.05 = 20,000
Statement of allocation of available fund ₹ 10,00,000
Rank Project Investment % investment NPV Balance

I 1 3,00,000 100 66,000 7,00,000
II 3 3,50,000 100 70,000 3,50,000
III 5 2,00,000 100 40,000 1,50,000
IV 4 1,50,000 33.33 27,000 Nil
NPV 2,03,000
b. If projects are indivisible, combinations of projects which give highest NPV are accepted
Statement of NPV of projects

Projects Investment NPV
1 3,00,000 66,000
3 3,50,000 70,000
4 4,50,000 81,000
5 2,00,000 40,000
6 4,00,000 80,000
Combinations Total Investment NPV

1,3,4 11,00,000 Not feasible
1,3,5 8,50,000 1,76,000
1,3,6 10,50,000 Not feasible
1,4,5 9,50,000 1,87,000
1,4,6 11,50,000 Not feasible
1,5,6 9,00,000 1,86,000
3,4,5 10,00,000 1,91,000
3,5,6 9,50,000 1,90,000
4,5,6 10,50,000 Not feasible
4,6 8,50,000 1,61,000
3,4 8,00,000 1,51,000
If projects are indivisible, highest NPV is availbale with projects 3,4,5
80
Q95 a if projects are divisible, decisions are to be taken on the basis of Profitability index
Statement of Profitable Index
Projects PV of CI PI Rank
A 15 / 0.20 = 75 75 / 50 = 1.5 III
B 20 / 0.20 = 100 100 / 80 = 1.25 IV
C 18 / 0.20 90 / 60 = 1.5 III
D 10 / 0.20 50 / 30 = 1.67 I
E 8 / 0.20 40 / 25 = 1.6 II
F 10 / 0.20 50 / 40 = 1.25 IV
Statement of allocation of available fund ₹ 1,00,000
Rank Project Investment % investment NPV Balance

I D 30 100 20 70
II E 25 100 15 45
III A 45 90 25 x 0.9 = 22.5 -
If projects are divisible, D,E,A are profitable Mix. Alternatively D,E,C also yield same return
NPV from C = 30 x 45/ 60 = 22.5
b If projects are indivisible, and surplus funds can be invested at cost of capital i.e 20 %
Q96 - Q100 NOT REQUIRED
Q101 Statement of NPV If replaced after 1st year

Cash outflow
Maintenance cost 16,000 1 0.8696 13,914
Salvage value 32,000 1 0.8696 (27,827)
Net cost 46,087
46,087
Equal annual cost = 0.8696
= 52,997
Statement of NPV if replaced after 2nd year

Cash outflow
22,000 2 0.7561 16,634
Salvage value 24,000 2 0.7561 (18,146)
Net cost 72,401
72,401
Equal annual cost = = 44,535
1.6257
81
Statement of NPV if replaced after 3rd year

Cash outflow
22,000 2 0.7561 16,634
38,000 3 0.6575 24,985
Salvage value 16,000 3 0.6575 (10,520)
Net cost 1,05,013
1,05,013
2.2832
Statement of NPV if replaced after 4th year

Cash outflow
22,000 2 0.7561 16,634
38,000 3 0.6575 24,985
36,000 4 0.5718 20,585
Salvage value 8,000 4 0.5718 (4,574)
Net cost 1,31,544
1,31,544
2.855
Since EAC is least after 2nd year, so machine should be replaced after 2nd year.
Q102 statement of cash outflow if replaced immediately

Cash outflow
Purchase price of new 40,000
Sale of old 8,000 32,000 0 1 32,000
Maintenance on new 8000 1 0.893 7144
10,000 2 0.797 7970
20,000 3 0.712 14,240
Scrap value of new 16,000 3 0.712 (11,392)
Net cash outflow 49,962
49,962
Equal Annual cost = 20,800
2.402
82
statement of cash outflow if replaced after 1 year
Cash outflow
Mentainance of old 1 yr 16,000 1 0.893 14,288
Sale of old 6,000 34,000 1 0.893 30,362
10,000 3 0.712 7120
20,000 4 0.636 12,720
60,690
3.037
Cash outflow
Sale of old 6,000 34,000 1 0.893 30,362
10,000 3 0.712 7120
20,000 4 0.636 12,720
60,690
3.037

Cash outflow
2 yr 25,000 2 0.797 19,925
Sale of old 500 39,500 2 0.797 31,482
10,000 4 0.636 6360
20,000 5 0.567 11,340
Scrap value of new 16,000 5 0.567 (9072)
80,019
3.605
Since EAC is least if old machine is replaced after 1st year, so replacement should be
made after 1st year.
83
ii. optimum replacement cycle of new asset

Statement of EAC if replaced after 1st yr
Running cost 8000 1 0.893 7144
Scrao value 26,000 1 0.893 (23,218)
23,926
EAC = 26,793
0.893
Statement of EAC if replaced after 1st yr

Running cost 8000 1 0.893 7144
10,000 2 0.797 7970
Scrao value 20,000 2 0.797 (15,940)
39,174
EAC = 23,180
1.69
Statement of EAC if replaced after 2nd yr

Running cost 8000 1 0.893 7144
10,000 2 0.797 7970
20,000 3 0.712 14,240
Scrao value 16,000 3 0.712 (11,392)
57,962
EAC = 24,131
2.402
Since EAC is least is machine is replaced after 2 yrs, so optimum replacement cycle for
new machine is 2 yrs
84

Cash outflow
Cost of windmill 300
Cost of land 15 315 0 1 315
Subsidy (15) 1 0.870 (13.05)
CO 301.95
Cash inflow 175 1 0.870 152.25
27 2 0.756 20.41
29 3 0.658 19.08
31 4 0.572 17.73
33 5 0.497 16.40
35 6 0.432 15.12
37 7 0.376 13.91
42 8 0.327 13.73
47 9 0.284 13.35
52 10 0.247 12.84
Sale of land 60 10 0.247 14.82
NPV 7.69
Since NPV is +ve so wind mill should be installed.

Yr1 yr2 yr3 yr4 yr5 yr6 yr7 yr8 yr9 yr10
Saving in elec cost 54 60 66 72 78 84 90 102 114 126
Maintenance cost 4 6 8 10 12 14 16 18 20 22
Depn 300
PBT (250) 54 58 62 66 70 74 84 94 104
PAT 0.5 (125) 27 29 31 33 35 37 42 47 52
Dep 300
Cf 175 27 29 31 33 35 37 42 47 52
85

Cash outflow
Land – sunk cost
Construction 15,00,000 0 1 15,00,000
Cash inflow
7,00,000 2 0.756 5,29,200
8,00,000 3 0.658 5,26,400
9,00,000 4 0.572 5,14,800
10,00,000 5 0.497 4,97,000
NPV 10,89,400

Yr 1 Yr 2 Yr 3 Yr 4 Yr5
Saving in accomodation 8 10 12 14 16
Boarding 0.5 0.5 0.5 0.5 0.5
Inhouse training 2 2 2 2 2
10.5 12.5 14.5 16.5 18.5
Maintenance cost 1.5 1.5 1.5 1.5 1.5
Depreciation 3 3 3 3 3
PBT 6 8 10 12 14
PAT (0.5) 3 4 5 6 7
Depn 3 3 3 3 3
Cash inflow 6 7 8 9 10
86

Cash outflow
Incremental
Less sale of old 40,000
Tax on CL ignored 2,90,000 0 1 2,90,000
(sale of old can be taken as 30,000,
As trade off is only option in replacement)
Cash inflow
Operating cash inflow 82,500 1-10 6.145 5,06,963
Salvage value 20,000 10e 0.386 7,720
Net Present value 2,24,683

Amount
Saving in variable cost
Old mach (24 + 8 + 16) = 48
New mach ( 14 + 12 + 12) = 38 10,000 x 10 1,00,000
saving in repairs 40,000
PBDT 1,40,000
Additional depn
330,000 − 20,000
Depn on new = 31,000
10
Depn on old 6000 25,000
PBT 1,15,000
PAT (0.5) 57,500
Depn 25,000
Incremental cash inflow 82,500
87
Q106 statement of NPV

Cash out flow
Incremental Purchase cost 2,50,000
Sale of old (1,00,000 – 30,000) 70,000 1,80,000 0 1 1,80,000
Cash inflows 20,000 1-5e

3.433 68,660
NPV (1,11,340)
Amount
Saving in operating cost
Cost of machine R 2,00,000
Cost of Machine S 1,80,000 20,000

Cash outflow
Initial equipment 175
Subsidy (25) 150 0 1 150
Additional equipment 20 0 1 20
Additional equipment 12.50 3 0.712 8.9
PV of cash outflow 178.9
Cash inflows
Operating cash inflows 21.875 1 0.893 19.53
28.39 2 0.797 22.63
79.463 3 0.712 56.58
85.433 4 0.636 54.33
85.433 5 0.567 48.44
55.193 6 0.507 27.98
55.193 7 0.452 24.95
55.193 8 0.404 22.30
Terminal value 1.25 8 0.404 0.505
Release of WC 20 8 0.404 8.08
NPV 107.325
88

1 2 3 4 5 6 7 8
Sales units 0.72 1.08 2.6 2.7 2.7 1.8 1.8 1.8
Sale - VC
(120 – 60%) 34.56 51.84 124.8 129.6 129.6 86.4 86.4 86.4
FC 18 18 18 18 18 18 18 18
Depn 21.875 21.875 21.875 24.375 24.375 24.375 24.375 24.375
PBT (5.315) 11.965 84.925 87225 87.225 44.025 44.025 44.025
Loss of 1st yr tr (2.658) (2.657)
Net PBT - 9.307 82.268 87.225 87.225 44.025 44.025 44.025
PAT 70% - 6.515 57.588 61.058 61.058 30.818 30.818 30.81
Depn 21.875 21.875 21.875 24.375 24.375 24.375 24.375 24.375
Cash inflows 21.875 28.39 79.463 85.433 85.433 55.193 55.193 55.193
Q108 Statement of Net cash outflow if worked with old machine

Salvage value (if worked on this
mach, SV will be lost) 5000 0 1 5000
Repairs 19,000 0 1 19,000
Tax saving on repairs (9,500) 1 0.909 (8,636)
Annual running cost 20,000(0.5) 10,000 1-5e 3.791 37,910
PV of net cash outflows 53,274
53,274
3.791
Statement of net cash outflows if worked on new machine

Purchase cost 49,000 0 1 49,000
Tax saving on depn 4900 x 0.5 2,450 1 -10e 6.145 (15,055)
Running cost net of tax 14,000 x 0.5 7,000 1-10e 6.145 43,015
76,960
Equal annul cost = 12,524
6.145
Since EAC of new machine is lower, so old machine should be replaced.
89
Q109 Any new project being considered for implementation may require the firm to raise additional
funds. This may also entail further cash flows in the form of payment of interest or dividend to
the supplier of funds. In CB process these financial cash flows i.e cash inflows in the form of
raising funds and cash outflows in the form of interest and dividend payments are ignored. The
question is whether these financial cash flows should be considered as relevant cash flows or
not ? the answer is that these financial cash flows need NOT to be as relevant cash flows
Thus in this question cost of machine is 200 lac and principal is repayable in 4 equal
installment. Interest is 16% p.a. cash outflows in the form of interest is ignored. It is assumed
that cost of debt is included in weighted average cost of capital i. 15%.
Statement of NPV
Cash outflow
Purchase price of machine 50 1 0.870 43.5
50 2 0.756 37.8
50 3 0.658 32.9
50 4 0.572 28.6
Compensation 30 0 1 30
Working capital (op stock) 20 0 1 20
Cash inflow
Operating cash inflow 91 1 0.870 79.17
110 2 0.756 83.16
116 3 0.658 76.33
152 4 0.572 86.94
Terminal value (20 – 15) = 5
Bookvalue(200 – 50 -38-28-21) = 63
Tax sav on CL (63 – 5) 0.5
= 29 34 4 0.572 19.45
NPV 152.25
90

Yr 1 Yr 2 Yr 3 Yr 4
Sales 322 322 418 418
Material 30 40 85 85
Wages 60 65 85 100
Other expenses 40 45 54 70
Factory OH 30 30 30 30
Opportunity cost (Rent) 10 10 10 10
Depreciation 50 38 28 21
PBT 102 94 126 102
PAT 51 47 63 51
+depn 50 38 28 21
+ op stock 20 55 55 55
- cl stock (55) (55) (55) -
+ saving in payment of
disposal fee (net of tax) 25 25 25 25
91 110 116 152
Amount Period Factor (12%) PV
CO Land 2,00,000 0 1 2,00,000
1,00,000 1 0.893 89,300
1,00,000 2 0.797 79,700
1,00,000 3 0.712 71,200
Building 2,00,000 0 1 2,00,000
10,00,000 2 0.797 7,97,900
8,00,000 3 0.712 5,69,600
Plant 15,00,000 3 0.712 10,68,000
5,00,000 4 0.636 3,18,000
Working capital 4,00,000 5 0.567 2,26,800
36,20,500
Cash Inflow
Operating cash inflow 6,50,000 6-15e 5.65 x 0.567 20,82,308
Terminal value
Building 6,00,000 15e 0.183 1,09,800
Land 8,00,000 15e 0.183 1,46,400
Plant 2,00,000 15e 0.183 36,600
Working cap 4,00,000 15e 0.183 73,200
NPV (11,72,192)
Since NPV is –ve. So project is rejected.
91

Amount
Sales 30,00,000
Variable cost 12,00,000
Fixed cost 8,00,000
Depreciation Bld 1,00,000
Plant 2,00,000
PBT 7,00,000
Tax 3,50,000
PAT 3,50,000
Depn 3,00,000
Cash flow 6,50,000
Q111 satement of cash outflow, in case of disposal of waste
Outflow 50,000 x 1 50,000
Tax saving 0.35 17,500
Net outflow 32,500
PV of cash outflow 32,500 x 5.019 1,63,118
Statement of NPV if waste is further processed
Statement of NPV
Cash outflow
Purchase price 6,00,000 0 1 6,00,000
Cash inflows 1,12,000 1-10e 5.019 5,62,128
NPV - 37,872
If waste is disposed, there is a loss of 1,63,118. If waste is further processed there is
loss of 37,872. Since due to further processing loss is reduced by 1,25,246, so waste
should be further processed.
Amount
Sales 40,000 x 10 4,00,000
Variable cost 40,000 x 5 2,00,000
Fixed cost 30,000
Depn 6,00,000 / 10 60,000
Advertisement 20,000
Disposal of 10,000 gallon 10,000
PBT 80,000
PAT (0.65) 52,000
Depn 60,000
Cash flow 1,12,000
92
Q112 statement of NPV

Cash outflow
Purchase cost 600 0 1 600
Working capital 150 0 1 150
100 3e 0.657 65.7
PV of Cash outflow 815.7
Cash inflows
Operating cash inflows 140 1e 0.870 121.8
207 2e 0.756 156.49
237 3e 0.657 155.71
270 4e 0.572 154.44
260 5e 0.497 129.22
253 6e 0.432 109.30
Terminal value 60
Tax on CG (60-52.67).5 56.335 6e 0.432 24.34
Release of working capital 250 6e 0.432 108

NPV 143.6
1 2 3 4 5 6
Op WDV 600 400 266.67 177.78 118.52 79
Depn 200 133.33 88.89 59.26 39.51 26.33
Cl WDV 400 266.67 177.78 118.52 79 52.67
Capital gain 60 – 52.67 = 7.33

Yr 1 yr 2 yr 3 yr 4 yr 5 yr 6
Sales units 4lac 8lac 10.8lac 12lac 12lac 12 lac
contribution 320 640 864 960 960 960
Fixed cost 240 360 480 480 480 480
Depn 200 133 88 59 40 26
PBT (120) 147 295 421 440 454
Tax 60 (73) (147) (210) (220) (227)
pAT (60) 74 148 211 220 227
depn 200 133 88 59 40 26
CF 140 207 237 270 260 253
93

Cash outflow
Shifting expense
net of tax 30,000 x 0.5 15,000
sale of old 5,000 x 0.5 (2,500) 3,12,500 0 1 3,12,500
Cash inflow 82,500 1 0.870 71,775

1,12,500 2-4e 2.283 x .87 2,23,449
NPV 17,276

Yr 1 Yr 2 Yr 3 Yr 4
Savings in operating cost 90,000 1,50,000 1,50,000 1,50,000
Depn 75,000 75,000 75,000 75,000
Incremental PBT 15,000 75,000 75,000 75,000
PAT (50%) 7500 37,500 37,500 37,500
Depn 75,000 75,000 75,000 75,000
Cash flow 82,500 1,12,500 1,12,500 1,12,500
94

Purchase price of new 300
Less sale of old 12 x 8 96
Removal cost (4.8)
- tax on CG on sale of old
3
BV of old (18 x 8 - 144 x5 ) = 57.6
Removal cost of old 0.6 x 12 = 4.8
Tax (96 – 57.6 – 4.8)0.35 (11.76) (79.44) 220.56 0 1 220.56
Additional working capital 50 0 1 50
Saving in utilities (assumed one time saving
And not subject to tax) (2.5) 0 1 (2.5)
Termination charges 9.21 0 1 9.21
Tax saving on termination charges (3.22) 1 0.833 (2.68)
Cash inflows
Operating CI 164.92 1 0.833 137.38
166.87 2 0.694 115.81
188.71 3 0.579 109.26
190.78 4 0.482 91.96
192.92 5 0.402 77.55
Salvage value of new 30 5 0.402 12.06
Release of WC 50 5 0.402 20.1
NPV 289.53
1 2 3 4 5
Additional sales 20 lac x 15 300 300 300 300 300
Capacity of old 37 lac
Capacity used 30 lac
New order 20 lac
Assumed new order cannot be accept partially
Capacity of new mach 52 lac
To be used 30 lac for earlier & 20 lac for
new order
Material cost 20 lac x 15 x 0.55 (165) (165) (165) (165) (165)

Saving in mat cost 30 lac x 15 x 0.05 22.5 22.5 22.5 22.5 22.5
95
Labour cost
Existing machine
(Unskilled 18 x 12 x 3500
Skilled 18 x 12 x 5500
Supervisor 3 x 12 x6500
Maintenance 2 x 12 x 5000)
= 22,98,000 + 2,29,800 = 25.28
( 10% inflation)
(Assumed inflation is not p.a)
(Alternatively it can be taken p.a)
New machine
( skilled 6 x 12 x 7000
Maintenance 1 x 6500 x 12 = 5.82 19.46 19.46 19.46 19.46 19.46
saving Maintenance cost

1 – 2 yr (22.5 – 7.5) 15 15 30 30 30
3 – 5 yr ( 67.5 – 37.50)
Saving in operating exp 52.10 54.71 57.44 60.31 63.33

(Since silent in info of new so assumed saved
Alternatively it can be assumed op exp same
So no savings)
Insurance - existing (8 x 18)x .02x 0.9 x 0.9 x 0.9 2.1 1.89 1.70 1.53 1.38
New 3 x 100 x .02 6 5.4 4.86 4.37 3.94
Additional cost 3.9 3.51 3.16 2.84 2.56
144
Incremental depn existing 28.8 28.8 - - -
5
300 − 30
New 54 54 54 54 54
5
Additional depn 25.2 25.2 54 54 54
PBT 214.96 217.96 207.24 210.43 213.73

PAT 65% 139.72 141.67 134.71 136.78 138.92
+ depn 25.2 25.2 54 54 54
Cash flow 164.92 166.87 188.71 190.78 192.92
96

Cash outflow
Purchase price 20,00,000 0 1 20,00,000
Cash inflow 11,15,000 1-5 3.791 42,26,965

9,75,000 6-10 3.791x .621 22,95,356
NPV 45,22,321
Since NPV is +ve, so machine should be purchased.

Yrs 1- 5 6-10
Amount
Saving in operating cost (manual labour ) 20,00,000
Operating cost of machine 5,00,000 15,00,000 15,00,000
Depreciation 20 lacs x 0.2 4,00,000 Nil .
PBT 11,00,000 15,00,000
Tax (0.35) 3,85,000 5,25,000
PAT 7,15,000 9,75,000
Depn 4,00,000 nil .
Cash flow 11,15,000 9,75,000
Q116 Statement of equal annual cost if old machine is replaced with

new machine immediately
Purchase Price(new) 90,000
Salvage valueof old 40,000 50,000 0 50,000
Maintenance cost(new) 10,000 1-8e 4.487 44,870
Salvage value (new) 20,000 8e 0.327 (6,540)
88,330
88,330
4.487
Statement of equal annual cost if old machine is replaced with
new machine after 1 year
st
Mentainance of old mach 1 yr 10,000 1 0.870 8,700
Salvage valueof old 25,000 65,000 1 0.870 56,550
Maintenance cost(new) 10,000 2-9e 4.4873 x 0.870 39,037
98,607
98,607
Equal Annual cost = = 20,664
4.772
97
st
2 yr 20,000 2e 0.756 15,120
Salvage valueof old 15,000 75,000 1 0.756 56,700
1,09,502
1,09,502
5.019

st
2 yr 20,000 2e 0.756 15,120
3 yr 30,000 3e 0.658 19,740
Salvage valueof old 10,000 80,000 3e 0.658 52,640
1,21,425
1,21,425
5.234

st
2 yr 20,000 2e 0.756 15,120
3 yr 30,000 3e 0.658 19,740
4 yr 40,000 4e 0.572 22,880
Salvage valueof old nil 90,000 4e 0.572 51,480
1,39,846
1,39,846
5.421
Since EAC is least if old machine is replaced with new machine immediately, so machine should
be replaced immediately
98
Q117 Statement of Annual cost if asset replaced after 1st year

Cash outflow
Purchase Price 90,000 0 1 90,000
Salvage value 35,000 1 0.909 (31,815)
Net cost 53,182
53,182
Equal annual cost = 0.909
= 58,506
Statement of Annual cost if asset replaced after 2st year

Cash outflow
38,000 2 0.826 31,388
Salvage value 21,000 1 0.826 (17,346)
net cash outflow 99,039
99,039
1.735
Statement of Annual cost if asset replaced after 3rd year

Cash outflow
38,000 2 0.826 31,388
46,000 3 0.751 34,546
Salvage value 9,000 3 0.751 (6,759)
net cash outflow 99,039
1,44,172
2.486
Since EAC is least after 2nd year, so machine should be replaced after 2nd year.
99
Q118 Statement of NPV if project abandoned after 1 yr

Cash outflow 1,00,000 0 1 (1,00,000)
Cash Inflow 42,000 1 0.909 38,178
62,000 1 0.909 56,358
NPV (5,464)

Cash outflow 1,00,000 0 1 (1,00,000)
Cash Inflow 42,000 1 0.909 38,178
80,000 2 0.826 66,080
NPV 4258

Cash outflow 1,00,000 0 1 (1,00,000)
Cash Inflow 42,000 1 0.909 38,178
40,000 2 0.826 33,040
35,000 3 0.751 26,285
NPV (2,497)
nd
Since NPV is highest if project is abandoned after 2 year. So project should be abandoned after
2nd year
100

Capital Budgeting Solution1

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30, lalit park, laxmi nagar, near lalita park gurudwara

9354 720 515 metro pillar 24, new delhi

SOLUTION CAPITAL BUDGETING

Amount Period factor PV

Operating Cash inflows 261800 1-4e 3.312 867082

realised working capital 150000 4e 0.735 110250

Net Present Value 174332

Statement of operating cash inflows

Particulars Annual Depreciation =

Since NPV of project is +ve so project should be accepted.

Q2 Statement of Net cash Inflows

Amount period factor present Value

Purchase Price 500000 0 1 500000

Statement of Net operating cash inflows

Since NPV is positive so project should be accepted

Note: Research and development cost is sunk cost, so ignored

Q3 statement of Net cash Inflow

Amount time PV factor Present Value

Incremental working capital 90000 0 1 90000

PV of Cash outflow 570000

Statement of annual Incremental operating Cash inflow

Q4 Statement of Net Cash Inflows

Amount Time PV factor Present Value

Terminal Value 180000 3e 0.579 104220

Statement of annual operating Cash inflows

1 year 2 year 3 year Depreciation

Q6 Statement of net cash inflows

Amount Time Pv Factor Present Value

incremental Working capital -50000 0 1 -50000

Statement of Net operating Cash inflows

Depreciation Depreciation Incremental depreciation

Amount time PV Factor Present Value

Incremental Cash Inflow of B

Incremental Salvage Val of B 10000 8e 0.467 4670

Since Incremental NPV of B is positive so Machine B is better

Incremental Working capital 12,500 0 1 12,500

Incremental cash inflow

Since NPV of replacement proposal is positive, so proposal should be accepted.

Q10 Statement of Equal Annual NPV (EANPV)

Equal Annual NPV = NPV / Annuity factor = NPV / Annuity factor

Since EANPV of Product X is higher, so product X should be accepted

Statement of Equal annual cost

Since EAC of Machine X is lower, so machine x is accepted.

Statement of annual operating cost

Statement of Equal Annual Cost Of A

Statement of Equal Annual cost of B

Q13 PV of Total Cash Outflow under System A

PV of Total Cash Outflow under System B

Initial Outlay 40,00,000

Q14 Statement of Net Present value of Cash Inflows

Incremental Working capital -90,000 0 1 -90,000

Present value of Cash Outflow 4,20,400

Since NPV is positive, so replacement is feasible

Statement of net operating cash inflow Depreciation

Q15 Statement OF NPV

Amount Period Factor PV

Purchase Price (New) 10,00,000

Increase in working capital 2,50,000 0 1 2,50,000

Terminal value of old 3,50,000

Statement of Net operating cash inflows

PBDT of New asset (21.5 – 9.5) 12,00,000 12,00,000 12,00,000 12,00,000

Statement of depn on new asset

Q16 Statement of Net Present value of cash Inflows