QUIZ # 2

Question 1:
The following information is related to Kareem company. Company is planning to purchase a new machinery
at a cost of Rs 500,000. It is expected that the machinery will opeate 6 years with zero salvage value.
Company uses Straight Line Method for calculating depreciation and the tax rate is 35%
Discount factor of the company is 12%

Following are the details of operating cost of Old machinery and New machinery

Operating Cost
Years New Old Benefit depreciatioNet benefitIncome tax net benefit aft cashflow
1 95,000 121,000 26,000 16,667 9,333 3,267 6,066 22,733
2 97,000 126,000 29,000 16,667 12,333 4,317 8,016 24,683
3 101,000 128,000 27,000 16,667 10,333 3,617 6,716 23,383
4 105,000 135,000 30,000 16,667 13,333 4,667 8,666 25,333
5 108,000 140,000 32,000 16,667 15,333 5,367 9,966 26,633
6 112,500 146,000 33,500 16,667 16,833 5,892 10,941 27,608

Required:
1 Calculate the cash inflow during the period
2 Calculate Discounted Payback period
3 Calculate Internal rate of return (IRR)

Year

1
2
3
4
5
6
7
8
9
10
ew machinery

Cash Inflow PV Factor Discounted Amount Pay back

12% Cash Inflo Needed Balance Years
22,733 0.8929 20,297 (100,000) (79,703)
24,683 0.7972 19,677 (79,703) (60,026)
23,383 0.7118 16,644 (60,026) (43,382)
25,333 0.6355 16,100 (43,382) (27,282)
26,633 0.5674 15,112 (27,282) (12,170)
27,608 0.5066 13,987 (12,170)

0.87
10.4411 13
Discounted payback period= 5 years 10 months and