CAPITAL BUDGETING

2022 2023 2024 2025

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

Proft 135 148.5 163.35 179.685

2022 2023 2024 2025

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

Proft 154 164.78 176.3146 188.6566

 2026
439.23 Dis Rate 12%
175.692 Years 5
43.923
21.9615

197.6535 ₹ 581.54

2026
458.7786
137.6336 Dis Rate 12%
91.75572
27.52672

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

The present values of Re. 1 of 10%, 18% and 20% to be received annually for 5 years being 3.791, 3.127 and 2.991 respectively
A requires a capital outlay of Rs. 12,00,000 and project ‘B” requires Rs. 18,00,000. Both are estimated to provide a cash flow for five years
. Show which of the two projects is preferable from the view point of (i) Net present value method,

791, 3.127 and 2.991 respectively.

Day 500
SP 80 Restaurant Business
Year days 365 2022
Sales (Growth of 10%) 500
RM (40%) 200
Yearly Sales 14600000 Lab (20%) 100
Raw material (50% of sales proce) 7300000 Other Exp (10%) 50
Labour (10% of sales) 1460000
Other Expense (15%) 2190000 Profit 150
3650000

304166.666667 Tours and Travel Co.

2022
Sales (Growth of 8%) 530
Lab (50%) 265
Other Processing Charges (20%) 106

Profit 159
de a cash flow for five years:

2023 2024 2025 2026 Dis Facot 12%

550 605 665.5 732.05
220 242 266.2 292.82
110 121 133.1 146.41
55 60.5 66.55 73.205 915.765 PV ₹ 646.15

165 181.5 199.65 219.615 $646.15

2023 2024 2025 2026 Dis Facot 12%

572.4 618.192 667.6474 721.0591
286.2 309.096 333.8237 360.5296
114.48 123.6384 133.5295 144.2118
932.7896 PV ₹ 660.90

171.72 185.4576 200.2942 216.3177

A Company is considering a proposal of installing a drying equipment. The equipment would involve a Cash outlay of Rs. 6,00,0
The expected life of the project is 5 years without any salvage value. Assume that the company is allowed to charge depreciati
purpose. The estimated before-tax cash inflows are given below:
Before-tax Cash inflows (Rs.
‘000)
Year 1 2 3 4 5
240 275 210 180 160

The applicable Income-tax rate to the Company is 35%. If the Company’s opportunity Cost of Capital is 12%, calcula
period, payback period, net present value and internal rate of return.
olve a Cash outlay of Rs. 6,00,000 and net Working Capital of Rs. 80,000.
s allowed to charge depreciation on straight-line basis for Income-tax

st of Capital is 12%, calculate the equipment’s discounted payback

Profitability index =

Years
0 -1000000
1 200000
2 300000
3 500000
4 400000
5 600000

24%

25%
Year Cf Disc factor 24% amount Year Cf Disc factor
0 -1000000 1 -1000000 0 -1000000 1
1 200000 0.8064516129032 161290.322581 1 200000 0.8
2 300000 0.6503642039542 195109.261186 2 300000 0.64
3 500000 0.5244872612534 262243.630627 3 500000 0.512
4 400000 0.422973597785 169189.439114 4 400000 0.4096
5 600000 0.3411077401492 204664.64409 5 600000 0.32768

-7502.7024029

Years CFAT
-80000
1 30000 using irr formula 26%
2 20000
3 30000
4 50000
5 30000
 20%
amount Year Cf Disc factoramount
-1000000 0 -1000000 1 -1000000
160000 1 200000 0.833333 166666.66667
192000 2 300000 0.694444 208333.33333
256000 3 500000 0.578704 289351.85185
163840 4 400000 0.482253 192901.23457
196608 5 600000 0.401878 241126.54321

-31552 98379.62963
X LTD is considering investment in either one of the two alternative projects both with life of 5 years and the following inform
Particular Project x (Rs.) Project y (Rs.)
COST OF PROJECT
( OUTFLOW)
Year 0 100000 80000 IRR Err:523 Err:523
Year 1 30000 40000
Year 2 30000 35000 Err:523 Err:523
Year 3 30000 30000
Year 4 30000 25000
Year 5 30000 10000

The expected rate of return is 10% p.a.

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

0.1
year cf disc factor amount year
0 -100000 1 -100000 0
1 30000 0.909091 27272.727273 1
2 30000 0.826446 24793.38843 2
3 30000 0.751315 22539.444027 3
4 30000 0.683013 20490.403661 4
5 30000 0.620921 18627.639692 5
inflow 113723.60308
npv $13,723.60
pi 1.1372360308
f 5 years and the following informations are given:

Present Value Method

cf
-80000 1 80000
40000 0.909091 36363.6363636
35000 0.826446 28925.6198347
30000 0.751315 22539.444027
25000 0.683013 17075.3363841
10000 0.620921 6209.21323059
inflow $111,113.25 $31,113.25

$1.39
INTERNAL RATE OF THE RETURN( IRR)
The IRR of the project is the rate at which the NPV = 0.

Lower rate + (difference in rate )

Accept / reject rule for project ?

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

>The project will be be rejected

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

IRR is calculated using the trial and the error method

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

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

Calculate IRR OF PROJECT ?

IF DISCOUNTING RATE IS 10% AND 12%
0.1
year cf disc factor year cf disc factor
0 -80000 1 -80000 0 -80000 1 -80000
1 30000 0.909091 27272.72727 1 30000 0.892857 26785.71
2 20000 0.826446 16528.92562 2 20000 0.797194 15943.88
3 30000 0.751315 22539.44403 3 30000 0.71178 21353.41
4 50000 0.683013 34150.67277 4 50000 0.635518 31775.9
5 30000 0.620921 18627.63969 5 30000 0.567427 17022.81

npv 119119.4094 39119.41 cash outflow 80000

npv cash inflow 112881.7
Npv 32881.71
irr 26%
pi -1.48899262 pi 1.411021
Assume a company is reviewing two projects. Management must decide whether to move forward with one, both, or neither.

Project A

Initial Outlay = $5,000

Year one = $1,700
Year two = $1,900
Year three = $1,600
Year four = $1,500
Year five = $700

Project B

Initial Outlay = $2,000

Year one = $400
Year two = $700
Year three = $500
Year four = $400
Year five = $300
ard with one, both, or neither. Its cost of capital is 10%. The cash flow patterns for each are as follows:
The Management of a Company has two alternative proposals under consideration. Project A requires a capital outlay of Rs. 1
Project A Rs. 4,00,000 per year and Project B Rs. 5,80,000 per year. The cost of capital is 10%. Show which of the two projects
The present values of Re. 1 of 10%, 18% and 20% to be received annually for 5 years being 3.791, 3.127 and 2.991 respectively

Years Cash flows(A) Cash flows(B)

0 -1200000 -1800000
1 400000 580000
2 400000 580000
3 400000 580000
4 400000 580000 18%
5 400000 580000

Irr 20% 18%

20%
Years Cash flow A Disc factor Amount
0 -1200000 1 -1200000
1 400000 0.8333333333 333333.333333333
2 400000 0.6944444444 277777.777777778
3 400000 0.5787037037 231481.481481482
4 400000 0.4822530864 192901.234567901
5 400000 0.401877572 160751.028806584

20% 0%
-3755.14403292155

Years Cash flow A Disc factor Amount

0 -1200000 1 -1200000
1 400000 0.8333333333 333333.333333333
2 400000 0.6944444444 277777.777777778
3 400000 0.5787037037 231481.481481482
4 400000 0.4822530864 192901.234567901
5 400000 0.401877572 160751.028806584

20% 0%
-3755.14403292155
 a capital outlay of Rs. 12,00,000 and project ‘B” requires Rs. 18,00,000. Both are estimated to provide a cash flow for five years:
hich of the two projects is preferable from the view point of Internal Rate of Return
7 and 2.991 respectively.
sh flow for five years:
Payback Period
It is the time period in which the total investment in the project is recovered.

Cash Flow = Cash flow after tax and before depreciation

In case of mutually exclusively projects:

Project with lowest pay back period should be accepted

In case of equal cash flow :

Example 1
Particulars Machine A
Cost 800000
annual cash flow 40000

In case of unequal cash flow :

PBP= Completed years +

Example 2
The management of xy ltd has proposed to invest Rs 150000 in a new machine which will give earning fo
Year CFAT Cum cashflows
1 60000 60000
2 40000 100000
3 40000 140000
4 36000 176000
5 30000 206000
6 25000 231000

required amount 10000 *12

amount requied at the end of the year 36000
10000/36000*12

year amt
1 40000
2 40000
3 40000
4 40000
5 40000
6 40000
7 40000
8 40000
9 40000
10 40000
11 40000
12 40000
13 40000
14 40000
15 40000
16 40000
17 40000
18 40000
19 40000
20 40000

cost 150000
Year CFAT
1 60000
2 40000
3 40000
4 36000
5 30000
6 25000

minimum required time 3 years

required amout 10000
amount earned 4th year 36000
time reequired to earn rs 10000 3.33333333333
pay back period 3 year 3.33 months
 x 12month)

machine which will give earning for six years as follows:

minimun time required 3 years

required amount 10000
amount earned at the end of 4th years 36000
time required to earn 10000 3.333 months
pay back peroid 3 years + 3.33 months
 cum cashflow
40000
80000
120000
160000
200000
240000
280000
320000
360000
400000
440000
480000
520000
560000
600000
640000
680000
720000
760000
800000

cum cash flow

60000
100000
140000
176000
206000
231000

r 3.33 months
investment 100000 80000
X LTD is considering investment in either one of the two alternative projects both with life of 5 years and the following inform

Particular Project x (Rs.) Project y (Rs.) cashflows y

Year 0 100000 80000
Year 1 30000 40000 40000
Year 2 30000 35000 75000
Year 3 30000 30000 105000
Year 4 30000 25000 130000
Year 5 30000 10000 140000
Even Uneven

PBP 3.33

Particular Project x (Rs.) DISC factor PV CUM CF

Year 1 30000 0.9090909090909 27272.7272727273 27272.727273

Year 2 30000 0.8264462809917 24793.3884297521 52066.115702
Year 3 30000 0.7513148009016 22539.4440270473 74605.55973
Year 4 30000 0.6830134553651 20490.4036609521 95095.96339
Year 5 30000 0.6209213230592 18627.6396917746 113723.60308

Particular Project y (Rs.) DISC factor PV CUM CF

Year 1 40000 0.9090909090909 36363.6363636364 36363.636364

Year 2 35000 0.8264462809917 28925.6198347107 65289.256198
Year 3 30000 0.7513148009016 22539.4440270473 87828.700225
Year 4 25000 0.6830134553651 17075.3363841268 104904.03661
Year 5 10000 0.6209213230592 6209.21323059155 111113.24984

0.1 5
year cfat disc factor pv cum cf
Year 0
Year 1 30000 0.9090909090909 27272.7272727273 27272.727273
Year 2 30000 0.8264462809917 24793.3884297521 52066.115702
Year 3 30000 0.7513148009016 22539.4440270473 74605.55973
Year 4 30000 0.6830134553651 20490.4036609521 95095.96339
Year 5 30000 0.6209213230592 18627.6396917746 113723.60308

pv ($113,723.60)
 0.1
year cfat disc factor pv cum cfs
0 -80000 1 -80000
1 40000 0.9090909090909 36363.6363636364 36363.636364
2 35000 0.8264462809917 28925.6198347107 65289.256198
3 30000 0.7513148009016 22539.4440270473 87828.700225
4 25000 0.6830134553651 17075.3363841268 104904.03661
5 10000 0.6209213230592 6209.21323059155 111113.24984

inflow 111113.249840113
outflow 80000
npv 31113.2498401127
pi 1.38891562300141
irr 27%

minimum required time 2

required amount 14710.743802
amt earned at the end of year 22539.444027
time required to earn rs 14710 7.832
pbp 2 years 7.8 months
years and the following informations are given:

minimun time required 2 years

required amount 5000
amount earned at the end of 3th years 30000
time required to earn 5000 2
pay back peroid 2 year & 2 months

minimun time required 4

required amount 4904
amount earned at the end of 5th years 18628
time required to earn 4904 3.159115 months
pay back peroid 4 years 3.15 months

minimun time required 2

required amount 14711
amount earned at the end of 3th years 22539.44
time required to earn 14711 7.832136
pay back peroid 2 years 7.8 months
1. Compute pay back period
Particulars Machine A Machine B
Cost 400000 500000
Annual cash flow 40000 100000

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

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

Calculate pay-back period

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

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

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