EX 1

A Company plan to invest in equipment that will cost Rs 1,000,000 and expected to generate a
net cash flow of Rs 275,000 end of the first year, Rs 380,000 end of the second year, 460,000
ends of the third year, Rs 310,000 at the end of the fourth year, and Rs 125,000 end of the fifth
year. The useful lifetime of equipment will be five years and scrap value of end of five Rs
25,000.
Evaluate the investment project by using
 ARR
 Payback
 NPV if the expected rate of return is 18%.

EX 2
Damindu Company LED plan to invest in new machinery that will cost Rs 1,800,000 and
expected to generate a cash inflow of Rs 575,000 end of the first year, Rs 870,000 end of the
second year, 960,000 ends of the third year, Rs 610,000 at the end of the fourth year, and Rs
725,000 end of the fifth year. In order to generate the above cash flows, the company will incur
the following cash outflow of Rs 225,000 end of the first year, Rs 350,000 end of the second
year, 460,000 ends of the third year, Rs 210,000 at the end of the fourth year, and Rs 315,000
end of the fifth year.
The useful lifetime of machinery will be five years and scrap value of end of five Rs 300,000.
 ARR
 Payback
 NPV if the expected rate of return is 18%
 IRR
EX 3
Kalindu Company LED plan to invest in new machinery that will cost Rs 2,500,000 and
expected to generate a cash inflow of Rs 975,000 end of the first year, Rs 990,000 end of the
second year, 960,000 ends of the third year, Rs 900,000 at the end of the fourth year, and Rs
925,000 end of the fifth year. In order to generate the above cash flows, the company will incur
the following cash outflow of Rs 275,000 end of the first year, Rs 350,000 end of the second
year, 360,000 ends of the third year, Rs 210,000 at the end of the fourth year, and Rs 315,000
end of the fifth year.
The useful lifetime of machinery will be five years and scrap value of end of five Rs 500,000.
The company adopt the straight-line basic for depreciation
The corporate tax rate is 28%, and a capital allowance is 25% can claim against the profit.
 ARR
 Payback
 NPV if the expected rate of return is 18%
 IRR

EX 4
KDU Company plans to invest in a new plant that will cost Rs 3,100,000 and working capital of
Rs. 400,000. The Company expected to generate a profit before tax of Rs 575,000 end of the first
year, Rs 590,000 end of the second year, 475,000 ends of the third year, Rs 400,000 at the end of
the fourth year, Rs 425,000 end of the fifth year and Rs 375000 end of the six-year.
The useful lifetime of plant will be six years and scrap value of end of six-year Rs 100,000. The
Company adopted the straight-line basic for depreciation
The corporate tax rate is 35%, and a capital allowance is 25% can claim against the profit.
 ARR
 Payback
 NPV if the expected rate of return is 12%
 IRR
 Discounted Payback period
 Profitability Index
Ex 5

Waste Management Centre (WMC) is a Semi-Government Organization operating as a waste-

collecting centre in the Western province. The collection waste of the WMC currently disposed
through a local contractor at the cost of Rs. 2,000 per metric ton of such waste. This local
contractor has already informed that this charge will be increased by 5% yearly from next year
onward.

WMC has a new project proposal from a Korean Company to collect waste and producing
compost as a 05-year project. Management of WMC is now considering recycling this waste in-
house. This recycling process will produce compost, which is 30% of the input waste and could
be sold at a price of Rs. 8000 per metric ton. The entire product plans to export to the Korean
market.

The table provides an estimate of waste during the next five years.

Year Year 01 Year 02 Year 03 Year 04 Year 05

Waste (metric tons) 10,000 11,000 12,000 12,500 13,000

The cost of the project feasibility study, which WMC and Korean Company have already carried
out, is Rs. 1 million.

The initial cost of Plant & machinery for this project estimated at Rs. 100 million. At the end of
the fifth year, the Plant and machinery can be sold for Rs. 20 million. WMC decide to keep on
their depreciation policy on a straight-line basis.

Four (04) contract workers shall be recruited for the new project at the cost of Rs. 120,000 per
annum for each worker. One of the supervising officers currently working in the waste collection
site, paying Rs. 360,000 per annum can be transferred to the new project. In addition to WMC
will have to spend Rs. 420,000 per annum for an especial supervisor to the project.

Extra land will need the project, and WMC expects to use the land as a waste collection area.
The apportioned rental cost of the land area is Rs. 02 million will be paid on a yearly basis
throughout the project duration.

Following operational costs (in addition to those stated above) are expected to be incurred during
the project period.

Year Year 01 Year 02 Year 03 Year 04 Year 05

Rs. Million 4 6 8 9 11
The cost of capital of WMC is 15%.
Assume all these transactions occur at the end of the respective year.
You are required to calculate;
 Calculate the Net Present Value (NPV) of the project and advise the management.
 You are required to justify if you do not consider any figures in your appraisal.
 Calculate the Internal Rate of Return (IRR) for the project and interpret.
Ex 6
a) What is payback approach? and list out its weaknesses. (3 Marks)
b) List out three Discounted Cash Flow (DCF) methods used in project evaluation (3 Marks)
c) ABC PLC has recently raised Rs. 5,000,000 from a right issue and directors are considering
two ways of using these funds. Two projects (A and B) are being considered each involving
the immediate purchase of equipment costing Rs. 5,000,000. One project can only be
undertaken, and the equipment for each will have a useful life equal to that of the project
life, with no soap value. The finance director thinks that the project with the higher NPV
(Net Present Value) should be chosen. Whereas the managing director thinks that the one
with the higher IRR (Internal Rate of Return) should be undertaken, especially as both
projects have the same initial outlay but different length of life. The company anticipates a
cost of capital of 10% and a polity of straight line depreciation is used to write off the cost
of equipment in the financial statements.
The net after tax cash flows of die projects are as follows:

Net after tax cash flows (*000)

Project Years
0 1 2 3 4 5 6 7
A -5000 1500 1400 1800 1200 1200 800 600
B -5000 1500 1200 1500 2500 1000

Required,
1) Calculate the payback period and Accounting Rate of Return for each project (4 Marks)
2) Calculate the NPV (Net Present Value) for each project (3 Marks)
3) Calculate the IRR(Internal Rate of Return) for each project for each project? (3 Marks)
4) Recommend with reasons, which project you would undertake. Justify the your answer (4
Marks)