CAPITAL BUDGETING DECISIONS- NON DISCOUNTING TECHNIQUES

● CONCEPT OF CFAT:

Q.1) Calculate CFAT

ABC Ltd is evaluating the purchase of new machinery with a depreciable base/acquisition cost of ₹
1,00,000, expected economic life of 4 years and change in earnings before tax and depreciation of ₹
45,000 in year 1, ₹ 30,000 in year 2, ₹ 25,000 in year 3 and ₹ 35,000 in year 4. Assume straight line
method of depreciation and a 30% tax rate. Calculate CFAT.

● NON-DISCOUNTING TECHNIQUES:
A. SIMPLE PAYBACK PERIOD

Q.2) Calculate simple payback period for the following project: Uniform cash flows

Suppose a project costs ₹ 20,00,000 and yields annually a profit of ₹ 3,00,000 after depreciation @
20% SLM but before tax at 50%.

Q.3) Calculate simple payback period in case of non-uniform cash flows:

Case a) XYZ Ltd is analysing a project requiring an initial cash outlay of ₹ 2,00,000 and is expected to
generate cash inflows as follows:

Year Annual cash inflows ₹

1 80,000
2 60,000
3 60,000
4 20,000
Case b) Assuming other things remain same. Cash outflow is ₹ 2,05,000.

Q.4) Calculate the payback period for the following project (Uniform cashflows)

An expenditure of ₹ 2 million is expected to generate net cash inflows of ₹ 5,00,000 each year for the
next seven years.

Q.5) Calculate the payback period for the following project (Non uniform cash flows)

Year Cash flows ₹

0 (31,00,000)
1 10,00,000
2 9,00,000
3 8,00,000
4 5,00,000
5 5,00,000

B. AVERAGE RATE OF RETURN/ ACCOUNTING RATE OF RETURN

Q.6) Calculate average rate of return

Times Ltd is going to invest in a machine a sum of ₹ 3,00,000 having a life span of 3 years. Salvage
value of machine is ₹ 90,000. The profit before depreciation for each year is ₹ 1,50,000 using 3
methods:
 a) Annual basis (Calculate for each year)
ARR= Profit after tax*100
Investment in the beginning of year
b) Total investment basis
ARR= Average PAT*100
Initial investment
c) Average investment basis
ARR= Average PAT*100
Average investment
Where average investment= Value of Investment in the beginning + Value of Invt. at the end
2

Q.7) A project requiring an investment of ₹ 10,00,000 and it yields profit after tax and depreciation
which is as follows:

Years Profit after depreciation and tax ₹

1 50,000
2 75,000
3 1,25,000
4 1,30,000
5 80,000
TOTAL 4,60,000
Suppose further that at the end of the 5th year, the plant and machinery of the project can be sold for
₹ 80,000. Determine the average rate of return.