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    Capital Budgeting Problems

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    vijayadarshini v
    The document provides information on four different investment scenarios or projects being considered by various companies. It includes details such as project costs, cash flows, tax rates, depreciation methods, and expected lives. The requester is asked to calculate metrics like payback period, average rate of return, NPV, IRR, and to advise which projects the companies should accept based on the analysis, citing reasons.

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    Capital Budgeting Problems

    Uploaded by

    vijayadarshini v
    202 views2 pages
    The document provides information on four different investment scenarios or projects being considered by various companies. It includes details such as project costs, cash flows, tax rates, depreciation methods, and expected lives. The requester is asked to calculate metrics like payback period, average rate of return, NPV, IRR, and to advise which projects the companies should accept based on the analysis, citing reasons.

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    Capital budgeting Problems

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    The document provides information on four different investment scenarios or projects being considered by various companies. It includes details such as project costs, cash flows, tax rates, depreciation methods, and expected lives. The requester is asked to calculate metrics like payback period, average rate of return, NPV, IRR, and to advise which projects the companies should accept based on the analysis, citing reasons.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    202 views2 pages

    Capital Budgeting Problems

    Uploaded by

    vijayadarshini v
    The document provides information on four different investment scenarios or projects being considered by various companies. It includes details such as project costs, cash flows, tax rates, depreciation methods, and expected lives. The requester is asked to calculate metrics like payback period, average rate of return, NPV, IRR, and to advise which projects the companies should accept based on the analysis, citing reasons.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    1)There are two mutually exclusive projects under active consideration of a company.

    Both
    the projects have a life of five years and have initial cash outlays of Rs.1,00,000 each. The
    company pays tax rate at 50% rate and the maximum required rate of the company has been
    given as 10%. The straight line method of depreciation will be charged on the projects. The
    projects are expected to generate a net cash inflow before taxes as follows
    Year Project X Project Y
    Rs Rs
    1 40,000 60,000
    2 40,000 30,000
    3 40,000 20,000
    4 40,000 50,000
    5 40,000 50,000

    With help of the above given information you are required to calculate
    a)The payback period of each project
    b) The Average rate of return for the project
    c) The NPV and Profitability Index for each project
    d) The IRR for each project
    On the basis of your calculations advise the company which project it should accept giving
    reasons

    2) An iron ore company is considering investing in a new processing facility. The company
    extracts ore from an open pit mine. During a year, 1,00,000 tonnes of ore is extracted. If the
    output from the extraction process is sold immediately upon removal of dirt, rocks and other
    impurities, a price of Rs.1,000 per ton can be obtained. The company has estimated that its
    extraction costs amount to 70% of the net realisable value of the ore.
    As an alternative to selling all the ore at Rs. 1,000 per tonne, it is possible to process further
    25% of the output. The additional cash cost of further processing would be Rs. 100 lakh. The
    equipment is subject to 20 percent depreciation per annum on reducing balance method. It is
    expected to have useful life of 5 years. Additional working capital requirement is estimated at
    Rs.10 lakh. The company’s cut-off rate for such investments is 15 percent. Corporate tax rate
    is 35 percent
    Assuming there is no other plant and machinery subject to 20 percent depreciation, should the
    company install the equipment if a) the expected salvage is Rs.10 lakh and b) there would be
    no salvage value at the end of 5 years

    3) Rahave Ltd is producing articles mostly by manual labour and is considering to replace it
    by a new machine. There are two alternative models X and Y of the new machines. Prepare a
    statement of profitability showing the payback period from the following information
    Machine X Machine Y
    Estimated life of the machine 4 years 5 Years
    Cost of machine 1,80,000 3,60,000
    Estimated savings in Scrap 10,000 16,000
    Estimated savings in direct 1,20,000 1,60,000
    Wages
    Additional cost of 16,000 20,000
    Maintenance
    Additional cost of 24,000 36,000
    Supervision

    4) YN Ltd is considering two alternative projects for investment. The projects are mutually
    exclusive. The company wants to choose the best alternative using non-discounted cash flow
    techniques. Advice the company with the help of the following details
    Particulars Project Y Project N
    Cost of the project 10,50,000 12,00,000
    Useful life of the Project 4 5
    (Years)
    Estimated Salvage Value at the 50,000 1,00,000
    end of life
    Working capital requirement 2,50,000 3,00,000
    Profit After Tax
    I Year 1,00,000 2,10,000
    II year 2,50,000 4,40,000
    III year 4,70,000 5,70,000
    IV Year 3,40,000 3,20,000
    V year 1,60,000

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