Question 1

A project of 20 years life requires an original investment of Rs.1,00,000. The other relevant information is
given below:

Average annual earning s before depreciation and tax Rs.20,000

Annual tax rate 50%
Calculate:

1. Pay back period

2. Pay back profitability
3. Average rate of return
4. Rate of return on original investment

Question 2

An enterprise is having the following two proposals of investment:

Proposal A Proposal B
Cost of investment (Rs.) 20,000 28,000
Life of the assets (Years) 4 5
Scrap value Nil Nil
Net income after depreciation and tax:

Year Rs. Rs.

2005 500 Nil
2006 2,000 3,400
2007 3,500 3,400
2008 2,500 3,400
2009 - 3,400

It is estimated that each of the project will require an additional working capital of Rs.2,000 which will be
received back in full after the expiry of each project life.
Depreciation is to be provided under straight line method.
The present value of Re.1 to be received at the end of each year at 10% per annum is given
below:
Year Present value
1 0.91
2 0.83
3 0.75
4 0.68
5 0.62

You are required to assess the profitability of the projects on the basis of the following methods:
1. Return on investment 3. Discounted pay back period
2. Pay back period 4. Profitability index

Question 3

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Atul enterprises wants to introduce a new product well estimated sales life of five years.

The manufacturing equipment will cost Rs.5,00,000 with scrap value of Rs.30,000 at the end of five
years. The working capital requirement is Rs.40,000, which will be released after five years.

The annual cash flow and P.V. factor @ 10% are:

Year P.V. Factor Cash Inflow (Rs.)

1 0.909 2.50,000
2 0.826 3,00,000
3 0.751 3,75,000
4 0.683 3,60,000
5 0.621 2,25,000

The depreciation to be charged under straight line method Rs.1,00,000.

Tax applicable @ 40%
Evaluate the proposal under various alternatives.

Question 4

Vijay Electronics Ltd. Is considering the purchase of a machine. Two machines LM and PM, are available
each costing Rs.1,00,000. In comparing profitability of machines, a discount rate of 10% is to be used.

Earning after taxation is expected as follows:

Year Machine LM Machine PM

1 30,000 10,000
2 40,000 30,000
3 50,000 40,000
4 30,000 60,000
5 40,000 40,000

Indicate which machine would be more profitable, investment under the various methods of ranking
investment proposal (Payback period, payback profitability, return on investment, ARR, discounted cash
flow, and excess present value)

Question 5
D Ltd. Is considering investment in a project requiring capital outlay of Rs.2,00,000. Forecast for annual
income after depreciation but before tax is as follows:

Year Rs.
1 1,00,000
2 1,00,000
3 80,000
4 80,000
5 40,000

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Depreciation may be taken at 20% on original cost and tax rate at 50% of net income.
You are required to calculate:
1. Pay back period
2. Rate of return on original investment
3. Rate of return on average investment
4. Discounted cash flow method taking cost of capital as 10%
5. Net present value index method
6. Internal rate of return method at 30% discount factor 0.781, 0.592, 0.455, 0.350, 0.269

Question 6

From the following details relating to a project, calculate the payback period using:
1. The traditional method
2. Discounted payback method

Cost of the project Rs.10,000

Life 5 years
Cost of capital 10%

Year Net cash inflows (Rs.) PV of Re.1 at 10%

1 4,000 0.909
2 3,000 0.826
3 4,000 0.751
4 2,000 0.683
5 4,000 0.621

Question 7
Excel trading Co. Ltd. is considering the purchase of a new machine for the immediate expansion
programme. There are three types of machines for this purpose. Their details are as follows:

Machine A Machine B Machine C

Cost of machine 17500 12500 9000

Estimated savings in scrap per 400 750 250

year
Estimated savings in direct 2750 6000 2250
wages per year
Additional cost of indirect _ 400 _
materials per year
Expected savings in indirect 100 _ 250
materials per year
Additional cost of 750 550 500
maintenance per year
Additional cost of supervision _ 800 _

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Estimated life of machine(yrs) 10 6 5

Taxation at 40% of profit

You are required to advise the management which type of machine should be purchased on the basis of
payback period?

Question 8

Alpha ltd is producing articles mostly on hand labor and is considering to replace it by a new machine.
There are 2 alternative models P and Q of the new machine. Prepare a stamen of profitability showing
the payback period from the following info:

Machine P Machine Q
Estimated life of machine 4 years 5 years
Rs Rs
Cost of machine 9000 18000
Estimated savings in scrap 500 800
Estimated savings in direct 6000 8000
wages
Additional cost of maintenance 800 1000
Additional cost of supervision 1200 1800
Ignore tax and depreciation.

Question 9

Electronics industries ltd is considering purchasing a new machine. Two alternative models are under
consideration. Following info is available:

Model A Model B
Cost of machine 300000 500000
Estimated life 10 years 12 years
Estimated savings in scrap per year 20000 30000
Additional cost of supervision per year 24000 32000
Additional cost of maintenance per year 14000 22000
Additional cost of indirect material per year 12000 16000
Estimated savings in wages per year 180000 240000
Rate of taxation may be regarded as 50% of
profits
Calculate the payback period

Question 10

Charlie company Ltd. wishes to buy a machine costing Rs.2,00,000. The life of this machine is 10 yrs and
its scrap value would be Rs.5,000.

The following details are provided:

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 Average Annual NPBT Rs.20,000
Tax rate 35%
Depreciation (already charged) SLM basis
Calculate:

i) Payback period
ii) A.R.R.(Accounting Rate of Return Method)

Question 11

Your company is considering the question of investment in a project for which the following data are
available:

Capital outlay Rs.2,20,000

Depreciation charges 20% p.a. (Straight line method)

Forecast of annual income before charging depreciation, but after all other charge:

Year Rs
1 1,00,000
2 1,00,000
3 80,000
4 80,000
5 40,000
Total 4,00,000
From the above data, the management wants you to calculate the following:

a) Payback period
b) Rate of return on average investment
c) Rate of return on original investment.
Ignore taxation

Question 12

One of the machines A and B is to be purchased. From the following information, find which one of the
two will be more profitable? The average rate of tax may be taken at 50%.

Machine A (Rs.) Machine B (Rs.)

Cost of machine 50,000 80,000

Working life 4 yrs 6 yrs
Earnings before depreciation
and tax Rs Rs
Yr 1 10,000 8,000
Yr 2 15,000 14,000
Yr 3 20,000 25,000
Yr 4 15,000 30,000

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 Yr 5 - 18,000
Yr 6 - 13,000

Question 13

A company is considering an investment proposal to install new milling controls. The project will cost Rs.
50,000. The facility has a little expectancy of 5 yrs and no salvage value. The company’s tax rate is 55%
and no investment tax credit is allowed. The film uses straight line depreciation. The estimated cash
flows before tax (CFBT) from the proposed investment proposals are as follows:

Year CFBT(Rs.)
1 10,000
2 11,000
3 14,000
4 15,000
5 25,000

Compute the following:

i) Pay back method
ii) Average rate of return

Question 15

The following data are supplied relating to two investment proposals, only one of which may be
selected:

Proposal A (Rs.) Proposal B(Rs.)

Initial capital expenditure 50,000 50,000
Profit(Loss):
Year 1 25,000 10,000
2 20,000 10,000
3 15,000 14,000
4 10,000 26,000
Estimate resale value at the end of yr 4 10,000 10,000

Notes:
a) Profit is calculated after deducting straight line depreciation.
b) The cost of capital is 10%.
Calculate for each proposal the payback period and the net present value. Which proposal
should be accepted? Why?

The following information may be useful to you:

Year Discount Factor at 10%

0 1.000

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 1 0.909
2 0.826
3 0.751
4 0.683
5 0.621

Question 16

Mohan & Co. is considering the purchase of a machine. The machines X & Y costing Rs.50,000 are
available. Earnings after taxation are expected to be as under:

Evaluate the two alternatives according to:

Year Machine X (Rs.) Machine Y (Rs.) Discount factor @ 10%

1 15,000 5,000 0.9091
2 20,000 15,000 0.8264
3 25,000 20,000 0.7513
4 15,000 30,000 0.6830
5 10,000 20,000 0.6209

1. Pay back method

2. Average rate of return method
3. Net present value method – a discount rate of 10% to be used

Question 17

A company is considering two mutually exclusive projects. Both require an initial outlay of Rs.10,000
each for machinery and have a life of 5 years. The company’s required rate of return is 10% and pays tax
at 50%. The projects will be depreciated on a straight line method basis. The net cash flows (before
taxes) expected to be generated by the projects are as follows:

Cash Flow Year

1 2 3 4 5
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Project 1 4,000 4,000 4,000 4,000 4,000
Project 2 6,000 3,000 2,000 5,000 5,000

The present value factors at 10% are:

Year 1 - 0.909
Year 2 - 0.826
Year 3 - 0.751
Year 4 - 0.683
Year 5 - 0.621
Calculate:
1. The payback period of each project

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 2. The average rate of return on each project
3. The net present value and profitability index for each project

Question 18

A company has an investment opportunity costing Rs.40,000 with the following expected net cash flow
(i.e. after taxes and before depreciation)

Year Net cash inflows (Rs.)

1 7,000
2 7,000
3 7,000
4 7,000
5 7,000
6 8,000
7 10,000
8 15,000
9 10,000
10 4,000

Using 10% as the cost of capital (rate of discount) determine the following:
1. Payback period
2. Net present value at 10% discounting factor
3. Profitability index at 10% discounting factor

Question 19

Speedage Company Ltd. Is considering a project which costs Rs.5,00,000. The estimated salvage value is
zero. Tax rate is 55%. The company uses straight line depreciation and the proposed project has cash
inflows before depreciation and tax as follows:

Year end Cash inflows (Rs.)

1 1,50,000
2 2,50,000
3 2,50,000
4 2,00,000
5 1,50,000
If the cost of capital is 12%, would you recommend the acceptance of the project under Internal Rate of
Return method?

Question 20

Calculate the IRR of the following projects and decide which is the most profitable project

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 Cash Inflows (CFAT)
Project X (Rs.) Project Y (Rs.) Project Z (Rs.)
Initial Cost 6,00,000 6,60,000 7,20,000
End of Year
1 30,000 3,60,000 1,20,000
2 1,20,000 2,40,000 1,80,000
3 1,80,000 - 1,20,000
4 2,40,000 - 3,00,000
5 3,00,000 1,80,000 1,20,000
6 (60,000) 1,20,000 60,000
TOTAL 8,10,000 9,00,000 9,00,000

Question 21

A company is considering the two mutually exclusive projects. The finance director considers that the
project with higher NPV should be chosen; whereas the MD thinks that one with higher rate of return
should be considered. Both the projects have got an useful life of 5 years and the cost of capital is 10%.
The initial outlay is Rs.2,00,000
The future cash inflow from Project X and Y are as under:

Year Project X (Rs.) Project Y (Rs.) PV Factor @ 10% PV Factor @ 20%

1 35,000 1,18,000 0.91 0.83
2 80,000 60,000 0.83 0.69
3 90,000 40,000 0.75 0.58
4 75,000 14,000 0.68 0.48
5 20,000 13,000 0.62 0.41

You are required to evaluate the projects and explain the inconsistency, if any, in the ranking of the
projects.

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