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Assignment - 1 (Capital Budgeting)

This document contains 10 capital budgeting problems involving calculation of various metrics like payback period, average rate of return, net present value, profitability index, and internal rate of return. The problems provide cash flow information for projects over multiple years and ask to apply capital budgeting techniques like payback period analysis, net present value analysis, and internal rate of return analysis to evaluate and select projects.

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189 views3 pages

Assignment - 1 (Capital Budgeting)

This document contains 10 capital budgeting problems involving calculation of various metrics like payback period, average rate of return, net present value, profitability index, and internal rate of return. The problems provide cash flow information for projects over multiple years and ask to apply capital budgeting techniques like payback period analysis, net present value analysis, and internal rate of return analysis to evaluate and select projects.

Uploaded by

Anusree
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CAPITAL BUDGETING

PROBLEM 1:
Initial Outlay = Rs.6,00,000
Annual profit = Rs.90,000 after depreciation @ 12.5% per annum but before tax at 50%
Calculate the Payback period.

PROBLEM 2:
The Cash outlay for projects A, B, C are Rs. 1,00,000
The standard payback period is 5 years. Net cash inflows for all the 3 projects are given below.
Assess
(Accept / Reject) the feasibility of each project based on the standard given. Use pay back
period method.

Yea Project A Project B Project C


r ( CIFs in Rs.) (CIFs in Rs.) (CIFs in Rs.)

1 30,000 30,000 10,000


2 30,000 40,000 20,000
3 30,000 20,000 30,000
4 30,000 10,000 40,000
5 30,000 5,000 -

PROBLEM 3:
Cash outflow is Rs. 25,000
Scrap value is Rs.5,000
Life of the project is 5 years
Depreciation is charged on a straight line basis
Tax rate is 50%. Find ARR.

Yea PBDT (Rs.)


r
1 5,000 PROBLEM 4:
2 6,000 Initial investment = Rs. 1,00,000
3 7,000
4 Year Project
8,000 I – CIFs (Rs.) Project II – CIFs (Rs.)
5 1 10,000 48,000 20,000
2 32,000 24,000
3 20,000 36,000
4 - 48,000
5 24.000 16,000
6 12,000 8,000

Assume cost of capital to be 10%. Which project would you select using IRR & PI methods?
PROBLEM 5:
Initial investment = Rs.5,00,000, Life = 6 years.

Year Net cash flows


(Rs. In ‘000)
1 -
2 100
3 160
4 240
5 300
6 600
The company’s cost of capital is 15%. Will you accept the project using NPV technique?

PROBLEM 6:
X Ltd. is considering the purchase of a machine. Two machines are available E and F. The cost
of each machine is Rs. 60,000. Each machine has an expected life of 5 years. Profits after
depreciation and before tax during the expected life of the machine are given below.

Year Machine E (Rs.) Machine F (Rs.)


1 15,000 5,000
2 20,000 15,000
3 25,000 20,000
4 15,000 30,000
5 10,000 20,000
Total 85,000 90,000

Find ARR. Ascertain which of the alternatives will be more profitable. The average rate of tax
may be taken as 50%.

PROBLEM 7:
Project ‘M’ initially costs Rs. 50,000. It generates following net cash flows:

Year Net Cash inflow (Rs.)


1 18,000
2 16,000
3 14,000
4 12,000
5 10,000

Taking cut-off rate as 10%, find Net present value. Suggest whether the project should be
accepted or not.

PROBLEM 8:
Initial investment Rs. 20,000. Net cash inflows – 1st year Rs.2,000; 2nd year Rs.2,000; from 3rd y
ear to 10th year Rs.2,500 each. Work out Net present value with a discount rate at 10% and
express whether the investment will be worthwhile.

PROBLEM 9:
Calculate the Internal rate of return for the following projects and decide which is the most
profitable project:

Particulars A (Rs.) B (Rs.) C (Rs.)


Initial cost 60,000 66,000 72,000
Returns: End of year 1 3,000 36,000 12,000 PROBLEM
2 12,000 24,000 18,000 10:
3 18,000 - 12,000 A company is
4 24,000 - 30,000 considering an
5 30,000 18,000 12,000 investment
6 (-) 6000 12,000 6,000 proposal to
install new
milling controls. The project will cost Rs. 50,000. The facility has a life expectancy of 5 years
and no salvage value. The company’s tax rate is 55%. The firm uses the straight line method of
depreciation. The minimum rate of return of the project is 10%. The estimated profits before
depreciation and taxes from the proposed investment proposal are as follows:

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

Compute the following:


(a) Pay back period.
(b) Average rate of return.
(c) Net present value
(d) Profitability index
(e) Internal rate of return.

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