EXCEL PRACTICE QUESTIONS

1. Present Value of a Single Future Cash Flow

X sells goods worth ₹1,500 on credit, with payment due after three years. The opportunity cost
of capital is 10% per annum. Calculate the present value of ₹1,500 using the appropriate TVM
formula.
2. Comparing Payment Options
X offers two payment options for goods sold:

• (i) Pay ₹2,500 now, or

• (ii) Pay ₹900 at the end of the first year, second year, and third year.
If the customer has an opportunity cost of 10%, which payment option should they choose
by comparing the present value of the series of payments to the lump-sum payment?

3. Present Value of Annuity Due

A recurring amount of ₹1,000 is receivable at the beginning of each of the next four years,
starting from today. The opportunity cost is 6%. Calculate the present value of these payments.
4. Perpetual Payments and Opportunity Cost
A bank offers a perpetual return of ₹1,800 per year for a sum of ₹16,000 deposited today.
Should the investor accept this offer if their opportunity cost of capital is 12%? What if the
opportunity cost is 10%?
5. Present Value of Varying Cash Flows
In continuation of the previous question, if the future payments are ₹800, ₹900, and ₹1,000
over the next three years, calculate the present value of these payments assuming a discount
rate of 10%.
6. Future Value of a Lump Sum Investment
An investor wants to find the future value of ₹5,000 invested today for 10 years at an interest
rate of 5%. Using the appropriate formula, calculate the future value.
7. Future Value of an Ordinary Annuity
An investor deposits ₹10,000 at the end of each of the next 10 years, starting from today. Given
a 10% interest rate, calculate the total accumulation at the end of the 10-year period.
8. Future Value of Annuity Due
A recurring deposit of ₹100 is made at the beginning of each of the next four years, starting
today. If the interest rate is 6%, calculate the total accumulation at the end of four years.
9. Deep Discount Bond
A Deep Discount Bond is issued for ₹5,000 today and will mature after 15 years for ₹18,000.
Should an investor whose opportunity rate of return is 11% invest in this bond?
10. Annual Savings to Reach Target Amount
How much should an investor save at the end of each of the next five years at a 10% interest
rate to accumulate ₹1,00,000 by the end of the period? Use the appropriate formula to find the
annual savings.
11. Loan Repayment with Equal Annual Instalments
A person borrows ₹1,00,000 today, to be repaid in equal annual instalments at the end of each
of the next five years. The interest rate on the loan is 10% per annum. Calculate the annual
instalment amount required to repay the loan, including interest.

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12. Net Present Value (NPV) of a Machine

A machine is available for ₹1,70,000 and has a useful life of five years. It is expected to
generate the following cash flows over the years:

• Year 1: ₹20,000
• Year 2: ₹50,000
• Year 3: ₹60,000
• Year 4: ₹40,000
• Year 5: ₹75,000

Calculate the NPV of the machine if the required rate of return is 10%.

13. Internal Rate of Return (IRR) of a Proposal

A firm is evaluating a project costing ₹1,60,000, which is expected to generate the following
cash flows:

• Year 1: ₹40,000
• Year 2: ₹60,000
• Year 3: ₹50,000
• Year 4: ₹50,000
• Year 5: ₹40,000

There is no salvage value at the end of the project’s life. Find the IRR of the project and
determine whether the project should be accepted if the firm’s hurdle rate is 12%.

14. Selection Between Two Investment Proposals

XYZ Ltd. has two investment proposals, A and B. The necessary information for these projects
is as follows:

• Project A:
o Initial Investment: ₹6,00,000
o Cash Flows:
▪ Year 1: ₹2,00,000
▪ Year 2: ₹2,00,000
▪ Year 3: ₹3,00,000
• Project B:
o Initial Investment: ₹8,00,000
o Cash Flows:
▪ Year 1: ₹2,40,000
▪ Year 2: ₹2,90,000
▪ Year 3: ₹4,00,000

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 Evaluate both projects and advise which one should be selected based on the NPV,
assuming the cost of capital is 10%.

15. IRR of a Proposal with Non-Annual Cash Flows

Find the IRR of the following proposal with non-annual cash flows:

Cash Flow Amount (₹) Date

1 –20,000 Jan. 1, 2017
2 5,500 March 1, 2017
3 8,500 Nov. 1, 2017
4 6,500 Feb. 15, 2018
5 5,500 April 1, 2018

Present the cash flows in an Excel sheet and calculate the IRR.

16. Capital Budgeting for Machine Purchase

TC Ltd. is considering purchasing a machine to augment its capacity. Three machines are under
consideration. The management needs to evaluate these machines based on their costs, revenues,
and economic lives.

Machine Details

Initial Estimated Annual Sales Economic Life Scrap Value

Machine
Investment (₹) (₹) (Years) (₹)
Machine 1 3,00,000 5,00,000 2 40,000
Machine 2 3,00,000 4,00,000 3 25,000
Machine 3 3,00,000 4,50,000 3 30,000

Cost of Production (Estimated)

Cost Component Machine 1 (₹) Machine 2 (₹) Machine 3 (₹)

Direct Materials 40,000 50,000 48,000
Direct Labour 50,000 30,000 36,000
Factory Overheads 60,000 50,000 58,000
Administration Costs 20,000 10,000 15,000
Selling & Distribution Costs 10,000 10,000 10,000
Total Cost of Production 1,80,000 1,50,000 1,67,000
You are required to find out the most profitable investment based on ‘Pay Back Method’.

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17. NPV Decision for Two Machines

A company is evaluating two machines, A and B. The cash flow details are as follows:

Details Machine A (₹) Machine B (₹)

Initial Investment 1,00,000 1,20,000 (half payable immediately, half in 1 year)
Year 1 Cash Receipts 20,000 0
Year 2 Cash Receipts 60,000 60,000
Year 3 Cash Receipts 40,000 60,000
Year 4 Cash Receipts 30,000 80,000
Year 5 Cash Receipts 20,000 0

At a 7% opportunity cost, which machine should be selected based on NPV?

18. Comparison of Two Mutually Exclusive Projects

XYZ Ltd. is considering two mutually exclusive projects. The cash flows are as follows:

Year Project A (₹) Project B (₹)

0 –1,00,000 –1,00,000
1 32,000 0
2 32,000 0
3 32,000 0
4 32,000 0
5 32,000 2,00,000

Required rate of return: 11%.

Tasks:
(a) Calculate the NPV of each project.
(b) Calculate the IRR of each project.
(c) Identify the cause of the ranking conflict.
(d) Decide which project should be accepted and explain why.

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19. Capital Budgeting Analysis

A company requires an initial investment of ₹40,000. The estimated net cash flows are as
follows:

Year Net Cash Flow (₹)

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 a 10% discount rate, calculate:

(i) Payback Period
(ii) Net Present Value (NPV)
(iii) Internal Rate of Return (IRR)

20. Weighted Average Cost of Capital (WACC)

PQR & Co.’s capital structure is as follows:

Source of Finance Amount (₹)

Equity Share Capital (5,000 shares of ₹100 each) 5,00,000
9% Preference Shares 2,00,000
10% Debentures 3,00,000

Additional details:

• Equity shares are trading at ₹102 each.

• Expected dividend: ₹9 per share.
• Dividend growth rate: 5%.
• Corporate tax rate: 30%.

Tasks:
(i) Calculate the Weighted Average Cost of Capital (WACC).
(ii) If the company raises an additional ₹5,00,000 term loan at 12%, calculate the revised WACC
assuming the market price of equity drops to ₹96 per share due to increased business risk.

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21. Leverage and EPS Calculation

The balance sheet of Alpha Numeric Company is as follows:

Liabilities Amount (₹) Assets Amount (₹)

Equity Capital 90,000 Fixed Assets 2,25,000
Retained Earnings 30,000 Current Assets 75,000
10% Debt 1,20,000
Current Liabilities 60,000
Total 3,00,000 Total 3,00,000

Other details:

• Total Asset Turnover Ratio: 3

• Fixed Operating Cost: ₹1,50,000
• Variable Operating Cost Ratio: 50%
• Income Tax Rate: 50%

Tasks:
(i) Calculate the operating, financial, and combined leverage.
(ii) Find the EBIT if EPS is: (a) ₹1, (b) ₹2, (c) ₹0.

22. Leverage Analysis for Four Firms

The following data is available for four firms (P, Q, R, and S):

Sales Selling Variable Fixed Interest Tax Rate Equity

Firm
(Units) Price/Unit (₹) Cost/Unit (₹) Costs (₹) (₹) (%) Shares
P 20,000 15 10 15,000 30,000 30 5,000
Q 25,000 20 15 40,000 25,000 30 9,000
R 30,000 25 20 50,000 35,000 30 10,000
S 40,000 30 25 60,000 40,000 30 12,000

Tasks:
Calculate the following for each firm:
(i) EBIT
(ii) EPS
(iii) Operating Leverage
(iv) Financial Leverage

23. Walter’s Model of Dividend Decision

The following information is available in respect of a firm:

Capitalisation rate (ke) = 0.10

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 Earnings per share (E) = Rs 10

Assumed rate of return on investments (r): (i) 15%, (ii) 8%, and (iii) 10%.

Show the effect of dividend policy on the market price of shares, using Walter’s model.

24. Gordon’s Model of Dividend Decision

A company has total investment of Rs. 5,00,000 assets and 50,000 outstanding equity shares of
Rs. 10 each. It earns a rate of 15% on its investments, and has a policy of retaining 50% of the
earnings.

If the appropriate discount rate for the firm is 10%, determine the price of its share using
Gordon Model.

What shall happen to the price, if the company has a payout of 80% or 20% ?

25. MM Theory of Dividend

A company belongs to a risk-class for which the appropriate capitalization rate is 10%. It currently
has outstanding 25,000 shares selling at Rs. 100 each. The firm is contemplating the declaration
of dividend of Rs. 5 per share at the end of the current financial year. The company expects to
have a net income of Rs. 2.5 lacs and a proposal for making new investments of Rs. 5 lacs.

Show that under the MM assumptions, the payment of dividend does not affect the value of the
firm.

26. Operating Cycle Method of Working Capital Estimation

Calculate Operating Cycle and Working Capital Required from the following figures:
Balance as at 1st Balance as at 31st
April March
Raw Materials 21,750 26,250
WIP 18,500 20,000
Finished Goods 21,000 27,000
Debtors 25,000 35,000
Creditors 17,350 20,000
Wages and Mfg Expenses 1,12,500
Admin. Expenses 10,000
Selling and Distribution Expenses 5,000
Purchase of RM (all credit) 1,24,500
Total Sales (all credit) 3,00,000

Assume 360 days in a year.

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27. Estimation of Working Capital

From the following details, prepare an estimate of the requirement of Working Capital:
Production 60,000 units
Selling price per unit Rs. 5
Raw material 60% of selling price
Direct wages 10% of selling price
Overheads 20% of selling price
Materials in hand 2 months requirement
Production Time 1 month
Finished goods in Stores 3 months
Credit for Material 2 months
Credit allowed to Customers 3 months
Average Cash Balance Rs. 20,000

Wages and overheads are paid at the beginning of the month following. In production all the
required materials are charged in the initial stage and wages and overheads accrue evenly.

28. Estimation of Working Capital

Cost sheet of a company provides following data:

Particulars Cost per unit (Rs.)
RM (Raw Materials) 50
DL (Direct Labour) 20
OH (Including depreciation of Rs.10) 40
Total cost 110
Average stock of RM is for 1 month. Average material in process is for half a month. Credit allowed
by suppliers is for a month and credit allowed to debtors is 1 month. Average lag in payment of
wages is 10 days; Average lag in payment of overhead is 30 days; and 25% of sales are on cash
basis. The cash balance is expected to be Rs. 1,00,000. FG lie in warehouse for 1 month. You are
required to prepare a statement showing WC required to finance a level of activity of 50,000 units
of output after adding 10% to your computed figure to allow for contingencies.

29. Receivables Management

Sagar Company currently makes all sales on credit and offers no cash discount. It is considering a
2% cash discount for payment within 10 days. The firms current Average Collection Period is 60
days, sales are 2,00,000 units, Selling Price is Rs. 30 per unit, Variable Cost per unit. is Rs. 20 and
the Average Cost per unit is Rs. 25 at the current sales volume. It is expected that the change in
credit terms will result in increase in sales to 2,25,000 units and the Average Collection Period
will fall to 45 days. However, due to increased sales, increase working capital required will be Rs.
1,00,000 (it does not take into account the effect on debtors). Assuming that 50% of the total sales
will be on cash discount and 20% is the return on investment, should the proposed discount be
offered?

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30. Receivables Management

Golden Syntex has annual sales of Rs. 24,00,000. The SP p.u. is Rs. 10 and the VC is 70% of the
SP. The RRR on investment is 20%, Average Cost Rs.9 p.u.; annual collection expenditure, Rs.
50,000 and percentage of default, 3%; credit terms, 2 months. Golden Syntex is considering the
change in credit policy by following Programme A or Programme B.

Programme
A B
ACP (months) 1.5 1
Annual Collection Expenditure (Rs.) 75,000 1,50,000
Percentage of default (%) 2 1

Determine which collection programme should Golden Syntex follow