Q.1.The project involves a total initial expenditure of Rs.

2,00,000 and it is estimated to

generate future cash inflow of Rs.30000, Rs.25000, Rs.22000, Rs.36000, Rs.40000,
Rs.40000, Rs.28000, Rs.24000 and Rs.24000 in its last year. Calculate the Pay- back period
Q.2.The following are the details of two projects. Which project should be selected on the
basis of payback period?
Particulars Project X Project Y
Initial Investment 100000 100000
Year (cash inflows)
1 20000 25000
2 20000 25000
3 30000 50000
4 30000 20000
5 50000 10000

Q.3.Samtron Ltd. has decided to purchase a machine to augment the company’s installed
capacity to meet the growing demand for its products. There are three machines under
consideration of the management. The relevant details including estimated yearly expenditure
and sales are given below. All Sales are cash. Corporate Income Tax is 40%. Interest on capital
may be assumed to be 10%.

Particulars Machines
1 2 3
Initial Investment 300000 300000 300000
Estimated annual sales 500000 400000 450000
Cost of production
(estimated):
Direct materials 40000 40000 48000
Direct Labour 50000 30000 36000
Factory OH 60000 50000 58000
Administration costs 20000 10000 15000
Selling and distribution 10000 10000 10000
costs

The economic life of Machine 1 is 2 years, while it is 3 years for the other two. The scrap
values are Rs.40,000 Rs.25,000 and Rs.30,000 respectively.
You are required to find out most profitable investment based on pay-back method.
Q.4.A project with a capital expenditure of Rs.500000 is expected to produce the following
profits (after deducting depreciation)

Year Amount (Rs.)

1 40000
2 80000
3 90000
4 30000

Calculate the ARR for the project. What will be the ARR if the scrap value is Rs.60000.
Q.5.A machine is available for purchase at a cost of Rs.80,000.

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It is expected to have a life of 5 years and scrap value of Rs.10000 at the end of the five- year
period.
The additional profits generated over its life are as follows:

Year Amount
1 20000
2 40000
3 30000
4 15000
5 5000

These estimations of profits are before depreciation and Tax. Assume tax rate as 20%
Calculate the ARR , Return on capital employed for the project and pay back period
Q.6.A firm can invest Rs.10000 in a project with a life of three years.
The projected cash inflow are as follows:

Year Amount (Rs.)

1 4000
2 5000
3 4000
The cost of capital is 10%. Should the investment be made?
Q.7.Geeta Limited is implementing a project with an initial capital outlay of Rs.7600. Its cash
inflows are as follows:

Year Rs
1 6000
2 2000
3 1000
4 5000

The expected rate of return on capital invested is 12% pa. Calculate NPV and the discounted
payback period of the project.
Q.8.Precision Instruments is considering two mutually exclusive Projects X and Project Y.
Following details are made available to you:
Project X Project Y
Project Cost 700 700
Cash Inflows
Year
1 100 500
2 200 400
3 300 200
4 450 100
5 600 100
Total 1650 1300

Assume no residual values at the end of the fifth year. The firm’s cost of capital is 10%.
Required in respect of each of the two projects:

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i)Net present value using 10% discounting
ii)Profitability Index
Q.9. Tirumala Ltd is evaluating a project with the following details:
Costs of the project Rs.500000, Installation costs Rs.50000, Expected life 5 years, The
Salvage value of the Project is Rs.10000, The tax rate is 20%, The project’s cost of capital
is 10%, The present risk-free rate in economy is 6.42% , The Company expects the Sales
and Operating Expenses for the 5 years as below. Operating expenses include
depreciation.

Year 1 2 3 4 5
Sales (Rs.) 150000 180000 200000 220000 230000
Operating 100000 120000 140000 160000 180000
Expenses (Rs.)

Evaluate the project basis:

a. Payback period
b. Accounting Rate of Return
c. NPV
d. Profitability Index
Q.10.The cost of the project is Rs.50,000 and it generates cash inflows of Rs.20,000 ,
Rs.15,000 ,Rs.25,000 and Rs.10,000 over four years.
Using Profitability Index method appraise the profitability of the project assuming 10% rate of
discount.
Q.11.A company is considering whether to purchase a new machine. Machines A and B are
available for Rs.80,000 each. Earnings after taxation are as follows:

Year Machine A Machine B

1 24000 8000
2 32000 24000
3 40000 32000
4 24000 48000
5 16000 32000
Required:
Evaluate the two alternatives using the following
a) Payback period
b) rate of return on investment
c)net present value method
Use the discount rate of 10%
Q.12.At the beginning of 2015, a business enterprise is trying to decide between two
potential investments.

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Required: Assuming a required rate of return of 10% p.a evaluate the investment proposals
under
a) Return on investment
b) Payback period
c)Discounted Payback
d)Profitability Index
The forecast details are as under:

Proposal A Proposal B
Cost of Investment 20000 28000
Life 4 years 5 years
Scrap value nil Nil
Net Income (after dep and
tax)
End of 2015 500 Nil
End of 2016 2000 3400
End of 2107 3500 3400
End of 2018 2500 3400
End of 2019 nil 3400

It is estimated that each of the alternative projects will require an additional working capital of
Rs.2000 which will be received back in full after the end of each project.
Depreciation is provided using the straight-line method.
The present value of Re.1 to be received at the end of each year (at 10% p.a) is shown
below:

Year 1 2 3 4 5

P.V 0.91 0.83 0.75 0.68 0.62