JU - CMS BBA SEM IV
BUSINESS FINANCE
BUSINESS FINANCE
Module 4: Investment Decisions (Capital budgeting)
PRACTICAL PROBLEMS
Payback period and post payback profitability
Q1) A project costs ₹. 1,00,000 and yields an annual cash inflow of ₹. 20,000 for 8
years. Calculate the payback period
Q2) Determine the payback period for a project which requires a cash outlay of ₹.
10,000 and generates cash inflows of ₹. 2,000, ₹. 4,000, ₹. 3,000 and ₹. 2,000 in the 1st,
2nd, 3rd and 4th year resp.
Q3) A project costs ₹. 5,00,000 and yields annually a profit of ₹. 80,000 after
depreciation @ 12% p.a. but before tax @ 30%. Calculate payback period.
Q4) A project requires an initial investment of ₹. 60,000 and yields an annual cash
inflow of ₹. 20,000 for 8 years. Calculate payback period.
Q5) A project costs ₹. 5,00,000 & yields annually a profit of ₹. 1,50,000 after
depreciation @ 12% but before tax of 25%. Calculate payback period.
Q6) There are two projects X and Y. Each project requires an investment of ₹. 2,00,000.
You are required to rank these projects according to payback period method from the
following information:
Net profit before depreciation and after tax
Years
Project X
Project Y
1
10,000
20,000
2
20,000
40,000
3
40,000
60,000
4
50,000
80,000
5
80,000
--Q7) Calculate the Pay-Back period for the following projects requiring a cash outlay of ₹
1,00,000. Suggest which project is acceptable.
[FOR PRIVATE CIRCULATION ONLY]
Page | 1
JU - CMS BBA SEM IV
BUSINESS FINANCE
Year Project A
Project B
1
30,000
30,000
2
30,000
40,000
3
30,000
20,000
4
30,000
10,000
5
30,000
5,000
Q8) X Ltd.is considering the purchase of new machine which will carry out some
operations performed by labour. A and B are alternative models. From the following
information, you are required to prepare a profitability statement and work out the
payback period in respect of each machine. Depreciation is charged on straight line
basis
Particulars
Estimated life of machine
Cost of the machine
Cost of indirect materials
Estimated savings in scrap
Additional cost of
maintenance
Estimated savings in direct
wages:
Employees not required
Wages per employee
Machine A(₹.)
10 years
3,50,000
16000
25000
24000
Machine B(₹.)
10 years
6,00,000
18,000
30,000
32,000
225
500
275
550
Tax rate applicable is 30%. Suggest the company regarding which model it should
prefer. Give your reasons.
Q9) Krupa Co.Ltd is considering the purchase of machinery. Two machinery X and Y
costing ₹. 2,00,000 each are available. Cash inflows are expected to be as under.
[FOR PRIVATE CIRCULATION ONLY]
Page | 2
JU - CMS BBA SEM IV
Year
1
2
3
4
5
BUSINESS FINANCE
Machine X (₹.)
60,000
80,000
1,00,000
60,000
40,000
Machine Y (₹.)
20,000
60,000
80,000
1,20,000
80,000
Calculate: a) Pay Back Period; b) Post Pay Back Period method.
Q10) For each of the following projects calculate i) payback period ii) post payback
profitability
Project A
Initial outlay ₹. 50,000
Annual cash inflow (After tax but before depreciation) ₹. 10,000
Estimated life 8 years
Project B
Initial outlay ₹. 50,000
Annual cash inflows (After tax but before depreciation)
First three years ₹. 15,000
Next five years ₹. 5,000
Estimated life 8 years
Average rate of return/ Accounting rate of return
Q11) A project requires an investment of ₹ 5,00,000 & has a scrap value of ₹ 20,000
after 5 years. It is expected to yield profits after depreciation & taxes during the 5 years
amounting to ₹ 40,000, ₹ 60,000, ₹ 70,000, ₹ 50,000 & ₹ 20,000. Calculate the Average
rate of return on the investment.
Q12) A company is proposing to take up a project which will need an investment of
₹.40,000 and working capital ₹.10,000. The net income before depreciation and tax is
estimated as follows:
Year
Cash inflow(₹.)
1
10,000
2
12,000
3
14,000
4
16,000
5
20,000
[FOR PRIVATE CIRCULATION ONLY]
Page | 3
JU - CMS BBA SEM IV
BUSINESS FINANCE
Deprecation is to be charged according to the straight-line method. Tax rate is 30%.
Calculate the Accounting Rate of Return.
Q13) A company intends to invest ₹. 10,00,000 in a project having life of 4 years. The
cash inflows from the project are expected to be ₹. 3,00,000, ₹. 4,20,000, ₹. 4,00,000
and ₹. 3,30,000 before charging depreciation and tax. Calculate Average rate of return
and accounting rate of return assuming tax rate @30% and straight line method of
depreciation.
Discounted cashflow methods:
Q14) A company is considering a project having an initial outlay of ₹. 10,00,000.
Expected life of the machine is 5 years and no scrap value id expected. Tax applicable
30%. Depreciation is charged under straight line method. Profits before tax and
depreciation are given below:
Year
PBDT (₹.)
Disc Fact @ 10%
1
2,00,000
0.909
2
2,15,000
0.826
3
2,55,000
0.751
4
2,70,000
0.683
5
4,10,000
0.621
Calculate the payback period and the discounted payback period.
Q15) Calculate the Discounted Pay Back Period from the following information:
Cost of Project
₹ 6,00,000
Life of Project
5 Years
Annual Cash Inflow
₹ 2,00,000
Year
1
2
3
4
5
DF@ 10%
0.909
0.826
0.751
0.683
0.621
Q16) Ami Ltd. is considering a purchase of a machine X. Calculate NPV from the
following information & advice about whether the machinery should be purchased or
not.
Particulars
Machine X
Cost of Machine
5,00,000
[FOR PRIVATE CIRCULATION ONLY]
Page | 4
JU - CMS BBA SEM IV
BUSINESS FINANCE
Life of Machine
5 years
Cash Flows
Year 1
20,000
Year 2
30,000
Year 3
40,000
Year 4
40,000
Year 5
45,000
The cost of capital is 10%. PV factor @ 10% are 0.909,0.826,0.751,0.683,0.621
Q17) A company is considering the proposal of taking up a new project which requires
an investment of ₹ 400 lakh on machinery & other assets. The project is expected to
yield the following earnings (before depreciation & taxes) over the next 5 years:
Year
1
2
3
4
5
Earnings (₹
in lakhs)
160
160
180
180
150
The cost of raising the additional capital is 12% & the assets are to be depreciated on
straight line basis. The scrap value at the end of 5 years may be taken as zero. Income
tax rate is 25%. Calculate the NPV & advice the management to take appropriate
decision.
Present value of Re. 1 at different rates of interest are as follows:
Year
12%
1
.89
2
.80
3
.71
4
.64
5
.57
Q18) Bell Ltd. wants to invest in a project. Two options are available: Project P &
Project Q. Following are the details.
[FOR PRIVATE CIRCULATION ONLY]
Page | 5
JU - CMS BBA SEM IV
BUSINESS FINANCE
Particulars
Project P
Project Q
Cost of Investment (₹)
80,000
90,000
Cash Flows: Year
(₹)
(₹)
1
30,000
40,000
2
40,000
50,000
3
50,000
60,000
4
60,000
80,000
5
90,000
90,000
Discounting Factor 15%.
Year
1
2
3
4
5
P.V. @ 15%
.870
.756
.658
.572
.497
Calculate NPV and Profitability Index for both the projects & recommend which project
should be selected.
Q19) A company has to select one of the two projects X or Y. Following are the cash
flows for the projects:
Year
Project X (₹)
Project Y (₹)
0
10,000
10,000
1
6,000
1,000
2
2,000
1,000
3
1,000
2,000
4
5,000
10,000
Calculate Internal rate of return with the help of discounting facto₹ of 10% and 12%
Year
Discount factor@10%
Discount factor @12%
1
0.909
0.893
2
0.826
0.797
3
0.751
0.712
4
0.683
0.636
Q20) Speed Ltd. is considering a machine which cost ₹ 5,00,000 with an estimated life
of 5 years. Tax rate is 30%. The company uses SLM of depreciation & the proposed
machine has cash inflows before depreciation & tax as follows:
[FOR PRIVATE CIRCULATION ONLY]
Page | 6
JU - CMS BBA SEM IV
BUSINESS FINANCE
Year
Cash Inflow
PV factor @ 22%
PV factor @ 24%
1
1,50,000
.820
.806
2
2,50,000
.672
.650
3
2,50,000
.551
.524
4
2,00,000
.451
.423
5
1,50,000
.370
.341
Calculate IRR.
Comprehensive illustrations
Q21) ABC Ltd has under consideration two mutually exclusive proposals for the
purchase of new equipment.
Machine X
Machine Y
Net cash outlay
₹ 1,00,000
₹ 75,000
Salvage value
-----
-----
Life (years)
5
5
PBDT
Years
1
2
3
4
5
(₹)
25,000
30,000
35,000
25,000
20,000
(₹)
18,000
20,000
22,000
20,000
16,000
Assume tax rate to be 30%. Suggest management the best alternative using
a) PBP; (b) ARR;
(c) NPV @ 8%;
Year
1
2
3
4
5
PV @ 8%
0.926
0.857
0.794
0.735
0.681
Q22) A company is considering an investment proposal to purchase a machine costing
₹ 2,50,000. The machine has a life expectancy of 5 years and no salvage value. The
company’s tax rate is 30%. The firm uses straight line method for providing
depreciation. The estimated cash flows before tax after depreciation (CFBT) from the
machine are as follows:
[FOR PRIVATE CIRCULATION ONLY]
Page | 7
JU - CMS BBA SEM IV
BUSINESS FINANCE
Year
CFBT (₹)
1
60,000
2
70,000
3
90,000
4
1,00,000
5
1,50,000
Calculate (a) Pay Back Period b) Net Present Value; (c) Profitability Index. The discount
rate is to be taken @ 10%. You may use the following table:
Year
1
2
3
4
5
DF@ 10%
0.909
0.826
0.751
0.683
0.621
Q23) From the following information calculate the (i) Pay back period; (ii) Net Present
Value and (iii) Profitability Index of the two projects and suggest which of the two
projects should be accepted assuming a discount rate of 10%
Project X
Project Y
Initial investment
₹ 2,00,000
₹ 3,00,000
Estimated Life
5 years
5 years
Scrap Value
₹ 10,000
₹ 20,000
The profits before depreciation and after taxes (cash flows) are as follows:
Year
Project X
Project Y
1
50,000
2,00,000
2
1,00,000
1,00,000
3
1,00,000
50,000
4
30,000
30,000
5
20,000
20,000
Q24) A company is considering an investment proposal to purchase a machine costing
₹. 2,50,000. The estimated life of the machine is 5 years with no salvage value. Tax rate
[FOR PRIVATE CIRCULATION ONLY]
Page | 8
JU - CMS BBA SEM IV
BUSINESS FINANCE
is 25%. The firm uses straight line method for providing depreciation. The estimated
cash flows before tax and after depreciation from the machine are as follows:
Year
CFBT (₹)
1
60,000
2
70,000
3
90,000
4
1,00,000
5
1,50,000
Calculate (a) Payback period, (b) Average rate of return (c) Discounted Payback period
(d) Net present value, (e) Profitability Index. The discount rate to be taken is 10%. You
may use the following table:
Year
1
2
3
4
5
DF@ 10%
0.909
0.826
0.751
0.683
0.621
Q25) A company has an investment opportunity costing ₹ 28,000 with the following
expected net cash flow after taxes and before depreciation.
Year
Net cash flows
Discount Factor
@10%
1
6,000
2
10,000
3
9,000
0.751
0.658
4
10,000
0.683
0.572
5
4,000
0.909
Discount Factor
@15%
0.870
0.826
0.756
0.621
0.497
Determine the following:
a) Net present value at 12% discount factor
b) Internal Rate of Return with the help of 10% and 15% discount factor.
Q26) Sundaram limited has an investment option which requires a capital outlay of ₹
1,80,000. It will generate the following cash inflows over a period of 4 years:
Year
1
2
3
4
Cash Inflows (₹)
54,000
62,000
64,000
68,000
Discount factor @
10%
0.909
0.826
0.751
0.683
[FOR PRIVATE CIRCULATION ONLY]
Page | 9
JU - CMS BBA SEM IV
BUSINESS FINANCE
Year
1
2
3
4
Discount factor @
14%
0.877
0.769
0.675
0.592
Calculate NPV @ 10% & IRR with the help of 10% & 14% discount factor.
[FOR PRIVATE CIRCULATION ONLY]
Page | 10