MB0029: Financial

Management
[Assignment – SET1 & SET2]

Name : P. Srinath
SMDUE ID : 520923307
Center : Mehbub College Campus, Secunderabad
Subject Code : MB0029
Subject : Financial Management
ASSIGNMENT – MBA – SEM II – Subject Code: MB0029 – SET 1

1. Why wealth maximization is superior to profit maximization in today’s context? Justify your
answer.

Profit Maximization has been considered as the legitimate objective of a firm because
profit maximization is based on the cardinal rule of efficiency. Under perfect competition
aallocation of resources shall be based on the goal of profit maximization.

A firm’s performance is evaluated in terms of profitability. Investor’s perception of

company’s performance can be traced to the goal of profit maximization. But, the goal of profit
mmaximization has been criticized on many accounts.

Wealth Maximization has, been accepted by the finance managers, because it

overcomes the limitations of profit maximisation. Wealth maximization means maximizing the
net wealth of the Company’s share holders. Wealth maximization is possible only when the
company pursues policies that would increase the market value of shares of the company.

Superiority of Wealth Maximization over Profit Maximization

 It is based on cash flow, not based on accounting profit.

 Through the process of discounting it takes care of the quality of cash flows.
Distant cash flows are uncertain. Converting distant uncertain cash flows into
comparable values at base period facilitates better comparison of projects. There are
various ways of dealing with risk associated with cash flows. These risks are adequately
considered when present values of cash flows are taken to arrive at the net present
value of any project.

 In today’s competitive business scenario corporates play a key role. In company

form of organization, shareholders own the company but the management of the
company rests with the board of directors. Directors are elected by shareholders
and hence agents of the shareholders. Company management procures funds for
expansion and diversification from Capital Markets. In the liberalized set up, the
society expects corporate to tap the capital markets effectively for their capital
requirements. Therefore to keep the investors happy through the performance of
value of shares in the market, management of the company must meet the wealth
maximisation criterion.

 When a firm follows wealth maximization goal, it achieves maximization of market

value of share. When a firm practices wealth maximisation goal, it is possible only when
it produces quality goods at low cost. On this account society gains because of the
societal welfare.

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  Maximization of wealth demands on the part of corporate to develop new products or
render new services in the most effective and efficient manner. This helps the
consumers as it will bring to the market the products and services that consumers need.

 Another notable features of the firms committed to the maximization of wealth is

that to achieve this goal they are forced to render efficient service to their customers
with courtesy. This enhances consumer welfare and hence the benefit to the society.

 From the point of evaluation of performance of listed firms, the most remarkable
measure is that of performance of the company in the share market. Every
corporate action finds its reflection on the market value of shares of the company.
Therefore, shareholders wealth maximization could be considered a superior goal
compared to profit maximization.

 Since listing ensures liquidity to the shares held by the investors, shareholders can
reap the benefits arising from the performance of company only when they sell
their shares. Therefore, it is clear that maximization of market value of shares will
lead to maximization of the net wealth of shareholders

2. Your grandfather is 75 years old. He has total savings of Rs.80,000. He expects that he live for
another 10 years and will like to spend his savings by then. He places his savings into a bank
account earning 10 per cent annually. He will draw equal amount each year- the first
withdrawal occurring one year from now in such a way that his account balance becomes zero
at the end of 10 years. How much will be his annual withdrawal?

Present Value (PV) =80000/-

Amount (A) =?

Interest Rat e (I) =10%

No. of Year (N) =10

PVAn = A {1+i)n-1} /{ i(1+i)n}

80000=A{1+.10)10 }/{.10(1+.10)10}

80000=A{ 1.593742/0.259374}

A =80000/ 6.144567

A = 13019.63 Yrly

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 3. What factors affect financial plan?

Factors Affecting Financial Plan

 Nature of the industry Here, we must consider whether it is a capital intensive or

labour intensive industry. This will have a major impact on the total assets that the
firm owns.

 Size of the Company The size of the company greatly influences the availability of
funds from different sources. A small company normally finds it difficult to raise
funds from long X Ds X 1000 , term sources at competitive terms. On the other hand,
large companies like Reliance enjoy the privilege of obtaining funds both short term and
long term at attractive rates.

 Status of the company in the industry A well established company enjoying a

good market share, for its products normally commands investors’ confidence. Such a
company can tap the capital market for raising funds in competitive terms for
implementing new projects to exploit the new opportunities emerging from changing
business environment.

 Sources of finance available Sources of finance could be grouped into debt and
equity. Debt is cheap but risky whereas equity is costly. A firm should aim at
optimum capital structure that would achieve the least cost capital structure. A
large firm with a diversified product mix may manage higher quantum of debt
because the firm may manage higher financial risk with a lower business risk.
Selection of sources of finance is closely linked to the firm’s capacity to manage the risk
exposure.

 The Capital structure of a company is influenced by the desire of the existing

management (promoters) of the company to retain control over the affairs of the
company. The promoters who do not like to lose their grip over the affairs of the
company normally obtain extra funds for growth by issuing preference shares and
debentures to outsiders.

 Matching the sources with utilization The prudent policy of any good financial plan
is to match the term of the source with the term of investment. To finance
fluctuating working capital needs the firm resorts to short terms finance. All fixed
assets financed investments are to be financial by long term sources. It is a cardinal
principle of financial planning.

 Flexibility: The financial plan of a company should possess flexibility so as to effect

changes in the composition of capital structure when ever need arises. If the
capital structure of a company is flexible, it will not face any difficulty in changing the
sources of funds. This factor has become a significant one today because of the
globalization of capital market.

 Government Policy: SEBI guidelines, finance ministry circulars, various clauses of

Standard Listing Agreement and regulatory mechanism imposed by FEMA and

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 Department of corporate affairs (Govt of India) influence the financial plans of
corporates today. Management of public issues of shares demands the compliances
with many statues in India. They are to be complied with a time constraint.

 Economic factors: Many economic factors will significantly affect your financial plan, i.e.
supply and demand, various institutions, business, labor force, and government. Supply
and demand will form price. Price level will change your consumption pattern, so do
your investment and others. Labor force will determine your income. When
unemployment rate is high, it will be more difficult to find job. When job is rare, people
are willing to work for less money, and vice versa. Financial institutions and others
business are the user of labors. Their activities will shape the economic and eventually
affect your financial. Government will influence economic by monetary and fiscal
policy. The steps government take will affect you financially. When government raise
the interest rate, economic will cool down. When economic slowdown, government will
lower the interest rate. When interest rate is low, invest your money in bank will not
give you decent return. It means take longer time for your investment to reach your
financial goals. Therefore, in order to get higher return people invest in stock market or
business.

 Global influence: Since the advance of technology causes this globe to become
“smaller”, especially in the era of globalization. Now people do business across the
country boundary, therefore what happen in other country will have an effect on people
in another country “Rain at Wall Street, drizzle around the world”. The economic of
particular country depend on foreign investment. When many foreign investors come,
they will create new businesses. New business will absorb many labors, therefore
lowering unemployment rate and increasing wages. However higher wage does not
always guarantee the prosperity of workers in certain country. When you earn high
income but everything is so expensive there. It is identical with make little, since your
much money actually cannot buy many things. For instance, average worker in
Indonesia make approximately 1 million Rupiah monthly. Can you imagine make 1
million dollars monthly here? Unfortunately, that 1 million Rupiah is only around $ 108,
since the currency exchange of Rupiah is around Rp. 9,200 to $ 1 USD. Currency
exchange surely will impact your purchasing power and your financial situation.
Currency of a country is usually base on its economic condition i.e. government’s
budget, balance trade, inflation level and growth. Foreign exchange is the biggest
financial market in the world, we definitely will learn about it in later articles.

 Economic condition: Consumer price, consumer spending, interest rate, money supply,
unemployment, house started, gross domestic product, trade balance and market
indication are among economic condition that affect your decision in handling your
money matters.

 Consumer pricemeasure the value of your money through inflation rate. It influences
your personal financial planning because consumer price alter your money purchasing
power. When consumer price increase beyond your income, you will unable to buy as
much thing as you used to. Consumer spending measures the demand of good and
service by individuals and household. When consumer spending is up, more jobs will be

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 available and wage will be higher. Increase in consumer spending will drive consumer
price to increase and inflation level as well.

 Interest rate measure cost of money or credit and return of investment. Increase in
interest rate will make credit more expensive and discourage borrowing. With high
interest, people are more likely to invest their money to earn interest than take higher
risk to do business. Excessive investment from investor with inability of bank lending to
third party will create over supply of fund. In which will drive down the interest rate
eventually.

 Money supply measures money available for spending in an economic. More money
make people have more to save. Therefore, increases in money supply tend to decrease
interest rate as more people save. Moreover, higher saving and lower spending will
reduce job opportunity. Unemployment measures number of people, who willing and
able to work, out of work. High unemployment rate reduce consumer spending and job
opportunity. It is wiser to setup higher emergency fund and reduce debt to cope with
high unemployment rate, since it is harder to get new job when unemployment rate are
high. House started measures the number of new house built. New house build is sign
of economic expansion. When new house build increase, it creates more jobs, higher
wage and higher consumer spending. Gross domestic product measures the total value
produce within a country’s border. GDP indicate country prosperity. High GDP will
increase employment opportunity and opportunity for personal financial wealth.

 Trade balance measures different between export and import. Deficit happen, when
import exceed export. Large deficit over long run will hurt employment and GDP.
Surplus happen, when export exceed import. Large surplus will raise the value of the
currency, reducing the future opportunity of export, since commodity become more
expensive to foreigner. Market indication (stock market index) measures the relative
value of stocks. These indexes provide indication of the price movement of stocks. Since
you will invest your money in the market to help you reach your financial goals,
understand how the market work will benefit you.

Q.4:- Suppose you buy a one-year government bond that has a maturity value of
Rs.1000. The market interest rate is 8 per cent. (a) How much will you pay for the bond? (b) If
you purchase the bond for Rs.904.98, what interest rate will you earn from this investment?

Case Study:

Deepak Hand tools Private Limited

DHPL is a small sized firm manufacturing hand tools. It manufacturing plan is situated in
Haryana. The company’s sales in the year ending on 31st March 2007 were Rs.1000 million
(Rs.100 crore) on an asset base of Rs.650 million. The net profit of the company was Rs.76
million. The management of the company wants to improve profitability further. The required
rate of return of the company is 14 percent.

The company is currently considering an investment proposal. One is to expand its

manufacturing capacity. The estimated cost of the new equipment is Rs.250 million. It is
expected to have an economic life of 10 years. The accountant forecasts that net cash inflows

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 would be Rs.45 million per annum for the first three years, Rs.68 million per annum from year
four to year eight and for the remaining two years Rs.30million per annum. The plant can be
sold for Rs.55 million at the end of its economic life.

The company would need to raise debt to the extent of Rs.200 million. The company has
the following options of borrowing Rs.200 million:

a. The company can borrow funds from a nationalized bank at the interest rate of 14
percent for 10 years. It will be required to pay equal annual installment of interest and
repayment of principal.

b. A financial institution has offered to lend money to DHPL at 13.5 per annum but it
needs to pay equated quarterly installment of interest and repayment of principal.

1. Should the company expand its capacity? Show the computation of NPV

2. What is the annual installment of bank loan?

3. Calculate the quarterly installments of the Financial Institution loan

4. Should the company borrow from the bank or from the financial institution?

Answer 1. Investment in New Equipment : 250000000

Life of machine : 10 Years

Salvage : 55000000

Years Cash inflows PV factors at 14 % PV of cash inflows

1 45,000,000 0.877 39,473,684

2 45,000,000 0.769 34,626,039

3 45,000,000 0.675 30,373,718

4 68,000,000 0.592 40,261,459

5 68,000,000 0.519 35,317,069

6 68,000,000 0.456 30,979,885

7 68,000,000 0.400 27,175,338

8 68,000,000 0.351 23,838,016

9 30,000,000 0.308 9,225,238

10 30,000,000 0.270 8,092,314

Salva 55,000,000 0.270 14,835,910

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 ge

    PV of cash inflows 294,198,670

    Initial cash out flow 250,000,000

    NPV 44,198,670

Here NPV is positive it is advisable to the company to expand its capacity.

Answer 2.

Loan Amount : 200000000

Interest rate : 14 %

No of Year(N) : 10 Years

Installment X PVIFA (14%,10) =20,00,00,000

Installment = 20,00,00,000 / 5.216

= 3,83,43,558

Answer 3.

Loan Amount : 20,00,00,000

Interest rate : 13.5 %

No of Year(N) Quarterly : 10 Years

Installment X PVIFA (13.5% / 4, 40) =20,00,00,000

Installment = 20,00,00,000 / 5.176

= 3,86,39,876

Answer 4. The company should borrow from bank because payback installment is lesser than
the financial institution.

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 ASSIGNMENT – MBA – SEM II – Subject Code: MB0029 – SET 2

1. A. What is the cost of retained earnings?

B. A company issues new debentures of Rs.2 million, at par; the net proceeds being Rs.1.8
million. It has a 13.5 per cent rate of interest and 7 years maturity. The company’s tax rate is
52 per cent. What is the cost of debenture issue? What will be the cost in 4 years if the market
value of debentures at that time is Rs.2.2 million?

A. Cost of Retained Earnings

A company’s earnings can be reinvested in full to fuel the ever-increasing demand of

company’s fund requirements or they may be paid off to equity holders in full or they may be
partly held back and invested and partly paid off. These decisions are taken keeping in mind the
company’s growth stages. High growth companies may reinvest the entire earnings to grow
more, companies with no growth opportunities return the funds earned to their owners and
companies with constant growth invest a little and return the rest.

Shareholders of companies with high growth prospects utilizing funds for reinvestment
activities have to be compensated for parting with their earnings. Therefore the cost of retained
earnings is the same as the cost of shareholder’s expected return from the firm’s ordinary
shares. That is, Kr=Ke

There are three methods one can use to derive the cost of retained earnings:

(a) Capital-asset-pricing-model (CAPM) approach

To calculate the cost of capital using the CAPM approach, you must first estimate the
risk-free rate (rf), which is typically the U.S. Treasury bond rate or the 30-day Treasury-bill rate
as well as the expected rate of return on the market (r m).

The next step is to estimate the company’s beta (b i), which is an estimate of the stock’s risk.
Inputting these assumptions into the CAPM equation, you can then calculate the cost of retained
earnings.

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 (b) Bond-yield-plus-premium approach

This is a simple, ad hoc approach to estimating the cost of retained earnings. Simply take
the interest rate of the firm’s long-term debt and add a risk premium (typically three to five
percentage points):

ks = long-term bond yield + risk premium

(c) Discounted cash flow approach

Also known as the “dividend yield plus growth approach”. Using the dividend-growth model,
you can rearrange the terms as follows to determine k s.

ks= D1 + g;
P0

where:
D1 = next year’s dividend
g = firm’s constant growth rate
P0 = price

and

(F+P)/2
Where kd is post tax cost of debenture capital,
I is the annual interest payment per unit of debenture,
T is the corporate tax rate,
F is the redemption price per debenture,
P is the net amount realized per debenture,
N is maturity period
13.5(0.52) + (1.8)/ 13.5*.48+2/7
6.51
---------------------------------------
(2+1.8)/2 1.9=3.43
(b) 13.5(1-.52) + (2-2.2)/4 13.5*.48-.2/4
---------------------------------------
(2+2.2)/2 2.1
=6.43/.21=3.06

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 2. Volga is a large manufacturing company in the private sector. In 2007 the company had a
gross sale of Rs.980.2 crore. The other financial data for the company are given below:

Items Rs. In crore

Net worth 152.31

Borrowing 165.47

EBIT 43.17

Interest 34.39

Fixed cost (excluding 118.23

interest)

You are required to calculate:

a. Debt equity ratio

b. Operating leverage

c. Financial leverage

d. Combined leverage. Interpret your results and comment on the Volga’s debt policy

a. Debt equity ratio=Borrowing/Interest

=165.47/34.39
=4.81

b. Operating leverage DOL=Q(S-V)/Q(S-V)-F where F= fixed cost

Now EBIT=Q(S-V)-F
So Q(S-V) =EBIT+F
= 43.17+118.23
=161.47
So DOL=161.47/43.17=3.74

c. Financial leverage DFL=EBIT/{EBIT-I-{Dp/(1-T)}}

Where I is interest, Dp is dividend on preference shares; T is tax rate

= 4.92

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d. Combined leverage= DOL*DFL
= 3.74*4.92
=18.4

As combined leverage is high so it is risky.

3. Explain Miller and Modigliani Approach to capital structure theory.

The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for
modern thinking on capital structure. The basic theorem states that, in the absence of taxes,
bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is
unaffected by how that firm is financed. It does not matter if the firm's capital is raised by
issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore, the
Modigliani-Miller theorem is also often called the capital structure irrelevance

Principle Modigliani was awarded the 1985 Nobel Prize in Economics for this and other
contributions. Miller was awarded the 1990 Nobel Prize in Economics, along with Harry
Markowitz and William Sharpe, for their "work in the theory of financial economics," with Miller
specifically cited for "fundamental contributions to the theory of corporate finance."

Historical background Miller and Modigliani derived the theorem and wrote their path
breaking article when they were both professors at the Graduate School of Industrial
Administration (GSIA) of Carnegie Mellon University. In contrast to most other business schools,
GSIA put an emphasis on an academic approach to business questions. The story goes that
Miller and Modigliani were set to teach corporate finance for business students despite the fact
that they had no prior experience in corpora the finance. When they read the material that
existed they found it inconsistent so they sat down together to try to figure it out. The result of
this was the article in the American Economic Review and what has later been known as the
MM theorem.

Propositions The theorem was originally proved under the assumption of no taxes. It
is made up of two propositions which can also b e extended to a situation with taxes. Consider
two firms which are identical except for their financial structures. The first (Firm U) is unlevered:
that is, it is financed by equity only. The other (Firm L) is levered: it is financed partly by equity,
and partly by debt. The Modigliani-Miller theorem states that the value of the two firms is the
same.

Without taxes

Proposition I: where VU is the value of an unlevered firm = price of buying a firm

composed only of equity, and VL is the value of a levered firm = price of buying a firm that is
composed of some mix of debt and equity.

To see why this should be true, suppose an investor is considering buying one of the two
firms U or L. Instead of purchasing the shares of the levered firm L, he could purchase the shares
of firm U and borrow the same amount of money B that firm L does. The eventual returns to
either of these i investments would be the same. Therefore the price of L must be the same as
the price of U minus the money borrowed B, which is the value of L's debt. This discussion also

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 clarifies the role of some of the theorem's assumptions. We have implicitly assumed that the
investor's cost of borrowing money is the same as that of the firm, which need not be true in the
presence of asymmetric information or in the absence of efficient markets.

4. How to estimate cash flows? What are the components of incremental cash flows?

Cash flow estimation is a must for assessing the investment decisions of any kind. To
evaluate these investment decisions there are some principles of cash flow estimation. In any
kind of project, planning the outputs properly is an important task. At the same time, the profits
from the project should also be very clear to arrange finances in a proper way. These forecasting
are some of the most difficult steps involved in the capital budgeting. These are very important
in the major projects because any kind of fault in the calculations would result in huge problems.
The project cash flows consider almost every kind of inflows of cash. The capital budgeting is
done through the coordination of a wide range of professionals who are going to be involved in
the project. The engineering departments are responsible for the forecasting of the capital
outlays. On the other hand, there are the people from the production team who are responsible
for calculating the operational cost. The marketing team is also involved in the process and they
are responsible for forecasting the revenue.

Next comes the financial manager who is responsible to collect all the data from the
related departments. On the other hand, the finance manager has the responsibility of using the
set of norms for better estimation. One of these norms uses the principles of cash flow
estimation for the process.

There are a number of principles of cash flow estimation. These are the consistency
principle, separation principle, post-tax principle and incremental principle. The separation
principle holds that the project cash flows can be divided in two types named as financing side
and investment side. On the other hand, there is the consistency principle. According to this
principle, some kind consistency is necessary to be maintained between the flow of cash in a
project and the rates of discount that are applicable on the cash flows. At the same time, there
is the post-tax principle that holds that the forecast of cash flows for any project should be done
through the after-tax method.

Incremental Principle The incremental principle is used to measure the profit

potential of a project. According to this theory, a project is sound if it increases total profit more
than total cost. To have a proper estimation of profit potential by application of the incremental
principle, several guidelines should be maintained:

Incidental Effects: Any kind of project taken by a company remains related to the other
activities of the firm. Because of this, the particular project influences all the other activities
carried out, either negatively or positively. It can increase the profits for the firm or it may cause
losses. These incidental effects must be considered.

Sunk Costs: These costs should not be considered. Sunk costs represent an expenditure
done by the firm in the past. These expenditures are not related with any particular project.
These costs denote all those expenditures that are done for the preliminary work related to the
project, unrecoverable in any case.

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 Overhead Cost: All the costs that are not related directly with a service but have indirect
influences are considered as overhead charges. There are the legal and administrative expenses,
rentals and many more. Whenever a company takes a new project, these costs are assigned.

Working Capital: Proper estimation is essential and should be considered at the time
when the budget for the project's profit potential is prepared.

5. What are the steps involved in capital rationing?

Capital budgeting decisions involve huge outlay of funds. Funds available for projects
may be limited. Therefore, a firm has to prioritize the projects on the basis of availability
of funds and economic compulsion of the firm. It is not possible for a company to take up all
the projects at a time. There is the need to rank them on the basis of strategic compulsion and
funds availability. Since companies will have to choose one from among many competing
investment proposal the need to develop criteria for Capital rationing cannot be ignored. The
companies may have many profitable and viable proposals but cannot execute because of
shortage of funds. Another constraint is that the firms may not be able to generate
additional funds for the execution of all the projects. When a firm imposes constraints on
the total size of firm’s capital budget, it is requires Capital Rationing.

Capital rationing refers to a situation in which the firm is under a constraint of funds,
limiting its capacity to take up and execute all the profitable projects. Such a situation may be
due to external factors or due to the need to impose internal constraints, keeping in view of the
need to exercise better financial control.

Capital Rationing may be due to:-

1. External Capital Rationing: External Capital Rationing is due to the imperfections

of capital markets Imperfection may be caused by:

(a) Deficiencies in market information

(b) Rigidities that hamper the force flow of Capital between firms.

When capital markets are not favorable to the company the firm cannot tap the
capital market for executing new projects even though the projects have positive net present
values. The following reasons attribute to the external capital rationing:

 Inability of the firm to procure required funds from Capital market because the
firm does not command the required investor’s confidence.
 National and international economic factors may make the market highly
volatile and instable.
 Inability of the firm to satisfy the regularity norms for issue of
instruments for tapping the market for funds.
 High Cost of issue of Securities I,e High floatation cost. Smaller firms smaller
firms may have to incur high costs of issue of securities. This discourages small
firms from tapping the capital markets for funds.

2. Internal Capital Rationing Impositions of restrictions by a firm on the funds allocated

for fresh investment is called internal capital rationing. This decision may be the result of a

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 conservative policy pursued by a firm. Restriction may be imposed on divisional heads on the
total amount that they can commit on new projects. Another internal restriction for Capital
budgeting decision may be imposed by a firm based on the need to generate a minimum rate
of return. Under this criterion only projects capable of generating the management’s
expectation on the rate of return will be cleared. Generally internal capital rationing is used by a
firm as a means of financial control.

6. Equipment A has a cost of Rs.75,000 and net cash flow of Rs.20000 per year for six years. A
substitute equipment B would cost Rs.50,000 and generate net cash flow of Rs.14,000 per year
for six years. The required rate of return of both equipments is 11 per cent. Calculate the IRR
and NPV for the equipments. Which equipment should be accepted and why?

For equipment A
Average cash flow Rs. 20000/- per year
And the initial investment Rs. 75000/-
So the ratio of initial cash flow & initial investment=75000/20000
=3.75

From the PVIFA table for 6 years annuity factor vary near 3.75 is 16%
So PV of cash flow at 16% is 73600/-

For next trial rate 15% so PV of cash flow is 75706

So IRR of the for the equipment A is 16+ (75706-75000)/ (75706-73600)
=16.34%

For equipment B average cash flow Rs. 14000/- per year

And the initial investment Rs. 50000/-
So the ratio of initial cash flow & initial investment=50000/14000
=3.57

From the PVIFA table for 6 years annuity factor vary near 3.75 is 18%
So PV of cash flow at 18% is 49000/-

For next trial rate 17% so PV of cash flow is 50257/-

So IRR of the for the equipment A is 18+ (50257-50000)/ (50257-49000)
=18.2%

Now NPV of equipment A = PV of net cash flow – initial cost

= (20000/- of PVIF 11% for 6 y)-75000/-
=9610/-

& NPV for the equipment B= PV of net cash flow-initial cost

= (14000/- of PVIF 11% for 6 y)-50000/-
=9227/-
So B is preferable because of highest rate of Profitability index

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