1) A mining company is considering to open a new coal mine.

The company has collected

the following information about the cash flows associated with this project:

 Equipment needed for new mine: Rs.900,000

 Working capital required for new mine: Rs.210,000
 Expected annual cash inflow from the sale of coal: Rs.750,000
 Expected annual cash expenses associated with the new mine: Rs.500,000
 Road repairs required after 5 years: Rs.110,000

The coal in the mine would be exhausted after 15 years. The equipment would be sold for its
salvage value of Rs.250,000 at the end of 15-year period. The company uses straight line method
of depreciation and does not take into account the salvage value for computing depreciation for
tax purpose. The tax rate of the company is 30%.

Required: 

1. Compute net present value (NPV) of the new coal mine assuming a 15% after-tax cost of
capital.
2. On the basis of your computations in requirement 1, conclude whether the coal mine
should be opened or not.

The Universal Trading Company has obtained a license to introduce a new product for 6 years.
The product would be purchased from manufacturing company for Rs.10 per unit and sold to
customers for Rs.20 per unit. The estimated annual cash expenses to sell the new product would
be Rs.18,000. Other information associated with the new product is given below:

 Cost of equipment needed: Rs.30,000

 Working capital needed: Rs.40,000
 Repairs and maintenance of equipment after 5 years: Rs.2,500
 Residual value of equipment after 6 years: Rs.5,000

The working capital would be released at the end of 6-year period. The expected annual sales are
5,000 units of product. The discount rate of the company is 16%.

Required:

1. Compute net present value (NPV) of the new product. (Ignore income tax).
2. Would you recommend the addition of new product?

SK Manufacturing Company uses discounted payback period to evaluate investments in capital

assets. The company expects the following annual cash flows from an investment of
Rs.3,500,000:
No salvage/residual value is expected. The company’s cost of capital is 12%.

Required:

1. Compute discounted payback period of the investment.

2. Is the investment desirable if the required payback period is 4 years or less.

The Martin Company is considering the four different investment opportunities. The selected
information about each proposal is given below:

The present value of cash inflows given above have been computed using a 10% discount rate.
The company is unable to accept all available projects because the funds available for investment
are limited.

Required:

1. Compute the profitability index (present value index) for all the projects.
2. Rank the four investment projects according to preference using:
(a). net present value (NPV).
 (b). profitability index (PI).
(c). internal rate of return (IRR).
3. Which one is the best approach for Martin Company to rank five competing projects?

Sunlight company needs a machine for its manufacturing process. The cost of the new machine
is Rs.80,700. The expected useful life of the machine is 8 years. At the end of 8-year period, the
machine would have no salvage value. After installation, the machine would increase cash
inflows by Rs.30,000 per year. Sunlight is interested to know the net preset value of the machine
to accept or reject this investment. The minimum required rate of return of the company is 16%
on all capital investments.

Required:

1. Compute net present value of the machine.

2. Is it acceptable to purchase the machine?

Delta company manufactures silicon boards that are used in preparing small, medium and large
size electronic circuits. The company is considering to reduce its cost by automating some of its
manufacturing tasks. This automation requires the installation of a new equipment. The relevant
information for net present value (NPV) analysis of investment in new equipment is given
below:

 Cost of equipment: Rs.72,000

 Expected annual cost savings to be provided by new equipment: Rs.40,000
 Useful life of the equipment: 6 years
 Salvage value at the end of 6 years: Rs.0
 Cost of capital: 23.2%

Expected inflation rate in cash flows associated with the new equipment: 10%

Required:

1. What would be the net present value (NPV) of new equipment if:
(a). the inflation is considered?
(b). the inflation is not considered?
2. Should the new equipment be purchased?

The National Transport Company has a number of large trucks. One of the trucks is in poor
condition and needs an immediate renovation at a cost of Rs.100,000. An overhaul of engine will
also be needed 6-years from now at a cost of Rs.10,000. If theses costs are incurred, the truck
will be useful for 12 years. After 12-year period, it will be sold at a salvage value (scrap value)
of Rs.30,000. At this time, the salvage value of the truck is Rs.35,000. The total annual revenues
of the truck will be Rs.200,000 and the total cost to operate the truck will be Rs.150,000 per
year.
Alternatively, National Transport Company can purchase a new truck for Rs.180,000. The new
truck will require some repairs at the end of 6-year period at a cost of Rs.5,000. Its salvage value
will be Rs.30,000 after its useful life of 12 years. The total annual revenues of the new truck will
be Rs.200,000 and its operating cost will be Rs.110,000 per year.

The company’s required rate of return is 15% before taxes.

Required: Should National Transport Company renovate the old truck or purchase a new truck.
Use the following approaches to net present value (NPV) analysis for your answer:

1. Total cost approach.

2. Incremental cost approach.

(Ignore income tax in your computations.)