Capital Budgeting

ARR
A project costs Rs. 15000 and has a scrap value of Rs. 3,000. its stream of income before depreciation and taxes during first five years is Rs. 3,000; Rs. 3600; Rs. 4200; Rs. 4800 and Rs. 6000. Assuming the rate at 50% and depreciation on straight line basis , calculate the average rate of return for the project.

Replacement Project
A machine purchased six years ago for Rs. 1,50,000 has been depreciated to a book value of Rs. 90,000. It originally had a projected life of 15 years & zero salvage value. A machine will cost Rs. 2,50,000 & result in reduced operating cost of Rs. 30,000 per year for the next 9 years. The older machine could be sold for Rs. 50,000. The new machine will be depreciated on a straight line basis over 9 years life with Rs. 25000 salvage value. The companys tax rate is 55%. If required rate of return is 10%; state the whether old machine should be replaced.

NPV
No project is acceptable unless the yield is 10%. Cash inflows of a certain project along with cash outflows are given as below
Year Outflow (Rs.) Inflows (Rs.) 0 1,50,000 _ 1 2 3 _ 4 _ 5 _

30,000 _ 20,000 30,000

60,000 80,000 30,000

The selvage value at the end of the 5th year is 40,000. calculate net present value. The P.V. for Re. 1 for five years at 10% discount factor is .909, .826,.751,.683 and .621 respectively

NPV
A project costing Rs. 100 Lakh has a life of 10 years at the end of which its scrap value is likely to be Rs. 10 lakhs. The firms cut off rate is 12%. The project is expected to yield a annual profit after tax & depreciation is Rs. 10 lakhs depreciation charged on straight line basis. At 12% p.a., the present value of Re. 1 received annually for 10 years is 5.650, and at the end is .322. Ascertain the NPV of the project and state whether we should go for the project.

PI
The initial cash outlay of a project is Rs. 50,000 and it generates cash inflows of Rs. 20,000, Rs. 25,000, Rs. 15,000, Rs. 10,000 in first four years. Using present value index method , appraise the profitability of proposed investment assuming 10% rate of discount.

IRR
A project with an initial investment of Rs. 10,000 generates cash inflows of Rs. 5,000; Rs. 4,000; Rs. 3,000 with life 3 years. What will be the IRR?

NPV & IRR

An equipment A has a cost of Rs. 75,000 and net cash flows of Rs. 20,000 per year for six years. A substitute equipment B would cost Rs. 50,000 and generates net cash flow of Rs. 14,000 per year for six years. The required rate of return of both the equipments is 11%. Calculate the IRR & NPV for each equipment. Which equipment should be accepted and why?