UNIT – II Home work Problems

Submission Date: Monday April 15, 2019 at 11:30am

1. P.9.6

A plastic manufacturer has under consideration the proposal of production of high quality plastic
glasses. The necessary equipment to manufacture glasses would cost Rs.1 lakh & would last 5
years. The tax rate of depreciation is 20% on written down value. There is no other asset in this
black. The expected salvage value is Rs.10,000. The glasses can be sold at Rs.4 each. Regardless
of the level of production , the manufacturer will incure cash cost of Rs.25,000 each year if the
project is undertaken. The overhead costs allocated to this new line would be Rs.5,000. The
variable costs are estimated at rs.2 per glass. The manufacturer estimates it will sell about 75,000
glasses per year. The tax rate is 35% should the proposal equipment be purchased ? assume 20%
cost of capital & additional working requirement, Rs50,000. Also assume that the firm would
have sufficient short-term capital gains in yaer-5.

Ans: NPV = Rs.1,35,453

Write whether the proposed equipment be purchased?

2. June/July 2015 Section – D Case Study – 20 Marks

Teja international is determining the cash flow for a project involving replacement of an old
machine by a new machine. The old machine has a book value of Rs.8,00,000 noe & it can be
sold to realise a post-tax salvage value of Rs.9,00,000. It has a remaining life of 5 years after
which its net salvage value is expected to be Rs.2,00,000.
The new machine costs rs.30,00,00, it is expected to fetch a net salvage value of Rs.15,00,000
after 5 years. The new machine is expected to bring a savings od rs.6,50,000 annually in
manufacturing costs(other than depreciation).The working capital required by the new machine
is Rs.5,00,000.the tax rate applicable to the firm is 30% rate of depreciation applicable to both
machines is 25% under WDV method. Cost of capital is 12%. Would you recommend to replace
the existing machine?

Ans: NPV = Rs. 15,60,203

Write whether to replace the existing machine?

3. June/July 2014 Q. No. 8 – 20 Marks

Naveen enterprises is considering a capital project about which the following information is
available.
i) The investment outlay on the project will be rs.100 million. This consists of Rs.80 million on
plant & machinery & 20 million on net working capital. The entire outlay will be incurred at the
beginning of the project.
ii) the project will be financed with Rs.45 million of equity capital, Rs.50 million of preference
capital,Rs.5 million of debt capital. Preference capital will carry a dividend rate of 15%.
iii) the life of the project is expected to be 5 years. At the end of 5 years, fixed assets will fetch a
net salvage value of Rs.30 million where as net working capital will be liquefied at its book
value.
iv) the project is expected to increase revenues of the frim by rs.120 million per year. The
increase in costs an account of the project is expected to be Rs.20 million per year( this includes
all items of cost other than depreciation , interest & tax) ,The effective tax rate would be 30%.
v)Plant & Machinery will be depreciated at the rate of 25% per year as per the WDV method.
Hence the depreciation charges will be
Year 1 2 3 4 5
(Rs in millions) 20 15 11.25 8.44 6.33
From above information estimate the project cash flows (CFAT).

Ans:
Year 1 2 3 4 5
CFAT (Rs in millions) 28 26.5 25.375 24.532 73.899