● The star fertilizers ltd. Is considering a proposal for investment of Rs.

500000 on product
development which is expected to generate net cash inflows for 6 years as under:

Year Net cash flows PV Factor @ 15%

1 Nil 0.87
2 100000 0.76
3 160000 0.66
4 240000 0.57
5 300000 0.50
6 600000 0.43
Calculate Net Present Value.

● Maruti ltd has decided to increase its productive capacity to meet an anticipated increase in
demand for its products. The extent of increase in capacity has still to be determined and management
meeting has been called for to decide which of the following two mutually exclusive proposals I and II
should be undertaken. You are required to:

1. Evaluate the profitability (ignoring taxation and investment allowance of each of the
proposal).
2. Advise management in deciding between proposal I and II on the assumption of cost of capital
at 8%.

Proposal I Proposal II
Building 50000 100000
Plant 200000 300000
Installation 10000 15000
Working capital 50000 65000
Net income
Annual pre depreciation profits 70000 95000
Other relevant income expenditure including sales ---------- 15000
promotion
Plant scrap value 10000 15000
Building disposable value 30000 60000
Note:
1. The investment life is 10years.
2. An exceptional amount of expenditure on sales promotion of Rs. 15000 will be spent in year
02 on proposal II. This has not been taken into account in calculating pre depreciation profits.
3. It is not the intention to dispose the building in ten years time. However it is company policy
to take a notional figure into account for project evaluation purposes.

● Ajay enterprises want to introduce a new product well estimated sale life of five years. The
manufacturing equipment will cost Rs 500000 with scrap value of Rs. 30000 at the end of five years.
The working capital requirement is Rs. 40000 which will be released after five years.
The annual cash inflow and PV factor @ 10% are:

Year PV Factor Cash inflow

 1 0.909 250000

2 0.826 300000

3 0.751 375000

4 0.683 360000

5 0.621 225000

The depreciation to be charged under straight line method Rs. 100000. Tax applicable @ 40%. Evaluate
the proposal under various alternatives.

● A company is considering an investment proposal to install a new milling machine at a cost of

Rs. 50000. It has a life expectancy of 05 years. The tax rate is 35%. Assume the firm is using straight
line method of depreciation and same is allowed for tax purpose. The estimated cash flows before
depreciation and tax from the investment proposal are as under:

Year 1 2 3 4 5

CFBT 10000 10692 12769 13462 20385

Calculate: Payback period, ARR and Net present value at 10% discount rate.

● Modern bakers ltd is considering the purchase of a new baking machine out of two
alternatives available ABC and XYZ each costing Rs 200000. Cash flows are expected as follows:

Year 1 2 3 4 5

ABC 20000 60000 80000 120000 80000

XYZ 60000 80000 100000 60000 40000

Modern bakers have a target on return on capital at 10%. On the basis of NPV compare the profitability
of machines. Also compute the payback period and give your conclusion.

● A plant manufacturing co. has taken up a proposal of manufacturing high quality glasses. The
cost of equipment is 80000. It would last for 05years. The glasses can be sold for Rs. 05each regardless
the level of production. Manufacturer will incur the cost of Rs. 25000(fixed for each year). The variable
cost is Rs. 2per glass. The sale estimate is Rs. 75000 glasses. The tax rate is 55%. Assume 10% cost of
capital & PV factor is @ 10% is 3.791. Calculate NPV and advise company whether to buy the
equipment or not.
● A company is considering 2 mutually exclusive proposals X and Y. Proposal X will require an
initial cost of Rs. 100000 with no salvage value and will also require an increase in working capital of
Rs. 60000 over its life. The project will generate additional sales of Rs. 130000 and will require cash
expenses of Rs. 40000 in each of its five years. It will provide depreciation on SLM basis. The EBT &
depreciation during the five years life are:
 Year 1 2 3 4 5

Earnings 70000 76000 80000 90000 92000

The applicable tax rate is 50% and cost of capital is 10%. Examine the acceptability of the project under
NPV.