capital budgeting 24 feb 2013

8/11/2019 Capital Budgeting 24 FEB 2013

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NOTES BY: - ROHIT D. AKOLKAR (MOB. NO. +91-9763261738)

CONTACT FOR COACHING (MBA 1ST

YEAR, SQM, FINACIAL MANAGEMENT, MANAGEMENT

ACCOUNTING)

VENUE:RAM MANDIR HALL, SURVEY NO. 135, MOHAN NAGAR, CHINCHWAD STATION

Que.No.( 1)

Bcompany is evaluating a proposal to acquire an automated welding machine for its small parts

assembly department. The equipment costs Rs.6,80,000 plus the company would have to pay a 5 percent

sales tax on the purchase and spend Rs. 20,000 for freight and installation. The equipment has a useful

life of 10 years and is expected to produce cost savings of Rs. 1,57,500 per year. There is no salvage

value. Company policy is not to fund any capital project whose internal rate of return is below the

compays16% cost of capital.

Required:

a)

Compute the payback on the project.

b)

Compute the net present value of the project.

c)

Find the internal rate of return to the nearest percent.

Que .No.(2) (May 2006)

The following statements gives quantitative consideration relevant for rank of project A and B.

CRITERIA PROJECT A PROJECT B

Investment Rs.400 Rs.300

Internal rate of discount factor 18% 20%

PV @ 6%discount factor Rs.542.70 Rs.421.20

NPV @ 12% discount factor Rs.60.50 Rs.60.50

Project are required an investment of Rs.400 and expected to have cash inflow of Rs. 110,

Rs.120, Rs.130, Rs.140, Rs.150 over its five economic life. Project B involved all investment of Rs.300

and expected have cash inflows of Rs. 100 each over its five year economic life.

Which of the two projects will you select if cost of capital is,

a)

10% b) 12% c)15%

Give reason in support of your decision.


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Que .No.(3) (Dec 2007)Capital budgeting

A firm whose cost of capital is 10% considering two mutually exclusive projects.

Project X and Project Y the Details are as follows:

Year Project X Project Y

0 (15,00,000) (15,00,000)

1 1,00,000 6,50,000

2 2,50,000 6,00,000

3 3,50,000 6,00,000

4 5,50,000 5,75,000

5 7,50,000 5,25,000

Calculate:

1) NPV @ 15%

2) Pay back period.

3) Profitability Index.

Give your opinion as to which project is to be selected.


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Que .N0. (4) (May 2008)capital budgeting

A firm is considering a two mutually exclusive projects.

Project P and Project Q the details are as follows.

Year Project P Project Q

Cash flows (Rs.) Cash flows (Rs.)

0 (15,00,000) (18,00,000)

1 1,00,000 6,00,000

2 2,50,000 6,00,000

3 3,50,000 6,00,000

4 5,50,000 5,75,000

5 7,50,000 5,25,000

Calculate:

1)

NPV @ 14%

2) Pay back period.

3) Profitability Index.

Give your opinion as to which project is to be selected.


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Que .No.(5) (Dec 2009)

A firm whose cost of capital is 10% is considering two mutually exclusive projects X & Y as per details:

Particulars Year Project X Project Y

Cost 0 70,000 70,000

Cash inflows 1 10,000 50,000

2 20,000 40,000

3 30,000 20,000

4 45,000 10,000

5 60,000 10,000

Compute the net present value at 10% profitability index & discounted pay-back period for the two

projects. (P.V. factors @ 10%=0.909, 0.826, 0.751, 0.683 & 0.621 for the year 1 to 5 resp.)


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Que .No.(6) (May 2010) capital budgeting

M/s Rohini Ltd. wants to enter into the field of production & sale of Household appliances. Following

details are available

a) Capital out lay Rs.26/- lacs

b) Salvage value at the end of 4thyear Rs. 2/- lacs.

c)

Tax rate 40%

d)

Projected sale as per market survey for total sale of 1.20 lacs units in 4 year life1styear 20%,

30% each in next 2 years, & balance in terminal year.

e) Cost & Revenue details (per unit)

Year selling price P.V. Fixed Cost Discounting

(Rs.) Ratio (Rs.) factors

1 500 30% 75 0.90

2 600 20% 80 0.81

3 650 20% 80 0.73

4 750 12% 60 0.66

f)

Initial investment is arranged from NBFC at 11% p.a

Suggest the management based on NPV and discounted pay back whether investment is justifiable or not.

Que.No.( 7) (Dec 2010)

A project costing Rs. 5,60,000 is expected to produce annual net profits of Rs.80,000 over a period of 15

years. Estimate the IRR. Also find the payback period and obtain the IRR from it. How do you compare

this IRR with the one directly estimate? The present value of annuity 1-15 years @ 11% rate of discount7.19 and 6.811 (at 12% rate of discount).


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Que.No.( 8).. ( May 2009)

A project cost Rs.1,00,000 and generates annual cash flows Rs.35,000 , Rs.40,000 , Rs.30,000 , Rs.50,000

resp. over its life of 4 years.

Calculate internal rate of return.

You may consider the discounting rate @ 15%, @18% and @20%.

Que.No.(9) ( May 2010)

Adventure Ltd. is considering two mutually exclusive machines X and Y. The company uses a certainly

equivalent approach to evaluate the proposals. The estimated cash flow and certainty equivalents for both

machines are as follows.

Machine X Machine Y

Year cash flow Cer. Eq. Year cash flow Cer.Eq.

0 (30000) 1.00 0 (40000) 1.00

1 15000 0.95 1 25000 0.90

2 15000 0.85 2 20000 0.80

3 10000 0.70 3 15000 0.70

4 10000 0.65 4 10000 0.60

Which machine should be accepted, if riskfree discount rate is 5%.

Que.N0.(10) (Dec 2010)

Using NPV and discounted payback advice the XYZ ltd. which project is worth accepted.

Initial investment Rs. 26 lakhs

Scrap at the end Rs. 2

Year 1 2 3 4 5

Project-A 5.75 4.75 8.00 9.00 7.20

Project-B 6.00 6.00 6.90 7.20 5.00

Discount 0.91 0.83 0.75 0.68 0.63

S@10%


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Note : Above figures are profit after tax.

Que.No.(11) ( Dec 2011)

XYZ Ltd. whose cost of capital is 10%, is considering two mutually exclusive projects X and Y, the

details of which are;

Particulars Project X (Rs.) Project Y (Rs.)

Initial investment 70,000 70,000

Cash inflow Year 1 10,000 50,000

Year 2 20,000 40,000

Year 3 30,000 20,000

Year 4 45,000 10,000

Year 5 60,000 10,000

By using NPV & IRR, state which project which project shall be accepted.

Que.N0 (12). (May 2012)

A company is considering two mutually exclusive projects X and Y. Project X costs Rs.36000.

The profitability distribution of two projects NPV are given below;

Project X Project Y

NPV Rs. Probability NPV Rs. Probability

3,000 0.1 3,000 0.2

6,000 0.4 6,000 0.3

12,000 0.4 12,000 0.3

15,000 0.1 15,000 0.2

Calculate the expected value, the standard deviation and the coefficient of variation for each project.

Which of these mutually exclusive projects do you prefer and why?


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capital budgeting 24 feb 2013

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