—_— je ILLUSTRATION 43 Tulsian Ltd. provides you the following information : 4. Total Cost of Plant (Life 4 years) Rs. 300 lakhs. 2. Plant is to be financed by 12% Debt and Equity so as to maintain Debt-Equity Ratio of 2:1. Debt is to be repaid in four equal annual installments beginning from the end of the first year. Annual Earning Before Interest, Depreciation and Tax : Rs. 200 lakhs. Tax Rate : 50%. Cost of Capital : 9%. 3. Method of Depreciation : Straight Line. Required : Calculate the (a) Project NPV and (b) Equity NPV. [Present Value of Annuity of Re. 1 for 4 years at 9%, 12% and 15% are 3.24, 3.037 and 2.855 respectively) Pree SOLUTION Case (a) Step 1 : Calculation of PV of CFAT IRs. in lakhs Particulars Year 1-4 ‘A. Eamings before Interest, Depreciation & Tax 200.00 B. Less : Depreciation (75.00) C. Earnings before tax 125,00 © scanned with Oken ScannerLass: Toe Earrings at Add: Depreciation 6 H t Coan iows Alor Tex (OFAT)P& Dy ot Annuity Factor @ 99% a pvotCFAT ‘outflow __ ‘step 2: Calculation of P pv of Cash “a was | oA z 00 204 NPV m| Aiterfax cost of | Product roporion | AN Sour — | ___ 1 2009-004= 05 X #005 x3 =0.15 or15% Hence, Cot of Eauty () = 15% step 2: Calculation of PV of CFAT available for Equity ‘Shareholders Particaars Yoart | Year 2 | Pet ore ieas Dopecaion #Tax | 20000 | 20008, |B. Less nterest on Long frm Debt (esoo) | (1800) | Loss :Onpreiaton (75.00)_| (75.00) | c. earings belo tax(A- 8} 10100] 10700 DB. Lene Tax @ 50% (e050) | 550 | 585 |e earnings ater tax 5050 | 5350 | F200 Depecton 700 | 75.00 |G. Caen intows ater Tax (OFAN) pa 725.50 | 128.50 | | Less Repayment of Pinal 50.00” | 50.00 Cash avatar Equty shareholders 75.50 OL prot temuty actor @ 15% ©. Lk pvotCrAT ‘seas | 5s step 3 Equly NPV = PV of CFAT avaliable for Equlty shareholders Cost of Plant finance? Eaemlity, = Rs. 226,902 lakh ~ Ris. 100 lakhs = Rs, 126.992 lakhs | © scanned with Oken ScannerILLUSTRATION 17 From the following information, calculate the present value of cash outiow : 1, Purchase Price of New Machinery Rs, 10,00,000, 2, Installation Expenses Re. 1,50,000 3. Workers’ Training Expenses incurred to put the asset to use Ris 50,000 4 ‘Subsidy Receivable trom Govt, 50% of Purchase price now and 10% of Purchase price at the end of 1st year Working Capital required Fs. 2,00,000 now and Rs. 1,00,000 at the beginning of 3rd year Additional Equipment costing Rs. 3,00,000 will be needed atthe beginning of 3d year 7. Retrenchment Compensation payable to the workers due to installation of this machine Rs, 1,00,000 (fully deductible for tax purposes) 8. Depreciation will be 100 % of the cost of machinery in year of purchase and the same will be allowed for tax purposes. 8. Cost of Capital 10% 10. Tax Rate 30% SOLUTION ‘Statement showing the Present Value of Cash Outflow Particulars Year| PV factor | Amount 1. Purchase Pics of New Machinery ° 1 | 10,00,000 |Z istataton Expenses ° 1 1,50,000 | 3. Worcs Training Expenses ° 1 50,000 4. Less: Subsidy from Govt | 0° 1 | (6,00,000) Ls: Subsidy from Govt. 1 0.902 | (1,00,000) ‘Ad: Working Capital, ° 1 200,000 ‘Ad: Working Capital, 2 gs | 100,000 6, Adtional Eauipment 2 2s | 300,000 7. Retenchment Compensation ° 1 1,00,000 8. Less: Tax Saving On retrenchment 1 0.902 | (20,000) ‘compensation | ‘Total PV of Cash Outiow Notes: (Installation Experises and Workers! training expenses are to be capitalized since these expenses are Incurred before the asset is put to us () Tax Saving on account of depreciation on Machinery (i.e., 30% of Fs. 6,00,000) and ‘Additional Equipment (/.8. 30% of Fs. 3,00,000) shall be considered while calculating CFAT for the year end 1 and 3 respectively. © scanned with Oken ScannerILLUSTRATION 19 ea Tulsian Ltd. provides you the following information : 1. Purchase Price of each Machine fs, 6,00,000 2. Woxking Capital fs. 300,000 3. Usotul Life of each machine 5 years 4. Estimated Salvage Value at the end of useful if Rs. 1,00,000 5. Actual SaWvage Value realised atthe end of useful fe Rs 1,20,000 6. Method of Depreciation ‘Straight line 7. TaxRate 30% 8. Costof Capital 10% 8. Eaming before depreciation & tax [mecnne Year 1 Year? Years Year4 | Years Machine X '3,00,000 '3,00,000 /3,00,000 '3,00,000 | 3.00,009 Machine Y 5 sy00,000 | 200.000 | 0000 | 2.000% { ntacrine 2 00000 | 400000 | 0000 | 200,000 : Required: Which of the above machines should be purchased on the basis of Net Present Vat Note : Present Value Factors @ 10% are as follows [Year Year1 | Year? | Years | Veard | Vea (Present Valve Factor ‘0909 | 0826 | 07st) 08s | — om ‘SOLUTION Statement showing the Computation of Cash inflow after Tax of Machine X [ Particulars Yeart_ | Year? | Year3 | Years | Yous Earning botore depreciation &tex | 00000 | 300.000 | —8,00,000"| 800,000] 3.00.00 Less: Depreciation .¢.00,000) | 3,90,000) | (.00:000) | (,00,000) | (1.0000 Earning before Tax 200,000 | 200,00 | 200,000 | 200,000 | 2.0, Less: Tax @ 30% (60,000) | (60,000) | (60,000) | “{60.000) | “te Earning ator Tax 7.40.00 | 140,000 | 7,40,000 | ~7.40,000 | 7.40 ‘Ad: Depreciation 4100.00 | 100,000_| 100,000 | 1100000 | +00 Cash Flow after Taxes(CFAT) 240,000 | 2,40,000 | 2,40,000 | 240,000" | 2.0, ‘Ades ease of Working Capital 3.004 ‘Ad: Actual Salvage Value of Asset. ‘200M Less: Tax on Ordinary Profiton Sale (60M 10% of Ris, 20,000 (eR. 120,000 = Rs. 1,00,000)} ~< Total CFAT for the last year 6,540 ‘Statement showing the Computation of Cash inflow after Tax of Machine Y Particulars Year | Yoar2 | Yours | Years | Yous Earring bolore depreciation & tax =~ | i,00,000 | 200,000 | 3,00,000 | 72.0008 Less: Depreciation {1,00,000) | (100,000) |__(1,00,000) |_(1,00,000) | (1.00008 Earning betore Tax (7,00,000) = 4,00,000 | 2,00,000 | 11,0008 Less: Tax @ 30% '30,000 = {a0.000) | (60.000) | 308 Eaming atter Tax (70,000) | — 770,000 | ~3,40,000 | 7.7008 ‘Add: Depreciation +1,00,900 | 1,00,000 | 1,00,000 | 1,00,000 | 100% , © scanned with Oken Scannerri itr Taxes(CFAT) mp0 5 of Working Copal 00 | ‘e000 | 170000 ] 240000 | 870.00 | ss tar 20000 (eR. 20,000, (ee fo ceorceatiorthelastyear | Songltha conpr tes mater Yon obs oa aah wh so: Ate er ib x sng on hepa EBT. on pnt wich coc ome ‘statement showing Computation of Cash Inflow after Tax of Machine Z Particulars eee ang baoe depreciation & lax =! tes sean (00000), ning bore Tax (1.00000) Tass Tax @ 30% am ain ater Tax ‘70.000; ‘38 Depreion 4.00000 | “cath Flow ater Taxes(CFAT) an | ae lease of Working Capa! ‘ans ‘a2 ash Salvage Value of Asst $0000 {es Taxon Proton Sale “6.000) {sor ot Re, 20.00 (ie. Ri. 20.000 | ER foo oon L “aao00 Ten CFAT for tho lst year Note: Assuming that the company has taxablo income from ater sources aginst which such loss {an be sto, tere willbe fax saving on negative EBT. Statement showing Net Present Value / ‘pv [__Machine x ‘achine 7 Machine 2 Year | tater | Amount PY | Amount | PV | Amount | PY | Faiziorsy | 0 | + feancoo |.00an0 onan (200.000 (00.000) [Meamgexoes | 0 | + |.onae (eaoan soon (00.000 (300.000) Grarerieyear | 1 | 0.900 | 240.000 | 218,160 | 90,000 1300000 | 345.420 \craticandyear | 2 | 026 | 24,000 | 5:28:240 | 1.00000 10.00 | 256060 |ofattesrayear | 3 | 0751 | 240,000 | 1.0200 | 1.70000 240000 | 120200 | [Gtteamyear | 4 | 089 | 240000 | 1183820 | 2.40009 $Vro000 | 1.16.10 Ceaterstyear | 5 | 0621 | 654,000 | 406.198 |1204000 4sapo0 | 275,728 ory 2604 278584 Ascommendaion: Machine since Machine Y has the highes ‘sommendatn: Wat Y steusbe puchad sree Machine Ye he Nah st NPV of Fs. ILLUSTRATION 20 Tusian Lis. provides you te folowing information: 4. Purchase Price of New Machinery As 10,00,00 2 Instalation Expenses Fs. 1,50,000 3. Workers Training Expenses incurred 1o put the asset use Rs 60,000 4. Subsiy om Gov. 60% of Purchase price 5, Working Captl Fe, 3,00,000 6. Useful Lite of the machine 5 yoars 7. Book Salvage Value at end of usefullife 10 % of purchase price © scanned with Oken Scanner‘240 _Tulsian’s Financial Management ‘8 cash Savage Value at ond of usefull Rs, 1,20,000 8. Method of Depreciation Seating 12 Torre os | Cost ot Capital gules: Abie the conpany wher he Machinery should be purchased or not on the bai Reese Vente ovr ce oneuop (Case (a) Earrings boore deprecation and tx are Rs, 5,00,000 p. Case (0) it Earnings belore depreciation and tax are 1st Year ni, 2nd year Rs. 6,00,000, a year Rs. 50,000, th eer Rs, 5,00,000, Sth yearn. SOLUTION Case (a) Statement showing the Calculation of Cash nfiow after Tax (CFAT) f rts Yor | Youra | Years | Yourd | Yours Eagar event ax | S00 | n00m0 | Zone | 00000 | 500m Sassen ana) | eno | (roneon 1280) Erg oe Tr ‘max | fener | ton0%0 ‘noon iaeta se saben) | cater | casoon ea Eiger ren an | aanen0 | San0%0 260000 fe Oopecion [ceo | Yano | $Soe00 ‘ono Gesvrowaterarexcran | Sao0e-) Baton ] aso Sano ‘a ash Sango ee oe 000 ett cr tase Tern ro Sa (Peghe Bio ba he 12000- fom Tol FAT oth ast yee an ‘Statement showing Net Present Value f Pas Year [PU tr | — Aan | & Racise Pies thew sina 9 T woe een) : aaa of a | aes nes nee o | 0000) « Sissy tomo oe ee mm | & goes ° 1 16.00,000) |S Cotree : 7 : | cman 2 | Sm | Seow 2 Seaver soccer 2 | eet | See 1 Gratis $ | gs | sence a asco ‘Recommendation Tw machina shove Purchased since it has postive | {Case (0)_Statoment showing Caleulation, ostve NPV. of Cash iow aorta (oF A, ari bolas devocoton Bia} rears Your |~Yeor5] eee | oon | eee arg re Toe trancn|"enneo | so {oor tO 50% Sap | dees | aoe amiga Tox se. can sateen soem | ‘oom | 203% Gaon tow ater Tees (ora) |"30000-| Spo goy |e ‘Rowan Won Copa 4 Cah Subage Va ct sx 4 © scanned with Oken Scannermn ning Treorimaun een (tates Samer rote: Assuming thatthe company has taxable income fram other sources against which such loss ot ro pre wie tax sang on ragatne EBT, ae — ram igre a ee | Petes 7c eaereet pt] tee | ea An i eros ee ceed pes + Sete o | ot | gee | aaa ie e | dy | Sat | ABE tee i | oe | cee] ee {eee 2 | om | see | sem 1 ees 2 | oe | jee | mee bs ae nevi sn i PV sareanenel eee nd nt a eo ete Pe = han eet aetna e000 ema ree ene ete ones ns 6 Ute atte ab D ieneereses ae eee ees ee a a 1 Sean nt x oy ENON “th year Fs. 500,000, Sth year. Fs. 5,00,000, ‘machinery shoud be purchased or not on the basis of Required : Advise the company whether the tne Net Present Value. SOLUTION ‘Statement showing the caloulation of Cash Inflow after Tax (CFAT) Parker Year | Yura | —Yoara_| Yous Eaming before depreciation & tax = "5,00,000 | ,00,000 | 5,00,000 Lior boncion sano | “iesson | “reson | is. Eliya {123 | aca 4z200 | 498560 tscrtace some Sem | dst | ange | c9.565 Eaming efter Tax (84,000) | 262,000 | 2,96,240 | 3,06,992 ‘Ade: Dopreciation +4,20,000 96,000 76,800 61,440 Goranereecran, [aoe | Svaaan | a7a00 | sane 4s Raase ong Cap ‘ei Ca Savoge Vet att. Tax Saving on Loss on Salo © scanned with Oken Scanner| ‘442 _Tulsian’s Financial Management | 229 ne = |rmmagaypee 2 | Total CFAT tor year 72a") Race ese i ee re ace eerie ‘ca be set of, thor wil be tx saving on negative EBT. ‘Statement showing Net Prosent Value [ rieuinrs—__| Yer | PViector | Amount | ov 2 Parehso rico New Macher 0 1 “(10,00,000) | (70.00,000) 2 teauiaonespenee |g 1 «i000 | “W800, | 3. Workers Training Expenses oO 1 (80,000) | (50,000) | © Subst) nom aoe ° ‘ soncoo | eoome 5 Wong Copal | 0 1 800000) | 0000 & CraT or tetyeer ‘ seo sooo | Some 2. CFAT er naar 2 aes | a7naoo ¥ & Gear oranyoor 3 ort | 37300 8. Crarioranyecr 4 oss | Saaae 10. GFAr orsn yer 3 osx | abries Low —— i Recommendation 2 The machine shouldbe purchased since thas postive NPV. ‘Morking Nota: Caleuaton of Yer Deprcaton i Yeori | Year| ~Yoor | ~Veara~| ~Yeure epee Ng nhs [Siow Aan | astoor | —eses trans | ese Deprecton @ 205. C1g9ec0) | esanm | sso | treo) | tavion Closing Saaroe 0000 | ssao0 [307200 [208 760 | tava 1LLUsTRATION 22 ‘ulsian Lid. provides you the folowing information 1. Purchase Price of New Machinery Fs. 199,000 2. Instalaion Expenses Fs.180,000 & Notes Tring Exprss incur opt ato eR 50,000 > Recevabe om Gov. athe endl tt yeu 60% el use pce 5. Working Capital Rs. 3,00,000, a 6 Use o he machine Sears 1, Book Savage Vaated ofustte 10503 purchase pow 8 Gash Savage Value at ord of uaculte. hy ac 9. Method of Depecaton Sreghtino 10. Tax at sore 11, Coste Capita 1% 12. Earrings betoreaepreiaton and tx aro 1 Eranae rection and tax are tat 000, th year Rs. 6,00,000, st year ni Required: kaise tho comp the Not Present Value, SOLUTION 000, re yoat ny whether he machinery shou be purchased or not onthe basis Statement showing the Calculation of Cash tnt Pare ag ie eran iar ion toce 2% Eng rT © scanned with Oken ScannerCash Flo afte To ee 30,000 | 3,80,000 | 3,80,000 | 3,80,000 | 30,000 Gea. Release of Working Capital sme 16 Gash Salvage Value of Asset, 0.00 Tax Saving on Loss on Sale 2p of RS. 20,000 (j.8. RS. 1,00,000 ‘et Fe 80.000) | Jotal CFAT for the last year Tess Capital Budgeting 3.43 Note : Assuming that the company has taxable income from other sources against which such loss fan be set off, there will be tax saving on negative EBT, Statement showing Net Present Value Particulars Year PV factor ‘Amount Pv 7 Purchase Price New Machinery 0 1 (10,00,000) | (10,00,000) | 2, Installation Expenses 0 1 (1,50,000) (1,50,000) | 3. Workers’ Training Expenses oO 1 (50,000) (50,000) 4. Subsidy from Govt. 1 0.909 6,00,000 545,400 | 5. Working Capital 0 1 (3,00,000) (3,00,000) | 6 CFAT for 1st year 1 0.909 30,000 27,270 | 7. CFAT for 2nd year 2 0.826 380,000 3,138,880, | 8 CFAT for 3rd year 3 0.751 3,80,000 285,380 |. CFAT for 4th year 4 0.683 3,80,000 2,59,540 10. CFAT for Sth year 5 0.621 4,16,000 2,58,936 LNPV 1,89,806 Recammendatian : The machine should be ourchased since it has positive NPV. © scanned with oken Scanner|LLUSTRATION 63 CAMIJ Ltd. is considering the replacement of its existing machine by the new one. A consultant who has charged a fee of Rs. 25,000 supplies the following information in that regard: New Machine: Cost Price installation Charges Useful Life Book Value at the end of useful life Disposal Value at the end of the useful life Annual Saving in running expenses Additional Working Capital Worker's Training Expenses Existing Machine: Current Book Value Current Market Value Disposal Charges Remaining Useful Life (no salvage value at the end) Rs. 25 Lakh Rs. 10,000 10 years Rs. 20,000 Rs. 10,000 Rs. 10 Lakh Rs. 35,000 Rs. 5,000 Rs. 5 Lakh Rs. 4.10 Lakh Rs. 10,000 10 years © scanned with Oken Scanner1.108 Tuean's Financial Ma ‘other Information: oe Income Tax Pale 20% cost of Capital 4193 “Ani Factor or 10 years @ 20% am Present Valve Factr fr 10th year @ 20% °. the company whether to replace the existing machine or nol. Aequred:Abis0 SOLUTION sutument showing the Calculation of incremental Cash inflow After Tax x ® ral ering bet Tax © inetae are laren Earn ser Tax | actncenenal epecton |. tnrementt cash Pw afer Tze (FAT (mre oer than at eon |. Ast Reso Stn Wotig Capa ss |. tne Caan Sgn Va th nd of sed Ls ‘000 |S as: termerta ee Aotge 3 |. Tostncremental GFA fort at yer ears ‘Statement showing Incremental Net Prosent Valve Pairs Yew | PViscor | — Amount | —PVat | mae | me ma Pace | 1 | e69007-| — asco | enti re ° 1 (10,000) ‘i. ‘Wore rang Speses of] 4 6000) 00) | ent Wang Cpt of] + | geo | om NaScerocedrateningMacine | 0 | 1 | decane’ | aaeton \(Ge-asomo-me 0000) “exseeg ones on alt xing o | 4 oso | msc som ot 100.000 seco Ge 3000 coo troene CFA yous two | ac | e000 ost eon timer w | ove | Goren | “tseere_| —_ iorasat Aeconmendaton: The Now Machine shoul be purchased Ponce chased ince te NPV i postve. (Catton ot wnara Depcaon Pare ‘ling ain Cost acne anaes en 08 Into Exper Merten ring pean Estimated Saha Vave - epee nt sion Goose ‘Ome Depceton soon see! © scanned with Oken Scanner—_—_______ecaritar uigting _ 3.108 (0 Caelaton of neemontl Tax Advariage ‘Pertculars “Biting Wachne |New Machine | erent Book Vala ond a hf {oss Cash Savage Value = (30.60) | (m0 Sor Tem Capi! Loss (Ga) "o.000 ‘arontoss Prof) @ 20% 5 5.000 500 (a) Consutans oes has been rated as sunk cost ILLUSTRATION 64 Inthis connection, 85 Electonics considering a proposal replace one os oii machine by the now on. following information is available: ° ‘The Existing Machine was line basis. thas a remaining ite bought 3 years ago for Rs. 10 Lakh. It was depreciated on straight ‘ot 5 years, but ts maintenance cost is expected to increase by Be. 50,000 pa. from the 6th year of ts instalation. its present realsable value i i. 6 Lakh ‘Tho New Machine costs Rs. 15 Lakh and is subject othe same rate of depreciation. Onsale alter 5 years, itis expected to Rs. 9 Lakh. With the New Machina, Operating Cost (excluding ‘depreciation ‘are expected to decrease by Rs. 1,00,000 pn addition, the speed of machine woul increase productiviy on account of which net revenues would increase by Fi. 1.5 vakh pa Other Information: The ax rate applicable is 30% and the ost of capital 10%. Required : Advise the company whether to replace the existing machine or not onthe basis of Nat Present Valve CA (tay 1992) Note : Prosont Value Factors @ 10% areas foows Year ~[Yeort [Year| Your’ [Years Yoars Present Vave Factor ‘aoe | o2e | aver] aces | osat ‘SOLUTION Statement showing the Calculation of Parioutars treason Revenue Toil Saveqin Puning Expenses . Total Seng in Marionance Expenses 1. ‘Ast Decrease in Dorocaion Incremental Eaing baer Tox F tartar @ 0h 6. erent Eating ate Tax 4H. Lees incremental Depreciation 1 incremental Cash Flow aftr Taxes (CFAT) 4. Aa Sage Valo of Aza a oon Use Lilo ‘Total incremental CFAT for the ast year Statement showing Incremental Net Present Value Panteutars Year | PVfactor | Amount | PV at Y0% at | — Purchase Pras x ° + | tama00) | 1.0.00) Net Sale Prose of Extng Machine ° 1 ‘800000 | ‘'soooce "caving on Lose on Sale ating ° 1 7500 7500 erhgn 3 othe 25000 a 28,00 ~ Incremental CFAT for 1-2 years saz | 175 | 179800 | s0ro0s Incremental CFAT fr 34 years aaa | 14s | 208500 | 2860 Incremental CFA fr Sth year 5 ose: | sioss00 | _sssa7e Incremental NPV 385881 ‘Recommendation : The New Machine should be purchased since the NPV is postive. © scanned with Oken Scanner4 3.110 _Tulsian’s Financial Management Wong Hote: usar hewmen Dare saampucus re = arTRaET Tone sao Pec age vate = ° Dome S00 = Lt Depradaton 1.2500 120,000 8.00%) (a Te expression Net Revenue woud increase by i, 1.5 labs pia has bon trated anata ILLUSTRATION 65 [MP Ltd, manufactures a epocial choral. tis thinking of replacing its existing machin ty new one, which would cost Ri. 25 Lakh. “The company's curent production's 40,000 units and is expecting to increase to 50,000 unt, it the new machine is bought. The Seling price of he product would remain unchanged at Rie) ‘er unit. The folowing is the cost af producing one unt of product using both the existing and nce sachin: Parctars ‘ising Machine | New Machine Vataio Oot - a8 tes Fred overheads 82 14 (Ceprecistion & locates corporate ovead) ‘The existing machine has an accounting book value of Ris, 40,000 and itis fully deprecated ‘ex purpose.Ithas a remaining econanve ie of 5 yeas. The supplier ofthe new machine has offered to accept the old machine in exchange fr Re 490,000. Howover the market pice ofthe existing machine today Is Ris. 60,000 end Ae, 160, attr 5 years. New Machine has aif of 5 yoars and a salvago valuo of is. 100,000 at he eae is economie ite. Assume that tx rat is 20% and cost of capita is 20%, Required : Advise the company whether to replace the existing machine or nat onthe bass ott Provent Value, Note; The present value of Annuity for 5 years @ 20% is 2.991 and the present vale fo st year's 0402, ‘SOLUTION ‘Statement showing the Calculation of Incremental Cash inflow After Taxes Parivar 75 rem Contain 2. Less: evemerial Geprecaton . leremental Earing belore Tax D. Lees Tax @ 20% lnctemertal Eaing ae Tax Ade: Inremona Doprecaon 6G. Incremental Cash Flow for Taxes HH Add: reromenial Cash Selvage Vaan 1 ‘Ad: errant Tax havering, |. Toa erent CFA forth a yo Statement showing incremental Nt Prosent Value i Pareuors Yerr | PVicior | Amount me 20% ie. Purchase e 7 0 [sae seamomon |S [tp © scanned with Oken Scanneroo Bsetng atts Taxon Slt iting imacne @ 30% oR 1.00000 ° ' om | ean ieee CFAT or = your tot ase | sasz0 | axzeer trons OFA fr Shy 8) |] ome |x " crt a eam | “aoe ‘Recommendation: The New Machine shousbo ine shoul be purchased snc the NPVs postive Working Notes: = (Caton ferent Contin Parties now wacning | Drea hw) Aunt dnd soo 8: Sting Pree pr ut 160 vara Cont pore oie) © conten er int a6 Toul Contin (40) mmon | 2x60 also of reer epreciaton increment —W ‘on 3) Coste Machine Esta Savane Vaio npc Ant Ueto 4.30000 (i) Candin of ert Tax Adria A = a vw or Patiuare ng Machine | Wowace | sO Beka aio od = tanaee {er Cn SobapeVabe isa | Ganon | e500 oe is000 = “Teron Prot @ 20% [sto = iy (Sine the xed overheads are allocation Yom other departments plus the deprecation of plant & Somat, its ie ned ovemeads ober than cpreiaon ae relevant, ILLUSTRATION 66 ‘The general manager of MP Ltd is considering the replacement ofa sx year old equipment ‘The company has lo eur excessive maintenance cost on the equipment. The equipment has & Zoro book valu. I can be modernised ata cost of Rs, 1,20,000 enhancing ts economic ite 10S years. “Tne equipment could be sold for Rs, 20,000 alter 5 yeas. The modernisation ofthe equipment would help material handing and in redudlng about and maintenance and repai costs. The Company has yet another alternative. It can buy a new machine ata cost of Fi. 3,00,000 wth teonome Ife a5 yours witha torminal valve of is, 60,000. The new machine is expocted to be ‘mote efeiontin reducing the costs of matoral handing, labour and maintenance and repair et. ‘Tho annual costs areas flow: Partutrs ‘tating Machine | Modorisaion | — Now Mechine Viages an Saaoe 20,0 20,00 ‘,000| ‘Superdion 40,000 16,000 +5000 Maintenance ‘30.000 10000 3.000 © scanned with Oken Scanner412 _Tusians Fi agement 2000 a 000 cost ae 00 Ea) “Te capery hes taxa of 0% ard requ a of re 1%, cued novos company water replace he eng actne oo one bat thy Peon vee nots Te Preset Va of arty fo yrs @ 10% 189.791 and tho present valu fr, yours ez SOLUTION ‘Statement showing the Calculstion of nremental Cash Inflow Aer Taxes (CFAT) [Parts [ma ‘A Incremental Saving S0.000 |i Coorrcenen bepesn | ease | | nen cane 208 o tmetaome on | |e trent Erg ae Tx var] | |e Adkt tacremental Deprociation 20,000 | | 6. nro ath ow ar Tse (F40 a | Goryeanoner tan asyeny | | Ge homme avege le ct Ast oe rc Us Le soon | | 4. tee nconnalTex vgs ° otal incre CEA ores yur oo Statement showing Inremerial et Present Value [ Particuare [__Yeor [PV actorat 10% | Amount | Pvatt0x | ras Pies a ate tarommnatcrariors-syean | sea | ar | geass | Sonam ‘owner FAT Sn your 3°] aan | Sawn intent NPV 78 Recommendation Tho New Machin cls ol be prchased sins he NB is noatve wong hee: (0 lst femal Seg l Parteutare Moderation | new acing | meeting ge Sales 20m ‘Supervision 16,000 sre Maintenance, a) Power a a) 0 Toulon Song son00 — | 5 —} sa (i Cake oneal Doran herent pect yl Prieur Moderation | Wow uachine | ere = - ew Cost of Machine +1,20,000 300,000 | Ennio Sage Vue c2oae,_| “coro Derek Ant ‘anoat | “aan Ut Lite Sy Sie apreciaton zoo | samo | _ aoe © scanned with Oken ScannerCapital Budgeting 3.113 (ii) Calculation of incremental Cash Salvage Value & Tax Advantage Particulars Modernisation New Machine Incremental (New — Old) “Book Value at the end 20,000 60,000 Less: Cash Salvage Value (20,000) (60,000) (40,000) Short Term Capital Loss (Gain) - - a Tax on Loss (Profit) @ 30 % haa aa = © scanned with Oken Scanner