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CF - PWS - 5

1. The document contains 10 practice problems related to capital budgeting techniques like NPV, PI, IRR, payback period and ARR. Various investment projects with initial costs and expected annual cash flows over different time periods are presented. 2. Techniques like NPV, IRR, payback period and profitability index are to be used to analyze and rank the investment projects to determine which ones should be accepted based on the required rate of return. 3. There are also questions about mutually exclusive projects and the potential for conflict in rankings between different techniques.

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83 views

CF - PWS - 5

1. The document contains 10 practice problems related to capital budgeting techniques like NPV, PI, IRR, payback period and ARR. Various investment projects with initial costs and expected annual cash flows over different time periods are presented. 2. Techniques like NPV, IRR, payback period and profitability index are to be used to analyze and rank the investment projects to determine which ones should be accepted based on the required rate of return. 3. There are also questions about mutually exclusive projects and the potential for conflict in rankings between different techniques.

Uploaded by

cyclo tron
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Corporate Finance Practice Worksheet 5

PGDM (A & B)
Date: 03/01/23

1. A project costs ₹1,50,000 and is expected to generate ₹35,000 for the next 5 years. The
required rate of return of the company is 12%. Calculate NPV and PI

2. A firm is considering a capital budgeting proposal having initial cost of ₹1,70,000. The
project is expected to generate annual cash flows of ₹20,000, ₹50,000, ₹60,000, ₹40,000, and
₹75,000 during the next 5 years. Calculate NPV and PI if the required rate of return is 10%.

3. The initial investment required for a project is Rs.1,00,000. The project expects annual cash
inflows after tax of Rs.25,000 for 6 years. Calculate IRR

4. The initial investment required for a project is ₹1,00,000. The project expects annual cash
inflows after tax of ₹25,000 for 6 years. Calculate IRR

Initial Investment - Rs.1,00,000


Life of the Asset - 6 Years
Years Cash Inflows
1 10,000
2 20,000
3 30,000
4 40,000
5 50,000
6 Nil
Calculate IRR

5. A company is considering two mutually exclusive projects. Both require an initial cash
outlay of ₹2,00,000 each and have a life of five years. The company's required rate of return
is 10% and pays tax at the rate of 30%. The projects will be depreciated on straight line basis.
The profit before depreciation and tax expected to be generated by the projects are as
follows:

Year 1 2 3 4 5
Project 1 80,000 80,000 80,000 80,000 80,000
Project 2 1,20,000 60,000 40,000 1,00,000 98,000
Determine the net present value and benefit cost ratio for each project and indicate which
project should be accepted and why?

6. An industry is contemplating to purchase a machine. Two machines A and B are available,


each costing Rs.5,00,000. In comparing the profitability of machines, a discount rate of 10%
is used. Earnings after taxation are expected as follows:

(₹ In '000s)
Year Machine A Machine B
1 150 50
2 200 150
3 250 200
4 150 300
5 100 200
Rank the investment proposals using
a. Payback period method
b. NPV @ 10%
c. IRR method

7. A company is considering an investment proposal to install new milling controls. The project
will cost Rs.50,000. The facility has a life expectancy of 5 years and no salvage value. The
estimated cash flows after tax (CFAT) from the proposed investment proposal are as follows:
K = 10% p.a.

Year CFAT
1 20,000
2 21,000
3 14,000
4 15,000
5 25,000
Compute ARR, PBP, NPV and PI

8. The expected cash flows of a project are as follows

Year Cash Flows


0 -1,00,000
1 20,000
2 30,000
3 40,000
4 50,000
5 30,000
The cost of capital is 12%. Calculate IRR and NPV

9. Equipment A has a cost of ₹75,000 and net cash flows of ₹20,000 per year for six years. A
substitute equipment B would cost ₹50,000 and generate net cash flows of ₹14,000 per year
for six years. The required rate of return of both the equipments is 10%. Calculate the PI and
NPV for the equipments. Which equipment should be accepted and why?

10. A company is considering the following investment projects:

Cash Flows (₹)


Projects
C0 C1 C2 C3
A -10,000 10,000
B -10,000 17,500 7,500
C -10,000 12,000 4,000 12,000
D -10,000 10,000 3,000 13,000

(a)Rank the project according to each of the following methods: (i) payback (ii) ARR (iii) IRR
and (iv) NPV: assuming discount rates of 10 and 30 percent.
(b) Assuming the projects are independent, which one should be accepted? If the projects are
mutually exclusive, which project is the best?
(c) In case of project C and D, why is there a conflict of rankings? Which one would you
recommend as the best one?

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