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9 views

Sum 11

Uploaded by

PRATHAMESH MANE
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© © All Rights Reserved
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Capital Budgeting - Financial Analysis

MMS - Sem: 4 - Project Management 21st April 2024


Scholar Classes @ Asgar Sir @ 8080 161 005 For MGM - IMSR
Q.11 Calculate (i) Pay Back Period (ii) Pay back profitability (iii) Average rate of return if you are
given that:
Cost of machine is Rs.2,00,000, Salvage Value Rs.20,000, Life of Machine 6 years, Rate of
depreciation @ 10% under W.D.V. basis Effective Income Tax Rate is 40% and Annual Profit
before depreciation and Income Tax for six years are Rs.70,000, Rs.90,000 and Rs.96,000
Rs.78,000, Rs.62,000 and Rs.50,000.
SOLUTION
1) Total Cash Outflow 200,000

2) Depreciation @ 10% - WDV


1st Year Cost 200,000
- Dep 20,000
2nd Year WDV 180,000
- Dep 18,000
3rd Year WDV 162,000
- Dep 16,200
4th Year WDV 145,800
- Dep 14,580
5th Year WDV 131,220
- Dep 13,122
6th Year WDV 118,098 6th Year 118,098
- Dep * 98,098 - Dep 11810
6th Year Scrap Value 20,000 6th Year End 106,288
Scrap Value 20,000
Loss on Sale 86,288

Since the scrap value & the estimated life is given, we assume, that the last year value is considered
**
as DEPRECIATION Value

3) Statement Showing Annual Cash Flow


Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 6
NPB Dep & Tax 70,000 90,000 96,000 78,000 62,000 50,000 50,000
- Depreciation 20,000 18,000 16,200 14,580 13,122 98,098 11,810
* NPB Tax 50,000 72,000 79,800 63,420 48,878 (48,098) 38,190
- Tax @ 40% 20,000 28,800 31,920 25,368 19,551 19,239 15276
* NPA Tax 30,000 43,200 47,880 38,052 29,327 (28,859) 22,914
+ Depreciation 20,000 18,000 16,200 14,580 13,122 98,098 11,810
* Annual Cash Inflow 50,000 61,200 64,080 52,632 42,449 69,239 34,724
Scrap Value - - - - - 20,000 20,000
Tax Saving 34,515 (86,288 x 40%)
Annual Cash Inflow 50,000 61,200 64,080 52,632 42,449 89,239 89,239

4) Cummulative Annual Cash Inflow


Year Amount Cum Cash Inflow
1 50,000 50,000
2 61,200 111,200
3 64,080 175,280
4 52,632 227,912
5 42,449 270,361
6 89,239 3,59,600
A) PBP = No of Years before Break Bal to be recovered before BEY
+
Even Year Annual Cash Inflow of BEY

24,720 200,000 - 175,280


3 +
52,632

3 + 0.47

3.47 Years

B) Pay Back Profitability Amount


Total Cash Inflow 359600 SV already added
+ Scrap Value -
- Total Cash Outflow 200,000
149600

C) ARR = Average Profit After Tax x 100


Average Investment

* APAT = Total Profit after Tax 159600 26600


No of Years 6

* Av. Invest = CV + SV 200,000 + 20,000 = 110,000


2 2

** When Dep is calculated under WDV Method, Av Invest = CV + SV / 2

ARR = 26600 x 100 = 24.18


110,000

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