UNIT - IV

The cost of project-A is Rs 50000 and cost of project-B is Rs1,00,000 the annual cash inflow for the next 4
years are Rs 25000 .What is the Payback period for the Project A & B?

Calculation of Payback period for the project

The cost of project A is Rs 50000

Payback Period = cost of the project
Annual cash inflows
= 50,000/25000
=2 years
The cost of project B is Rs 1,00,000
Payback Period = cost of the project
Annual cash inflows
= 1,00,000/25000
=4 years

In this above calculation B project has 4 years, A project has 2 years. it is better to choose the
project A it has less payback period.

The cost of a project is Rs.50,000 which has an expected life of 5 years. The cash inflows for next 5 years are
Rs.24,000; Rs.26,000; Rs.20,000; Rs.17,000 and Rs.16,000 respectively. Determine the Payback period.

Cost of the project / initial investment Rs. 50000

Pay back period = Cost of the project
Annual cash inflow

Year cash inflow(Rs.) cumulative cash inflows (Rs)

1 24000 24000
2 26000 50000
3 20000 70000
4 17000 87000
5 16000 103000

Above table shows that the original investment can be recovered by the endof the second year
and hence the project has 2 years of payback period.
So the payback period is 2 years.
From the following particles of two machines each costing Rs 2,50,000/- suggest whichis the best
machines and why ?
Years 1 2 3 4
Machine X 90,000 1,60,000 1,20,000 70,000

Machine Y 1,60,000 1,20,000 90,000 50,000

Calculate: i) Pay Back Period ii) Accounting rate of Return.

original investment of two machines each costing Rs 2,50,000

Calculation of payback period

Year Machine X cummulative Machine Y cummulative
cash inflows cash inflows
1 90,000 90,000 1,60,000 1,60,000
2 1,60,000 2,50,000 1,20,000 2,80,000
3 1,20,000 3,70,000 90,000 3,70,000
4 70,000 4,40,000 50,000 4,20,000

Pay back period = Cost of the project

Annual cash inflow
Machine X takes to recover the original investment in 2 years but Machine Y takes less than 2 years . So
pay back period is 1year 9 months, hence machine y is accepted.

Y= 1year 9 months

1 year = (250000 – 160000) =90,000 = 1 Year

Next year = (90000\120000)*12 = 9 months
= 1 year 9 months

Calculation of ARR

ARR = AVERAGE NET PROFIT AFTER TAXES × 100 AVERAGEINVESTMENT

Machine X & Y average investment = 2,50,000 = 1,25,000

2

Average profit after taxes X &Y = 4,40,000/4= 1,10,000 4,20,000/5 = 1,05,000

ARR for machine X & Y = 1,10,000 × 100 = 88% 1,05,000 × 100 =84%
1,25,000 1,25,000

ARR for machine is X high so select X machine.

 Consider the case of the company with the following two investment alternatives each costing
Rs.9 lakhs. The details of cash inflows are as follows:
Year 1 2 3
Project1 3,00,000 5,00,000 6,00,000
Project2 6,00,000 3,00,000 4,00,000
Estimated the cost of capital is 10% per year. Determine NPV for the two projects.

Determiation of NPV

NPV = present value of cash inflow – present value of cash outflow

year project 1 project 2 10%pv Present value of future cash outflow

factor Project1 Project 2
1 3,00,000 6,00,000 0.909 2,72,700 5,45,400
2 5,00,000 3,00,000 0.826 4,13,000 2,47,800
3 6,00,000 4,00,000 0.751 4,50,600 3,00,400
Total present value of future cash flows 11,36,300 10,93,600
(Less) original investment 900000 900000
NPV 236000 1,93,600

Since NPV is positive for both project. The NPV value is higher in project 1 compared to project
2 so, project 1 is suggested.

The cost of the project is Rs.10,00,000, which has an expected life of five years. Thecash inflow for
the next five years are Rs.3,20,000, Rs.3,80,000, Rs.3,00,000, Rs 3,00,000 and Rs.2,60,000
respectively Determine payback period.

Cost of the project OR Initial investment Rs. 10, 00,000

Pay back period = cost of the project
Annual cash inflow
Year cash inflow(Rs.) cummulative cash inflows (Rs)
1 3,20,000 3,20,000
2 3,80,000 7,00,000
3 3,00,000 10,00,000
4 3,00,000 13,00,000
5 2,60,000 15,60,000

Above table shows that the original investment can be recovered by the endof the THIRD year and hence the
project has 3 years of payback period.
So the payback period is 3 years.
Calculate Net Present Value a discount factor of 12% is used to the projects.

Project A 1,50,000 2,50,000 2,00,000 1,50,000 1,00,000

Project B 50,000 1,50,000 2,00,000 3,00,000 2,00,000

Original Investment of the Project is 5,00,000

Determiation of NPV

NPV = present value of cash inflow – present value of cash outflow

year project 1 project 2 12%pv Present value of future cash outflow

factor Project1 Project 2
1 1,50,000 50,000 0.893 1,33,950 44,650
2 2,50,000 1,50,000 0.797 1,99,250 1,19.550
3 2,00,000 2,00,000 0.712 1.42.400 1,42,400
4 3,00,000 3,00,000 0.636 1,90,800 1,90,800
5 2,00,000 2,00,000 0.567 1,13,400 1,13,400
Total present value of future cash flows 7,79,800 6,10,800
(Less) original investment 5,00,000 5,00,000
NPV 2,79,800 1,10,800

Since NPV is positive for both project. The NPV value is higher in project 1 compared to project
2 so, project 1 is suggested.
 UNIT –V
From the following balance Sheet of XYZ Co. Ltd., Calculate liquidity ratios.[L5][CO5]Balance sheet of
XYZ Co. Ltd. As on 31.12.2022

Liabilities (Rs in Assets (Rs in

thousand) thousand)
Preference share capital 100 Lands and buildings 225
Equity share capital 150 Plant and Machinery 250
General reserve 250 Furniture and Fixtures 100
Debentures 400 Stock 250
Creditors 200 Debtors 125
Bills Payable 50 Cash at Bank 250
Outstanding Expenses 50 Cash in hand 125
Profit and loss account 100 Prepaid expenses 50
Bank Loan 200 Marketable securities 125
(long-term)
Total 1500 Total 1500

Calculation of Current Ratio

Current assets = stock +debtors +cash in hand +cash at bank +prepaid expenses + Marketable security

= 250+125+250+125+50+125 = 925

Current Liabilities = creditors + bank overdraft + outstanding expenses

= 200+50 +50 = 300

CURRENT RATIO = CURRENT ASSETS/CURRENT LIABILITIES

= 925/300
= 3.08:1

For every one rupee of current liabilities, there is Rs.3.08 worth current assets. The

Liquidity position is satisfactory as it is more than the standard of 2:1.

Calculation of Quick Ratio

Quick assets =current assets – (stock + prepaid expense)

= 925 - (250 + 50)
= 625
QUICK RATIO = QUICK ASSETS /CURRENT LIABILITIES
= 625/300
= 2.08
Since this also is above the standard of 1:1, short term liquidity position of the company is
satisfactory.
A Firm sold goods worth Rs 5,00,000 and its gross profit is 20 percent of sales value. The inventory
at the beginning of the year was Rs 16,000 and at end of the year was 14,000.

Sales = 5, 00,000
Gross profit = sales/sales value percentage
= 5, 00,000 *20/100 = 1, 00,000

Cost of goods sold = Sales – Gross profit

= 5, 00,000 – 1, 00,000 = 4,00,000

Average inventory = opening stock +closing stock

2
=16000+14000 = 15,000
2
INVENTORY TURNOVER RATIO = COST OF GOODS SOLD/ AVERAGE INVETORY

= 4, 00,000 /15,000
= 26.67
Approximately 27 times

INVENTORY HOLDING PERIOD = 364 DAYS/ INVENTORY TURNOVER

=364/27
Approximately 14 days.
A firm’s sale during the year was Rs. 4, 00,000 of which 60 percent were on creditbasis. The balance
of debtors at the beginning and end of the year were 25,000 and15, 000 respectively. Calculate
debtor’s turnover ratio of the firm, also find out Debt collection period.

Sales = 4, 00,000
Credit sales = sales/sales percentage
= 4, 00,000 *60/100 = 2,40,000
Average debtors = opening debtors +closing debtors = 25000 +15000 =20000
2 2
DEBTORS TURNOVER RATIO = CREDIT SALES/ AVEREGE DEBTORS
= 2, 40,000 /20,000 = 12 times

DEBT COLLECTION PERIOD = 365 DAYS/ DEBTORSTURNOVER RATIO

= 365/12

= Approximately 31 days
Journalize the following transactions in the books of Ms. Jeevani
2012, Jan 1 Jeevani commenced business with cash Rs.5,00,000
2 Purchased goods for cash Rs.20,000
3 Purchased goods from Mohan Rs.6,000
7 Paid into bank Rs.5,000
10 Purchased furniture Rs.2000
20 Sold goods to Suresh on credit Rs.5,000
25 Cash sales Rs. 3,500
26 Paid to Mohan on account Rs.3,000
31 Paid salaries Rs.2,800

Journal Entries in the books of Ms. Jeevani

Date Particulars Ledger Debit Credit

folio amount amount
Rs. Rs.
1/1/2012 Cash a/c Dr. 5,00,000
To Jeevani’s capital a/c 5,00,000
(being the business start with capital)
2/1/2012 Purchase a/c Dr. 20,000
To cash a/c 20,000
(being the goods purchased for cash)
3/1/2012 Purchase a/c Dr. 6,000
To Mohan a/c 6,000
(being the goods purchased from Mohan)
7/1/2012 Bank a/c Dr. 5,000
To cash a/c 5,000
(being cash paid into bank)
10/1/2012 furniture a/c Dr. 2,000
To cash a/c 2,000
(being the furniture purchased for cash)
20/1/2012 Suresh a/c Dr. 5,000
To sales a/c 5,000
(being the goods sold to Suresh)
25/1/2012 Cash a/c Dr. 3,500
To sales a/c 3,500
(being the goods sold for cash)
26/1/2012 Mohan a/c Dr. 3,000
To cash a/c 3,000
(being the cash paid to Mohan)
30/1/2012 Salary a/c Dr. 2,800
To cash a/c) 2,800
(being the salary paid)
TOTAL 5,47,300 5,47,300