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    Sum 17

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    PRATHAMESH MANE

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    Sum 17

    Uploaded by

    PRATHAMESH MANE
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    Sum 17

    Uploaded by

    PRATHAMESH MANE

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    © All Rights Reserved
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    of 4

    Capital Budgeting - Financial Analysis

    MMS - Sem: 4 - Project Management Apr-24


    Lecture By Asgar Sir @ 8080 161 005 For MGM - IMSR

    Sum 17 M/s Pragna & Co. (P) Ltd. is considering two different projects. Project A and B are mutually
    exclusive projects each requiring an initial cash outflow of Rs.1,00,000 having life of 5 years. The
    company pays tax @ 50% and its rate return required is at 10%. The projects will be depreciated
    on a Straight Line basis. The net cash flows before taxes and depreciation is expected to be
    generated by the projects are as follows:

    Project Project
    Year A B
    (Rs.) (Rs.)
    1 40,000 60,000
    2 40,000 30,000
    3 40,000 20,000
    4 40,000 50,000
    5 40,000 50,000

    You are required to calculate:


    1. The payback period of each project.
    2. The average rate of return for each project.
    3. The net present value of each project.
    4. The profitability index for each project.
    Which project should be accepted? Give reasons.

    Solution

    For Project : A For Project : B

    1. Total Cash Outflow 100,000 1. Total Cash Outflow 100,000

    2. Dep = Cost Value - Scrap Value 100,000 - Nil 2. Dep = Cost Value - Scrap Value 100,000 - Nil
    20,000 20,000
    Estimated Lif of an Asset 5 Estimated Lif of an Asset 5
    3. Annual Cash Inflow 3. Annual Cash Inflow
    Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Particulars Year 1 Year 2 Year 3 Year 4 Year 5
    NPB Dep & Tax 40,000 40,000 40,000 40,000 40,000 NPB Dep & Tax 60,000 30,000 20,000 50,000 50,000
    - Depreciation 20,000 - Depreciation 20,000 20,000 20,000 20,000 20,000
    * NPB Tax 20,000 * NPBTax 40,000 10,000 Nil 30,000 30,000
    - Tax @ 50% 10,000 - Tax @ 50% 20,000 5,000 Nil 15,000 15,000
    * NPA Tax 10,000 * NPA Tax 20,000 5,000 Nil 15,000 15,000
    + Depreciation 20,000 + Depreciation 20,000 20,000 20,000 20,000 20,000
    * Annual Cash Inflow 30,000 30,000 30,000 30,000 30,000 * Annual Cash Inflow 40,000 25,000 20,000 35,000 35,000
    Cummulative Annual
    40,000 65,000 85,000 1,20,000 1,55,000
    Cash Inflow

    A) PBP = Total Cash Outflow A) PBP = No of Years before Bal to be recovered before BEY
    Break Even Year
    +
    Annual Cash Inflow Annual Cash Inflow of BEY

    1,00,000 15000
    3 +
    30,000 35000

    3.33 Years 3 + 0.43

    3.43 Years
    B) ARR = Average Profit After Tax x 100 B) ARR = Average Profit After Tax x 100
    Average Investemnt Average Investemnt

    APAT = Total Profit after Tax = 10,000 APAT = Total Profit after Tax = 55000 11000
    No of Years No of Years 5

    Av Investment = {CV - SV} + SV + WC Av Investment = {CV - SV} + SV + WC


    2 2

    100,000 - Nil + Nil + Nil 100,000 - Nil + Nil + Nil


    2 2

    50,000 50,000

    ARR = 10,000 x 100 20% ARR = 11,000 x 100 22%


    50,000 50,000

    4 Present Value of Annual Cash Inflow - DF @ 10% C NPV Proj - A Proj - B


    Proj A Proj B PV of TCI 113,700 117,670
    Year DF @ 10%
    ACI PVACI ACI PVACI - PV of TCO 100,000 100,000
    1 0.909 30,000 27,270 40,000 36,360 13,700 17,670
    2 0.826 30,000 24,780 25,000 20,650
    3 0.751 30,000 22,530 20,000 15,020 PV of TCI 113,700 117,670
    D PI
    4 0.683 30,000 20,490 35,000 23,905 PV of TCO 100,000 100,000
    5 0.621 30,000 18,630 35,000 21,735
    1,13,700 1,17,670 1.14 1.18
    PV of Total Cash Inflow
    Conclusion Chart showing Score Card
    Findings Score
    Method
    A B A B
    PBP 3.33 Yrs 3.43 yrs 1 0 A
    ARR 20% 22% 0 1 B
    NPV 13,700 17,670 0 1 B
    PI 1.14 1.18 0 1 B
    Total Score 1 3

    Machine B should be Purchased

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