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4.unit-4 Capital Budgeting
4.unit-4 Capital Budgeting
BUDGETING:
Investment decisions are
generally known as capital
budgeting or capital expenditure
decisions.
Investment decisions deal with
investment of organizations
resources in Long tern (fixed) Assets
and / or Short term (Current) Assets.
0 -70000
1 30000
2 30000
3 20000
4 10000
5 50000
2.Compute the Payback Period for the
investment from the following data. Capital
outlay is Nu -40 K
Year Cash Flow
0 -40k
1 10k
2 12k
3 15k
4 10k
5 7k
Answer:3.3 Years
3.Suppose that a project
requires a cash outlay of Rs
20,000 and generates cash
inflows of Nu 8000:Nu
7000:Nu 4000 and Nu 3000
during the next 4 years. What
is the project Payback?
4.A company is considering the following
investment projects:
Project CF0 CF1 CF2 CF3
A -10000 10000 ---- ----
B -10000 7500 7500 ----
C -10000 2000 4000
12000
D -10000 10000 3000 3000
Calculate the payback period for the above
investments?
5.Axe limited is in need of a bottling machine.
The brands Sachs and Tachs are
available in the market. The relevant details
in respect of these brands
Sach
are given
Tach
below.
Price 35000 40000
Net cash Flow
Year 1 10000 10000
Year 2 10000 15000
Year 3 10000 20000
Year 4 15000 25000
0 -1000 -1000
1 50 500
2 100 350
3 250 250
4 300 60
5 400 100
6 450 100
7 500 150
9.Two types of equipments are available in the
market. Touch Limited requires one such
equipment. The details relating to the equipment
are given below. Brand
X Y
Initial 70000 60000
capital
outlay
Life 6 5
Residual 0 0
Value
Tax rate 50% 50%
Depreciati Straight Straight
Profit Before tax and Depreciation
Average Return
ARR = ---------------------------
Initial Investment
Acceptance Rule:
Accept if calculated rate is higher than minimum rate
established by the management.
It can reject the projects with an ARR lower than the
expected rate of return.
A highest rank will be given to a project with highest ARR,
1.The Cost of Acquisition of an asset is Rs
50,000.The firm has to spend Rs 5000 towards its
installation. The life of the assets is 5 years and
the salvage value at the end of its useful life is Rs
5000.The returns(PAT) from the assets are as
follows
The firm uses the straight line method for
Year PAT
computing depreciation. You are required to work
1 10,000
out the accounting rate of return and Payback
period based on the2initial15,000
investment.
3 15,000
4 20,000
5 20,000
2.Determine the average rate of return(ARR)
and payback period(PB) from the following
data of two machines
Particulars Machine AA and Machine
B. B
Cost -56000 -56000
PAT PAT
Year 1 3300 11000
Year 2 5400 9300
Year 3 7500 7000
Year 4 9300 5300
Year 5 11000 3000
2 15,000
3 15,000
4 20,000
5 20,000
Profitability Index
Is the ratio of the present values of cash
inflows ,at the required rate of return to the
initial cash Flow.
PI= PV of cash Inflows
Initial cash Flow
Acceptance Rule :
Accept if PI > 1
Reject if PI < 1
May accept if PI = 1
Profitability Index is a relative measure of
projects profitability
Profitability Index
1.The initial cash outlay of a Project is Rs
100000 and it can generate cash inflow of
Rs 40,000, Rs 30000,Rs 50,000 and Rs
20000 in year 1 through 4.Assume a 10%
rate of discount. Find the Profitability
Index.
2.The initial cash outlay of an investment
is Rs 100,000 and it generates cash
inflows of Rs. 50,000, Rs. 60,000, Rs.
65,000 and Rs. 50,000 in the four years.
Calculate PI of the investment assuming
3.Calculate the Profitability Index for the
two mutually exclusive projects X and Y
assuming a discount rate of 10%,the
details ofYear
which are
Project X given below.
Project Y
0 -70,000 -70,000
1
10000 50000
2
20000 40000
3
30000 20000
4
45000 10000
5 60000 10000
2 15,000
3 15,000
4 20,000
5 20,000
NET PRESENT VALUE :
1 8000
2 10000
3 14000
2.A firm use NPV rule to evaluate all its
project, should the firm accept the
following project if the required rate of
return is 18%.What if the required rate of
return isYear30%? Cash Flow
0 -30000
1 20000
2 14000
3 11000
0 -70000 -70000
1 10000 50000
2 20000 40000
3 30000 20000
4 45000 10000
5 60000 10000
2 20,000
3 25,000
4 25,000
2 30000
3 20000
4 10000
Year CF
1 2000
2 1500
2.Compute IRR from the following data
Initial Investment Nu 30000
Cash flow after tax
Year CF
1 10000
2 12000
3 15000
4 10000
5 7000
3.Compute IRR from the following data
Initial Investment Nu 80,700
Cash flow after tax
YEAR Cash Flow
0 80700
1 30000
2 30000
3 30000
4 30000
5 30000
6 30000
7 30000
8 30000
4.A firm is contemplating to install a new equipment in
its factory. Two brands of the machine are available in
the market. The relevant data are given below.
Brands
A B
Costs 70000 80000
Life 5 4
Residual 10000 10000
PBT
1 10000 16000
2 12000 20000
3 15000 26000
4 10000 24000
5 10000 ---