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Uneven
A project cost 10000 and generates inflow of
2000,4000,3000 and 2000 in first,second,third and
forth year. Calculate payback period.
1st
2nd
3rd
4th
5th
Project
X
1000
2000
4000
5000
8000
Project
Y
2000
4000
6000
8000
Cumulat
Project
Cumulat
X
Cash
inflows
5000
4000
3000
1000
ive
Cash
inflows
5000
9000
12000
13000
1st
2nd
3rd
4th
5th
6th
The company has fixed three
which project
ive
Cash
inflows
1000
3000
6000
10000
1000
2000
3000
4000
5000
6000
year as a cutoff point, State
Should be accepted.
Payback period for X=2+10000-90000/3000=2 and one
third year
Payback period for Y=4 year
Acceptance rule is
Accepted if PB is less than standard pay back
Rejected if PB is more than standard pay back
Since cut off point is 3 year Project X should be accepted.
600000
Variable cost
50% of sales
Sales REVENUE
less variable cost
Less FIXED cost
30000
370000
Less dep(600000/8)
PBT
Tax(50%)
PAT
75000
295000
147500
147500
Add:Dep
75000
222500
Year
1st
2nd
income after
depreciation but
before tax
200000
200000
3rd
4th
5th
160000
160000
80000
*100 =40%
45000
100000
36000
Machine
2
45000
80000
30000
2 year
3 year
Machine 1
Machine
2
80000
30000
15000
35000
22500
Solution
100000
36000
22500
41500
22500
*100 =184%
22500
Accounting rate of return
=Average Annual income after tax and
dep *100
Average Investment
35000
*100 =156%
22500
Machine 1 ARR IS HIGHER SO IT SHOULD BE PREFERRED.
X
50000
5000
Y
60000
7500
Z
70000
10000
Cost
Estimate
d scrap
Life in
12
10
13
years
Average
10000
14000
18000
profit
before
tax and
dep
Tax is 50%.Find ARR Rate and which machine to be
procured.
Calculation of Average Income after tax and dep
Average profit
before tax and
depreciation
Less dep
Cost-scrap/life
Profit before tax
Less tax 50%
Average profit after
10000
14000
18000
3750
5250
4615
6250
3125
3125
8750
4375
4375
13385
6692.5
6692.5
Average INVESTMENT=
Initial investment+scrap/2=27500
33750
40000
*100 =11.36%
27500
4375
*100 =12.96%
33750
6692.5
40000
*100 =16.73%
NPV:
An investment of 10000(having a scrap value of 500)
yields the following return:
Year
1st
2nd
3rd
4th
5th
Cash flow
4000
4000
3000
3000
2000
Year
Cash flow
PV FACTOR
1st
4000
.909
Present
value
3636
2nd
3rd
4th
5th
Scrap
4000
3000
3000
2000
500
.826
.751
.683
.621
.621
Total Present
Value
3304
2253
2049
1242
310.5
12794.5
Year
Cash flow
PV FACTOR
1st
2nd
3rd
50000
30000
50000
.909
.826
.751
Present
value
36360
24780
37550
4th
20000
.683
Total Present
Value
13660
112350
=7.931%
25%
.800
.640
.512
.410
.328
30%
.769
.592
.455
.350
.269
Year
Cash flow
PV FACTOR
1st
10000
.800
Present
value
8000
2nd
3rd
4th
5th
20000
30000
45000
60000
.640
.512
.410
.328
Total Present
Value
12800
15360
18450
19680
74290
C. IRR
AT 25% PV FACOTR Present value is 74290 which more
than initial investment. Hence next trial rate of return is
30%
Year
Cash flow
PV FACTOR
1st
2nd
3rd
4th
10000
20000
30000
45000
60000
.769
.592
.455
.350
.261
5th
Present
value
7690
11840
13650
15750
15140
Total Present
Value
65070
18 %
Cost of Capital-
15%
a) 40%=dividend is 1.6
1.6+.18(2.4)/.15 =29.87
.15
b) 50%=dividend is 2
2+.18(2)/.15 =29.33
.15
c) 60%=dividend is 2
2.4+.18(1.6)/.15 =28.80
.15
12 %
20.
20(1-.9) = 21.74
.20-.9*.12
70% pay out=30% retention ratio
20(1-.3) = 85
.20-.3*.12