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Q No.1 CAPITAL BUDGETING

A firm invested cash Rs.200,000 on a project. It is forecasted that following cash flow will generate by
this project in coming 5 years. Firm cost of capital is 12%.

Year Cash Inflow

1 Rs. 50,000
2 50,000
3 75,000
4 125,000
5 75,000

Requried: Use above information to calculate

• Payback period
• Discounted payback period
• NPV
• Profitability Index
• IRR

Q No.2

A company is considering an investment proposal to install new milling machine. The project will cost
Rs.50,000. The facility has a life expectancy of 5 years and no salvage value. The company tax rate is
40%. Firm uses straight-line method for depreciation. The estimated earning before tax from the
proposed investment plan are as under.

Year Earning before tax

1 Rs. 22,000
2 18,000
3 14,000
4 15,000
5 25,000

Compute cash flow for 5 years.

athar@iqra.edu.pk
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Calculate:

1. Payback period
2. Profitability Index
3. IRR
4. NPV( discount rate is 15%)

Q.3

Firm purchased plant Rs. 150,000; foundation cost paid 10,000 and installation Rs. 20,000. Estimated life
is five years with zero salvage value. Estimated earning is as follows.

Years EBT
1 Rs. 70,000
2 Rs. 50,000
3 Rs. 70,000
4 Rs. 70,000
5 Rs. 60,000

Firm uses Straight Line Method. Tax rate 40% and cost of capital is 15%.
Calculate:
(i) Payback period
(ii) Profitibility Index
(iii) NPV
(iv) IRR

Q.4 Firm purchased plant Rs. 150,000; foundation cost paid 10,000 and installation Rs. 20,000. Project is
forecast for five years, details are as follows:

• Sales 15000 units [growth of sales by 20% for first two years and then 10% for rest of the
project life].
• Working capital required at the start of project 10,000.
• Sales price 25 per unit
• Variable cost of sales Rs. 8 per unit
• Fixed expenses Rs. 10,000(excluding depreciation)

Firm uses diminishing Balance Method [rate20%] and tax rate 40%. Assume that plant sold at the end of
the project equal to its book value. Cost of capital 15%.

athar@iqra.edu.pk
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Calculate

NPV and IRR

Q No.5

Lobers Inc, has two investment proposals, which have the following characteristics

Project A
Period Cost Profit after tax Net cash flow
0 9000 ------ -------
1 1000 5000
2 1000 4000
4 1000 3000

Project B

Period Cost Profit after tax Net cash flow

0 12000 ------- --------

1 1000 5000

2 1000 5000

3 4000 8000

For each project, compute its payback period, its net present value, and its IRR using a discount rate of
15%.

Q No.6

The Wingler Equipment Company purchased a machine 5 years ago at a cost of $100,000. It had an
expected life of 10 years at the time of purchase and an expected salvage value of $10,000 at the end of
the 10 years. It is being depreciated by the straight line method toward a salvage value of $10,000.

A new machine can be purchased for $150,000, including installation costs. Over its 5 year life, it will
reduce cash operating expenses by $50,000 per year. Sales are not expected to change. At the end of its
useful life, the machine is estimated to be worthless. Straight line method of depreciation will be used
with no salvage value.

athar@iqra.edu.pk
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The old machine can be sold today for $65,000. The firm’s tax rate is 34 percent. The appropriate
discount rate is 15 percent.

Required

1. What is the NPV of this project?

athar@iqra.edu.pk