Bhimsen company is considering investing in a machine to produce bowling b

The building which is proposed to be used in the production process can be s

for immeidately an after tax amount of 150,000. If you go ahead with the
investment the building can be sold at the end 5th year at an after tax amoun
150,000. The cost of the machine is 100,000 and it is expected to last 5 years.
the end of 5 years, the machine will be sold at estimated value of 30000. The
machine can be depreciated on a straight line basis to value of 20000. The
production units during 5 year of machine life is expected to be 5000, 8000 ,
12000 , 10000 and 6000 units. The price of bowling balls will be Rs 20 per un
the first year`. And the price is expected to increase at 2% per year. The first y
production cost will be Rs 10. And it is expected to increase at 10% per year. T
project requires an immediate( year 0) investment in working capital of 10000
The net working capital every year is 10% of sales. The tax rate is 34%.
Discounting rate is 10%
o produce bowling balls.
on process can be sold
ahead with the time 0 1 2
t an after tax amount of OP Bal 100000 84000
ected to last 5 years. At Dep 16000 16000
value of 30000. The
ue of 20000. The Closing Bal 100000 84000 68000
to be 5000, 8000 ,
will be Rs 20 per unit in Dep Tax Shield 5440 5440
per year. The first year
se at 10% per year. The
king capital of 10000. Initial Inv -100000
x rate is 34%. Salvage Value
Capital Gain tax
Opp Cost -150000

Units 5000 8000

Price 20 20.4
Cost 10 11.0
Business Cashflows 50000 75200
After-tax cashflows 33000 49632

WC 10000 10000 16320

Change in WC -10000 0 -6320
Net Cashflows -260000 38440 48752
50032.9
 3 4 5
68000 52000 36000
16000 16000 16000
52000 36000 20000

5440 5440 5440

30000
-3400
150000

12000 10000 6000

20.8 21.2 21.6
12.1 13.3 14.6
104496 79142 42046
68967 52233 27750

24970 21224
-8650 3745 21224
65758 61419 231014