Assignment No.

1
FM
1. Nestle is contemplating replacing its old machinery with a new one. The old
machine has been completely depreciated but has a current market value of Rs.
2000. The new machine will cost Rs.50,000, having a life of 5 years. The new
machine will be depreciated using the Double declining method and will have a
Rs.5,000 salvage value. The new machine will generate revenues of Rs.100,000
while old machine was generating revenues of Rs.80,000 and annual non-
depreciation expenses increases by Rs.10,000. What are the relevant cashflows if
the company pays a 43% tax for the first 3 years and 40% tax for the last 2 years?

2. XYZ Company is considering replacement of its existing machine by a new

machine which is expected to cost Rs 160,000. The new machine will have a life
of 5 years and will yield annual cash revenues of Rs 250,000 and incur annual
cash expenses of Rs 150,000. The existing machine has a book value of Rs
40,000, and can be sold for Rs 20,000 today. It is good for the next 5 years and is
estimated to generate annual cash revenues of Rs 200,000 and to involve annual
cash expenses of Rs 140,000. If sold after five years, the salvage value of the
existing machine can be expected to be Rs.2,000.
XYZ Company pay tax at 35 per cent, and can write off depreciation at 30 per
cent on the written-down value of the asset. The company’s opportunity cost of
capital is 20 per cent. Compute the relevant cash flows.

3. Fecto cement is contemplating replacing its old machinery with a new one. The
old machine has been completely depreciated but has a current market value of
Rs.2000. The new machine will cost Rs.25,000, having a life of 6 years, and have
no value after this time. The new machine will be depreciated using MACRS 5
year property class(i.e 20%,32%,19.2%,11.52%,11.52%,5.76%) basis and will
have a Rs.5,000 salvage value. The new machine will generate revenues of
Rs.50,000 while old machine was generating revenues of Rs.40,000 and annual
non-depreciation expenses increases by Rs.3,000. What are the relevant cashflows
if the company pays a 43% tax?

4. Bittech Corporation is considering buying a plant for Rs.1, 600,000 with SV

100,000 for producing a ram. Installation charges are Rs.100,000 and you require
Rs.10,000 for your N.W.C which will be available at the end of the life of the
plant. The plant has an expected life of 5 years and will be depreciated using the
SOYD method. Sales are expected to be Rs.2,100,000. Operating cost excluding
depreciation of the plant are Rs.1,000,000 per year. The corporation pays income
tax at the rate of 35%. Find the relevant cashflows for the project.