Amity Business School

Amity Business School

MBA Class of 2013, Semester II Financial Management Module IV

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Q1. Evaluate the project using NPV& IRR method of evaluation. Cost of plant Rs.600000 Additional working capital required Rs. 300000 Life of the plant is 5 yrs and SLM is used for depreciation. Tax rate is 30% Salvage value is 100000. Earning before depreciation and taxes are is follows;Year 1 2 3 4 5 Earnings 500000 400000 300000 300000 200000 (Discount rate is 10% )

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Q2. Gopal Industries Ltd is considering the purchase of a new machine which would carry out some operations at present being performed by hands. The two alternative models under consideration are X and Y. The following information is available in respect of the two models:
X Cost of Machine Estimated Life (Years) Estimated Savings in Scrap (p.a.) Additional Cost of Supervision(p.a.) Additional Cost of Maintenance(p.a.) Cost of Indirect Material (p.a.) Estimated savings in wages: (i) Wages per worker p.a. (ii) No. of Workers not required 3,000 200 3,000 250 10,00,000 10 60,000 65,000 35,000 30,000 Y 15,00,000 15 80,000 85,000 50,000 40,000

Using the method of Pay-back Period, suggest as to which model should be bought.. Ignore tax

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Q3. Sun National is considering the purchase of a new machine, which will replace Some manual operations. There are two alternatives X and Y. From the following Information prepare a profitability statement and work out the payback period for each. Model X Model Y Cost of machine Rs. 1,50,000 Rs. 2,50,000 Estimated life 5 yrs 5 yrs Cost of indirect materials Rs.6000 Rs.8000 Estimated savings in scrap Rs.10,000 Rs.15,000 Additional Cost of maintenance Rs.19,000 Rs.27,000 Estimated Savings in direct wages: Employees not required 15 20 Wages per employee p.a. Rs.6000 Rs.6000 Tax rates is 50 per cent Suggest which machine is preferred.

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Q4. A company is considering, purchase of machinery which costs Rs.8,00,000 & Which has an estimated life of 10 yrs. This machine will generate additional sales of Rs.4,00,000 per year while increased costs and maintenance will be Rs.1,00,000 per Year. The cost of the machine is depreciated on a straight line and has no salvage value At the end of its 10 yrs life. The company has a cost of capital of 12% and a corporate Tax rate of 40%. Your are required to calculate; i. Annual cash flow ii. The NPV iv. Pay back period iii. IRR

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Q5. Novartis manufacturing company bought a machine 5 years ago at a cost of Rs.15000. The machine had an expected life of 15years at the time of purchase and a Zero salvage value at the end of 15 yrs. It is being depreciated on a straight line basis And has a book value of Rs.10000 at present. The production manager reports that he Can buy a new machine for Rs.20000 which over its 10 yrs life will expand sales Annually from Rs.20000 to Rs.22000. Further, it will reduce operating cost from Rs.14000 to Rs.10000. The old machines current market value is Rs.2000. Taxes are at present 50% and the companys cost of capital is 10 percent . Calculate the cash outlay of the project and the net cash inflows and comment on the Decision of the production manager to replace the old machine.

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Q6. MRPL petrochemicals ltd which has a 50 per cent tax rate and a 10 percent after Tax cost of capital, is evaluating a project, which will cost Rs.1,00,000 and will Required an increase in the level of working capital of Rs.50,000. over its effective Life. The project will generate additional sales of Rs.1,00000 and will require cash expenses Of Rs. 30,000 each year of its 5 yrs life span. It will depreciate on straight line basis. Calculate the NPV.

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Q7.Walt ltd , plans to undertake a project for placing a new product in the market. The Companys cut off rate is 12%. It was estimated that the project would cost Rs.400000 In plant and machinery in addition to working capital of Rs. 10,00,00. which will be Recovered in full when the projects 5 year life is over. The maintenance cost incurred Will be Rs. 20000. The scrap value of plant & Machinery at the end of 5 yrs was estimated at Rs. 50000. After providing for Depreciation on straight line basis, profit after tax are as follows.

Year 1 PAT 4,00000 Tax rate is 50%. Evaluate the project under i. IRR method ii. NPV method.

2 5,00000

3 500000

4 5 5,00000 100000

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Q8.Jupiter limited is a manufacturing unit and is in dilemma whether it should replace a manually operated machine with fully automated version of the machine. The existing machine was purchased 10 years ago and has a book value of Rs.140000 and remaining life of 10 years. Salvage value is Rs.40000. The machine has recently begun causing problems with frequent breakdowns and its maintenance charges costing to the company is Rs.20000 per year. The company has been offered Rs.100000 for the old machine as a trade in on the automatic model which has a deliver price of Rs.220000 (before allowance for trade-in). It is expected to have 10 yrs life and a salvage value of Rs.20000. But the new machine will require installation charges of Rs.40000. with the usage of new machine it is estimated to have a cost saving in material of Rs.80000 per year. Maintenance charges are to be bore by the manufacturer. the tax rate is 40% applicable to both income and gains. The depreciation method followed by the company is straight line method. Evaluate the project and suggest the right measure.