Q1. Shah Corporation is venturing in a new project.

Initial investment for the project

is Rs.20 lakhs. The rate depreciation 25% on WDV basis. The rate of discount is
10%, Tax rate is 40%.
Calculate:

a) ARR
b) Discounted pay back period
c) Discounted pay back profitability

Year 2005 2006 2007 2008 2009

Earning Before Tax 2 5 7 9 2
(Rs.in Lakhs)

Q2. A company is considering two mutually exclusive projects. Both require an initial
cash outlay of Rs.10, 000 each for machinery and have a life of 5 years. The
company’s required rate of return is 10% and pay tax at 50% rate. The projects will
be depreciated on straight line basis. The net cash flows (before taxes) expected to
be generated by the projects are as follows:
Cash Year
Flow 1 2 3 4 5
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Project 1 4,000 4,000 4,000 4,000 4,000

Project 2 6,000 3,000 2,000 5,000 5,000
The present value factors at 10% are:
Year1 - 0.909
Year2 - 0.826
Year3 - 0.751
Year4 - 0.683
Year5 - 0.621
Calculate:
a) The pay back of each project;
b) The average rate of return of each project;
c) The net present value and profitability index for each project.

Q3. SAM ltd provides you data pertaining to Machine “X” & Machine “Y”

Calculate the ARR & Pay back period.

Machine X Machine Y
Cost 10,00,000 12,00,000
Life 5 years 5 years
Profit After Depreciation (SLM) before Tax. (Tax Rate @35%)

Year Machine X Machine Y

1 1,20,000 1,50,000
2 90,000 1,20,000
3 1,10,000 1,30,000
 4 80,000 1,10,000
5 80,000 1,00,000

Q4. A company whose cost of capital is 12% is considering two projects ‘A’ and ‘B’.
The following data are available:

Project A Project B
(Rs.) (Rs.)
Investment 1,40,000 1,40,000
Cash Flows:
Year 1 20,000 1,00,000
Year 2 40,000 80,000
Year 3 60,000 40,000
Year 4 1,00,000 20,000
Year 5 1,10,000 20,000
3,30,000 2,60,000

Select the most suitable project by using the following methods:

a) Pay back period.
b) Net present value.
c) Profitability index.
The Present value of Re.1 at 12% are:
Year 1 0.9
Year 2 0.8
Year 3 0.7
Year 4 0.6
Year 5 0.55

Q5. The Project cash flows from two mutually exclusive projects M & N are as under:
Period Project M Project N
0 Year (Outflow) 22,000 27,000
1 to 7 (Inflow) 6,000 each year 7,000 each year
Project Life 7 years 7 years

(1) Advice on the Project selection with reference to Internal Rate of Return.
(2) Will it make any difference in Project selection if the Cash flow from Project N is
for 8 years instead of 7 years @ 7,000 each year?
PV Factor At For 7 years For 8 years
15% 4.16 4.49
16% 4.04 4.34
17% 3.92 4.21
18% 3.81 4.08
19% 3.71 3.95
20% 3.60 3.84

Q6. A Firm is considering buying a machine for Rs 20,000 cash down to produce
a product which can be sold at Rs 10 per unit. The machine is expected to
 produce 1,000 units of such product p.a. The machine is expected to have a
working life of 5 years with no scrap value at the end of its life. The operating cost
(Excluding Depreciation) for producing 1,000 units p.a. is estimated to be around
Rs 4,000/-. Depreciation on SLM basis is admissible for tax purposes. The Tax
Rate is 40%. Cost of Capital is 10%.
Should the Machine be purchased?
Explain the reasons for any change in the basis of your recommendation if
accelerated depreciation at the rate of 30% for each of the first 3 Years & 10% for
the 4th Year is admissible for the tax purposes.
The present value of Re 1 to be received at the end of each year at 10% is
Year PV Factor
1 0.91
2 0.83
3 0.75
4 0.68
5 0.62

Q7. A Company has an investment opportunity costing Rs 40,000 with the following
expected Net Cash Flow (i.e. after taxes & before depreciation)
Year Net Cash Inflows
(Rs)
1 7,000
2 7,000
3 7,000
4 7,000
5 7,000
6 8,000
7 10,000
8 15,000
9 10,000
10 4,000

Using 10% as the cost of Capital determine the following:

(1) Pay back Period
(2) Net present Value at 10% discounting factor
(3) Profitability Index at 10% discounting factor
(4) Internal Rate of return with the help of 10% & 15% discounting factors.

Q8. One of the two machines X & Y is to be purchased, from the following information, find
out which of the two will be more profitable? The average rate of Tax may be taken at 50%.
Particulars Machine X (Rs) Machine Y (Rs)
Cost of Machine 50,000 80,000
Working Life 4 Years 6 Years
Earnings before Rs Rs
Depreciation & Tax
Year 1 10,000 8,000
Year 2 15,000 14,000
Year 3 20,000 25,000
Year 4 15,000 30,000
Year 5 -- 18,000
Year 6 -- 13,000

Calculate: 1) Pay back period

2) Accounting Rate of Return.

Q9. Gun Metals Ltd. is considering two different investment proposals. The details are as
under:
Particulars Proposal A (Rs) Proposal B (Rs)
Investment Cost 9,500 20,000
Estimated Income (Net
Cash Flows) at end of
Year 1 4,000 8,000
Year 2 4,000 8,000
Year 3 4,500 12,000
(a) Suggest the most attractive proposal on the basis of excess present value methods
considering that future incomes are discounted at 12%.
(b) Also find out the internal rate of return of the two proposals.