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LOVELY PROFESSIONAL UNIVERSITY

HOMEWORK NO 3

School: LSM Department: Management

Name of the faculty member: Aarti

Course No: MGT 517 Course Title: Financial Management

Class: MBA Term: II Section: S1002 Batch:2010

Max. Marks: Fifteen Date of Allotment:24-03-11 Date of Submission: 04-04-11

Topic: Numerical Problems on the Capital Budgeting decision. Each student is required to
submit the HW containing solution of each problem.

Evaluation Details: Six problems have been given to all the students. Evaluation will be made
as follows:
• 5 Marks for submission
• 10 marks of test based on assignment.
PART A

Qns.1 Using information below, calculated Discounted pay-back period.

Initial Outlay Rs.80,000


Estimated Life 5 years
Profit After tax:-
End of the year 1 6,000
End of the year 2 14,000
End of the year 3 24,000
End of the year 4 16,000
End of the year 5 NIl

Qns.2 following are the data on a capital project being evaluated by the management of
ABC ltd:-

Annual Cost saving Rs.50,000


Useful life 4 years
IRR 14%
Profitability Index 1.06522
NPV ?
Cost of capital ?
Cost of project ?
Pay back period ?
Salvage Value 0
Find the missing values considering the following table of discount factor only:-

Discount 14% 13% 12% 11%


Factor
1st year 0.877 0.885 0.893 0.901
2nd Year 0.769 0.783 0.797 0.811
3rd Year 0.675 0.693 0.712 0.732
4th Year 0.592 0.613 0.636 0.659
2.913 2.974 3.038 3.103

Qns.3 Determine which of the following two mutually exclusive projects should be
selected if they are:-

i) One-off investments

ii) If they can be repeated indefinitely

A B
Investment Rs.40,000 Rs.60,000
Life 4 years 7 years
Annual Net Cash Inflows Rs.15,000 Rs.16,000
Scrap value Rs.5,000 Rs.3,000
Cost of capital- 15%. Ignore tax

The present value of annuity for 4 years and 7 years at 15% are respectively 2.8550
and 4.1604 and the discounting factors at 4 years and 7 years respectively are 0.5718
and 0.3759.

PART B

Qns.4 N Ltd has just installed Machine-R at a cost of Rs 2,00,000. The machine has a
five year life with no residual value. The annual volume of production is estimated at
1,50,000 units, which can be sold at Rs 6 per unit. Annual operating costs are estimated
at Rs 2,00,000 (excluding depreciation) at this output level. Fixed costs are estimated at
Rs 3 per unit for the same level of production. N Ltd has just come across another
model called Machine-S capable of giving the same output at an annual operating cost
of Rs 1,80,000 (exclusive of depreciation). There will be no change in fixed costs.
Capital cost of this machine is Rs 2,50,000 and the estimated life is for 5 years with no
residual value. The company has an offer for sale of Machine-R at Rs 1,00,000. The
cost of dismantling and removal will be Rs 30,000. As the company has not yet
commenced operations, it wants to sell Machine-R and purchase Machine-S. N Ltd will
be a zero-tax company, for seven years in view of several incentives and allowances
available. The cost of capital may be assumed at 14 per cent.
(i) Advise whether the company should opt for replacement.

(ii) Will there be any change in your view if Machine-R has not been installed but the
company is in the process of selecting one or the other machine?

Qns.6 Qns. 15 from I.M Pandey

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