Even

A project cost 100000 and yields a 20000 for 8

years .Calculate `payback period.
Initial Investment/Annual cash inflow
=100000/20000=5years.

Uneven
A project cost 10000 and generates inflow of
2000,4000,3000 and 2000 in first,second,third and
forth year. Calculate payback period.

Initial Investment/Annual cash inflow

=9000 will be recovered till 3 years
In whole 2000 is RECOVERD in 12month SO in how
many month 1000 will be recovered.
1000 will be recovered in 1000/2000 *12=6 month
So pay back is 3 years 6 month.
Choosing best out of twoThere are two projects each consist of 20000
outlays. You are required to rank these projects on
pay back method.

Net profit before dep and after tax

1st
2nd
3rd
4th
5th

Project
X
1000
2000
4000
5000
8000

Project
Y
2000
4000
6000
8000

The payback for Project X is 5years

The payback for Project Y is 4years
So Y will be preferred over X.

Kavita Limited is considering two projects. Each requires

an investment of Rs10000.The net cash inflow from
investment in project X and Y are as follows:
Project

Cumulat

Project

Cumulat

X
Cash
inflows
5000
4000
3000
1000

ive
Cash
inflows
5000
9000
12000
13000

1st
2nd
3rd
4th
5th
6th
The company has fixed three
which project

ive
Cash
inflows
1000
3000
6000
10000

1000
2000
3000
4000
5000
6000
year as a cutoff point, State

Should be accepted.
Payback period for X=2+10000-90000/3000=2 and one
third year
Payback period for Y=4 year
Acceptance rule is
Accepted if PB is less than standard pay back
Rejected if PB is more than standard pay back
Since cut off point is 3 year Project X should be accepted.

Management of ABC LIMITED wants to buy a new

machine on the condition that its cost can be
recovered in 5 years by saving there from after
depreciation and taxation. Following information is
givenSales revenue by machine-800000
Cost of machine

600000

Variable cost

50% of sales

Average fixed cost other than depreciation-30000

Life of machine is 8 years
Taxation is 50%
Profitability statement
NET CASH FLOW=SALES-EXP-DEP-TAX+DEP
=EBIT-TAX+DEP
800000
400000

Sales REVENUE
less variable cost
Less FIXED cost

30000
370000

Less dep(600000/8)
PBT
Tax(50%)
PAT

75000
295000
147500
147500

Add:Dep
75000
222500

Net cash inflow

Initial Investment/Annual cash inflow

=600000/222500=2.7years.
Since payback period 2.7 year is less than 5 year
hence machine should be acquired.

OUNTING RATE OF RETURN

Meeta limited is considering an investment in a
project having a capital outlay of 400000 and 50%
tax. Forecast of annual income after depreciation
but before tax is as follows:

Year

1st
2nd

income after
depreciation but
before tax
200000
200000

3rd
4th
5th

160000
160000
80000

Total Income is 800000

Tax rate is 50% 400000

Total Income after tax 400000

Average Annual income is 400000/5=80000

Average Investment is Original cost+Scrap
2
400000+0
2
=200000

Accounting rate of return

=Average Annual income after tax and
dep *100
Average Investment
80000
200000

*100 =40%

The working result of two machines is given below:

Machine 1
Cost of machine
Sales per year
Total cost per
year(excluding
depreciation
Expected life

45000
100000
36000

Machine
2
45000
80000
30000

2 year

3 year

Machine 1

Machine
2
80000
30000
15000
35000
22500

Solution

Sales per year

Cost of machine
Dep
Net income per year
Average investment

100000
36000
22500
41500
22500

Accounting rate of return

=Average Annual income after tax and
dep *100
Average Investment
41500

*100 =184%

22500
Accounting rate of return
=Average Annual income after tax and
dep *100
Average Investment
35000

*100 =156%

22500
Machine 1 ARR IS HIGHER SO IT SHOULD BE PREFERRED.

A company is considering purchasing a machine

.Three machines are available X, Y AND Z.The
details are:

X
50000
5000

Y
60000
7500

Z
70000
10000

Cost
Estimate
d scrap
Life in
12
10
13
years
Average
10000
14000
18000
profit
before
tax and
dep
Tax is 50%.Find ARR Rate and which machine to be
procured.
Calculation of Average Income after tax and dep
Average profit
before tax and
depreciation
Less dep
Cost-scrap/life
Profit before tax
Less tax 50%
Average profit after

10000

14000

18000

3750

5250

4615

6250
3125
3125

8750
4375
4375

13385
6692.5
6692.5

tax and dep

Average INVESTMENT=
Initial investment+scrap/2=27500

33750

40000

Accounting rate of return

=Average Annual income after tax and
dep *100
Average Investment
3125

*100 =11.36%

27500
4375

*100 =12.96%

33750
6692.5
40000

*100 =16.73%

NPV:
An investment of 10000(having a scrap value of 500)
yields the following return:
Year
1st
2nd
3rd
4th
5th

Cash flow
4000
4000
3000
3000
2000

Is the investment desirable? Discuss according to NPV

assuming PV factor for first-five
year-.909,.826,.751,.683,.621 respectively.

Year

Cash flow

PV FACTOR

1st

4000

.909

Present
value
3636

2nd
3rd
4th
5th
Scrap

4000
3000
3000
2000
500

.826
.751
.683
.621
.621
Total Present
Value

3304
2253
2049
1242
310.5
12794.5

Net Present value=Present value-Initial cost

=12794.5-10000=2794.5 Investment
desirable.
The initial outlay of project is 100000 and its
generate 50000,-30000,50000,20000 from the end
of first year to fourth year.
Assume discount rate is 10%.Calculate profitability
index.The PV FACTOR IS FOR ONE TO FOURR YEARS
IS
.909
.826
.751
.683

Year

Cash flow

PV FACTOR

1st
2nd
3rd

50000
30000
50000

.909
.826
.751

Present
value
36360
24780
37550

4th

20000

.683
Total Present
Value

13660
112350

Profitability index= present value of inflows/

present value of outflows
112350/100000=1.1235
Net profitability index = Accept if P.I is greater than1:
Reject if P.I is less than1

A project cost Rs 32000 and its expected to

generate inflow of 8000 each for 5 years. Calculate
internal rate of return.
At 7% 8% and 9% per annum the present value of
Rs one received annually for 5 years is
4.1002,3.9926,3.8896.

The cash inflow is uniform for 5 years.

First-Calculation of PV factor
PVF = Initial outlay / Annual cash inflow
=32000/8000=4

Second-Then consult the PV table with the

number of years equal to the life of the assets &
find out the rate at which calculated PVF =PV
given in the table
At 7% 8% and 9% per annum the present value of Rs one
received annually for 5 years is 4.1002,3.9926,3.8896.
Referring to table at 4 FACTOR lies between 4.1002 and
3.9926 which is 7% and 8% .Therefore IRR lies between
7% and 8%
Third
Now Calculating Present value of cash inflow at
7%= 8000*4.1002=32801.6
Now Calculating Present value of cash inflow at
8%= 8000*3.9926=31940.8

Now Interpolation of IRR

IRR= LDR+P1-O *(HDR-LDR)
P1-P2
=7+32801.6-32000 *(8-7)
32801.6-31940.8
=7+801.6 *1
860.8
=7+.931

=7.931%

The estimated cash flow from the project with initial

investment of 70000 will be
10000,20000,30000.45000,60000 in first to fifth year
respectively.
Compute
A.Net present value of project @25% discount rate.
B.Profitibility Index.
C. Internal rate of return of the project.
Discount factor at
Year
1st
2nd
3rd
4th
5th

25%
.800
.640
.512
.410
.328

30%
.769
.592
.455
.350
.269

A.Net present value of project @25% discount rate.

Year

Cash flow

PV FACTOR

1st

10000

.800

Present
value
8000

2nd
3rd
4th
5th

20000
30000
45000
60000

.640
.512
.410
.328
Total Present
Value

12800
15360
18450
19680
74290

NPV=Total present value-Initial Investment

NPV =74290-70000=4290

B.Profitability index= present value of inflows/

present value of outflows
=74290/70000 =1.06

C. IRR
AT 25% PV FACOTR Present value is 74290 which more
than initial investment. Hence next trial rate of return is
30%
Year

Cash flow

PV FACTOR

1st
2nd
3rd
4th

10000
20000
30000
45000
60000

.769
.592
.455
.350
.261

5th

Present
value
7690
11840
13650
15750
15140

Total Present
Value

65070

AT 30% PV FACOTR Present value is 65070 which less

than initial investment. Hence actual rate is calculated.

Now Interpolation of IRR

IRR= LDR+P1-O *(HDR-LDR)
P1-P2
=25+74290-70000 *(30-25)
74290-65070
=25+4290 *5
9220
=25+.2.36
=27.326%

The following information is available of Avanti

Corporation :
Earnings per share- Rs.4
Rate of return --

18 %

Cost of Capital-

15%

What will be price per share as per Walter model if

dividend payout ratio is 40%? 50%? 60%.

a) 40%=dividend is 1.6
1.6+.18(2.4)/.15 =29.87

.15
b) 50%=dividend is 2
2+.18(2)/.15 =29.33
.15
c) 60%=dividend is 2
2.4+.18(1.6)/.15 =28.80
.15

The following information is available of ABCCorporation :

Rate of return -Earning-Rs-

12 %
20.

What will be price per share as per Gordon model if

dividend payout ratio is 10%? 70% at cost of capital is
20%

10% pay out=90% retention ratio

20(1-.9) = 21.74
.20-.9*.12
70% pay out=30% retention ratio
20(1-.3) = 85
.20-.3*.12