MB0029: Financial

Management
[Assignment SET1 & SET2]

Name : P. Srinath
SMDUE ID : 520923307
Center : Mehbub College Campus, Secunderabad
Subject Code : MB0029
Subject : Financial Management
 ASSIGNMENT MBA SEM II Subject Code:
MB0029 SET 1

1. Why wealth maximization is superior to profit maximization in

todays context? Justify your answer.

Profit Maximization has been considered as the legitimate objective of

a firm because profit maximization is based on the cardinal rule of
efficiency. Under perfect competition aallocation of resources shall be based
on the goal of profit maximization.

A firms performance is evaluated in terms of profitability.

Investors perception of companys performance can be traced to the goal
of profit maximization. But, the goal of profit mmaximization has been
criticized on many accounts.

Wealth Maximization has, been accepted by the finance

managers, because it overcomes the limitations of profit maximisation.
Wealth maximization means maximizing the net wealth of the Companys
share holders. Wealth maximization is possible only when the company
pursues policies that would increase the market value of shares of the
company.

Superiority of Wealth Maximization over Profit Maximization

It is based on cash flow, not based on accounting profit.

Through the process of discounting it takes care of the

quality of cash flows. Distant cash flows are uncertain. Converting
distant uncertain cash flows into comparable values at base period
facilitates better comparison of projects. There are various ways of
dealing with risk associated with cash flows. These risks are
adequately considered when present values of cash flows are taken to
arrive at the net present value of any project.

In todays competitive business scenario corporates play a

key role. In company form of organization, shareholders own the
company but the management of the company rests with the board
of directors. Directors are elected by shareholders and hence
agents of the shareholders. Company management procures funds
for expansion and diversification from Capital Markets. In the
liberalized set up, the society expects corporate to tap the capital
markets effectively for their capital requirements. Therefore to
keep the investors happy through the performance of value of shares
in the market, management of the company must meet the wealth
maximisation criterion.

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 When a firm follows wealth maximization goal, it achieves
maximization of market value of share. When a firm practices wealth
maximisation goal, it is possible only when it produces quality goods at
low cost. On this account society gains because of the societal
welfare.

Maximization of wealth demands on the part of corporate to

develop new products or render new services in the most effective
and efficient manner. This helps the consumers as it will bring to the
market the products and services that consumers need.

Another notable features of the firms committed to the

maximization of wealth is that to achieve this goal they are forced to
render efficient service to their customers with courtesy. This
enhances consumer welfare and hence the benefit to the society.

From the point of evaluation of performance of listed firms,

the most remarkable measure is that of performance of the
company in the share market. Every corporate action finds its
reflection on the market value of shares of the company.
Therefore, shareholders wealth maximization could be considered a
superior goal compared to profit maximization.

Since listing ensures liquidity to the shares held by the

investors, shareholders can reap the benefits arising from the
performance of company only when they sell their shares.
Therefore, it is clear that maximization of market value of shares
will lead to maximization of the net wealth of shareholders

2. Your grandfather is 75 years old. He has total savings of Rs.80,000.

He expects that he live for another 10 years and will like to spend
his savings by then. He places his savings into a bank account
earning 10 per cent annually. He will draw equal amount each year-
the first withdrawal occurring one year from now in such a way that
his account balance becomes zero at the end of 10 years. How much
will be his annual withdrawal?

Present Value (PV) =80000/-

Amount (A) =?

Interest Rat e (I) =10%

No. of Year (N) =10

PVAn = A {1+i)n-1} /{ i(1+i)n}

80000=A{1+.10)10 }/{.10(1+.10)10}

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 80000=A{ 1.593742/0.259374}

A =80000/ 6.144567

A = 13019.63 Yrly

3. What factors affect financial plan?

Factors Affecting Financial Plan

Nature of the industry Here, we must consider whether it is

a capital intensive or labour intensive industry. This will have a major
impact on the total assets that the firm owns.

Size of the Company The size of the company greatly

influences the availability of funds from different sources. A small
company normally finds it difficult to raise funds from long X Ds X
1000 , term sources at competitive terms. On the other hand, large
companies like Reliance enjoy the privilege of obtaining funds both
short term and long term at attractive rates.

Status of the company in the industry A well

established company enjoying a good market share, for its
products normally commands investors confidence. Such a company
can tap the capital market for raising funds in competitive terms for
implementing new projects to exploit the new opportunities
emerging from changing business environment.

Sources of finance available Sources of finance

could be grouped into debt and equity. Debt is cheap but risky
whereas equity is costly. A firm should aim at optimum capital
structure that would achieve the least cost capital structure. A
large firm with a diversified product mix may manage higher
quantum of debt because the firm may manage higher financial
risk with a lower business risk. Selection of sources of finance is
closely linked to the firms capacity to manage the risk exposure.

The Capital structure of a company is influenced by the

desire of the existing management (promoters) of the company to
retain control over the affairs of the company. The promoters who do
not like to lose their grip over the affairs of the company normally
obtain extra funds for growth by issuing preference shares and
debentures to outsiders.

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 Matching the sources with utilization The prudent
policy of any good financial plan is to match the term of the source
with the term of investment. To finance fluctuating working
capital needs the firm resorts to short terms finance. All fixed assets
financed investments are to be financial by long term sources. It is a
cardinal principle of financial planning.

Flexibility: The financial plan of a company should possess

flexibility so as to effect changes in the composition of capital
structure when ever need arises. If the capital structure of a
company is flexible, it will not face any difficulty in changing the
sources of funds. This factor has become a significant one today
because of the globalization of capital market.

Government Policy: SEBI guidelines, finance ministry

circulars, various clauses of Standard Listing Agreement and
regulatory mechanism imposed by FEMA and Department of
corporate affairs (Govt of India) influence the financial plans of
corporates today. Management of public issues of shares demands the
compliances with many statues in India. They are to be complied
with a time constraint.

Economic factors: Many economic factors will significantly

affect your financial plan, i.e. supply and demand, various institutions,
business, labor force, and government. Supply and demand will form
price. Price level will change your consumption pattern, so do your
investment and others. Labor force will determine your income. When
unemployment rate is high, it will be more difficult to find job. When
job is rare, people are willing to work for less money, and vice versa.
Financial institutions and others business are the user of labors. Their
activities will shape the economic and eventually affect your financial.
Government will influence economic by monetary and fiscal policy. The
steps government take will affect you financially. When government
raise the interest rate, economic will cool down. When economic
slowdown, government will lower the interest rate. When interest rate
is low, invest your money in bank will not give you decent return. It
means take longer time for your investment to reach your financial
goals. Therefore, in order to get higher return people invest in stock
market or business.

Global influence: Since the advance of technology causes this

globe to become smaller, especially in the era of globalization. Now
people do business across the country boundary, therefore what
happen in other country will have an effect on people in another
country Rain at Wall Street, drizzle around the world. The economic
of particular country depend on foreign investment. When many
foreign investors come, they will create new businesses. New business
will absorb many labors, therefore lowering unemployment rate and
increasing wages. However higher wage does not always guarantee
the prosperity of workers in certain country. When you earn high

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 income but everything is so expensive there. It is identical with make
little, since your much money actually cannot buy many things. For
instance, average worker in Indonesia make approximately 1 million
Rupiah monthly. Can you imagine make 1 million dollars monthly here?
Unfortunately, that 1 million Rupiah is only around $ 108, since the
currency exchange of Rupiah is around Rp. 9,200 to $ 1 USD. Currency
exchange surely will impact your purchasing power and your financial
situation. Currency of a country is usually base on its economic
condition i.e. governments budget, balance trade, inflation level and
growth. Foreign exchange is the biggest financial market in the world,
we definitely will learn about it in later articles.

Economic condition: Consumer price, consumer spending,

interest rate, money supply, unemployment, house started, gross
domestic product, trade balance and market indication are among
economic condition that affect your decision in handling your money
matters.

Consumer price measure the value of your money through

inflation rate. It influences your personal financial planning because
consumer price alter your money purchasing power. When consumer
price increase beyond your income, you will unable to buy as much
thing as you used to. Consumer spending measures the demand of
good and service by individuals and household. When consumer
spending is up, more jobs will be available and wage will be higher.
Increase in consumer spending will drive consumer price to increase
and inflation level as well.

Interest rate measure cost of money or credit and return

of investment. Increase in interest rate will make credit more
expensive and discourage borrowing. With high interest, people are
more likely to invest their money to earn interest than take higher risk
to do business. Excessive investment from investor with inability of
bank lending to third party will create over supply of fund. In which will
drive down the interest rate eventually.

Money supply measures money available for spending in an

economic. More money make people have more to save. Therefore,
increases in money supply tend to decrease interest rate as more
people save. Moreover, higher saving and lower spending will reduce
job opportunity. Unemployment measures number of people, who
willing and able to work, out of work. High unemployment rate reduce
consumer spending and job opportunity. It is wiser to setup higher
emergency fund and reduce debt to cope with high unemployment
rate, since it is harder to get new job when unemployment rate are
high. House started measures the number of new house built. New
house build is sign of economic expansion. When new house build
increase, it creates more jobs, higher wage and higher consumer
spending. Gross domestic product measures the total value produce
within a countrys border. GDP indicate country prosperity. High GDP

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 will increase employment opportunity and opportunity for personal
financial wealth.

Trade balance measures different between export and

import. Deficit happen, when import exceed export. Large deficit over
long run will hurt employment and GDP. Surplus happen, when export
exceed import. Large surplus will raise the value of the currency,
reducing the future opportunity of export, since commodity become
more expensive to foreigner. Market indication (stock market index)
measures the relative value of stocks. These indexes provide
indication of the price movement of stocks. Since you will invest your
money in the market to help you reach your financial goals,
understand how the market work will benefit you.

Q.4:- Suppose you buy a one-year government bond that has a

maturity value of Rs.1000. The market interest rate is 8 per cent. (a)
How much will you pay for the bond? (b) If you purchase the bond
for Rs.904.98, what interest rate will you earn from this investment?

Case Study:

Deepak Hand tools Private Limited

DHPL is a small sized firm manufacturing hand tools. It manufacturing

plan is situated in Haryana. The companys sales in the year ending on 31st
March 2007 were Rs.1000 million (Rs.100 crore) on an asset base of Rs.650
million. The net profit of the company was Rs.76 million. The management of
the company wants to improve profitability further. The required rate of
return of the company is 14 percent.

The company is currently considering an investment proposal. One is

to expand its manufacturing capacity. The estimated cost of the new
equipment is Rs.250 million. It is expected to have an economic life of 10
years. The accountant forecasts that net cash inflows would be Rs.45 million
per annum for the first three years, Rs.68 million per annum from year four to
year eight and for the remaining two years Rs.30million per annum. The plant
can be sold for Rs.55 million at the end of its economic life.

The company would need to raise debt to the extent of Rs.200 million.
The company has the following options of borrowing Rs.200 million:

a. The company can borrow funds from a nationalized bank at the

interest rate of 14 percent for 10 years. It will be required to pay equal
annual installment of interest and repayment of principal.

b. A financial institution has offered to lend money to DHPL at 13.5 per

annum but it needs to pay equated quarterly installment of interest and
repayment of principal.

1. Should the company expand its capacity? Show the computation

of NPV

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 2. What is the annual installment of bank loan?

3. Calculate the quarterly installments of the Financial Institution

loan

4. Should the company borrow from the bank or from the financial
institution?

Answer 1. Investment in New Equipment : 250000000

Life of machine : 10 Years

Salvage : 55000000

Yea PV of cash
rs Cash inflows PV factors at 14 % inflows

45,000,00 39,47
1 0 0.877 3,684

45,000,00 34,62
2 0 0.769 6,039

45,000,00 30,37
3 0 0.675 3,718

68,000,00 40,26
4 0 0.592 1,459

68,000,00 35,31
5 0 0.519 7,069

68,000,00 30,97
6 0 0.456 9,885

68,000,00 27,17
7 0 0.400 5,338

68,000,00 23,83
8 0 0.351 8,016

30,000,00 9,22
9 0 0.308 5,238

30,000,00 8,09
10 0 0.270 2,314

Salv 55,000,00 14,83

age 0 0.270 5,910

PV of cash inflows 294,1

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 98,670

250,00
Initial cash out flow 0,000

44,1
NPV 98,670

Here NPV is positive it is advisable to the company to expand its capacity.

Answer 2.

Loan Amount : 200000000

Interest rate : 14 %

No of Year(N) : 10 Years

Installment X PVIFA (14%,10) =20,00,00,000

Installment = 20,00,00,000 / 5.216

= 3,83,43,558

Answer 3.

Loan Amount : 20,00,00,000

Interest rate : 13.5 %

No of Year(N) Quarterly : 10 Years

Installment X PVIFA (13.5% / 4, 40) =20,00,00,000

Installment = 20,00,00,000 / 5.176

= 3,86,39,876

Answer 4. The company should borrow from bank because payback

installment is lesser than the financial institution.

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 ASSIGNMENT MBA SEM II Subject Code:
MB0029 SET 2

1. A. What is the cost of retained earnings?

B. A company issues new debentures of Rs.2 million, at par; the net

proceeds being Rs.1.8 million. It has a 13.5 per cent rate of interest
and 7 years maturity. The companys tax rate is 52 per cent. What is
the cost of debenture issue? What will be the cost in 4 years if the
market value of debentures at that time is Rs.2.2 million?

A. Cost of Retained Earnings

A companys earnings can be reinvested in full to fuel the ever-

increasing demand of companys fund requirements or they may be paid off
to equity holders in full or they may be partly held back and invested and
partly paid off. These decisions are taken keeping in mind the companys
growth stages. High growth companies may reinvest the entire earnings to
grow more, companies with no growth opportunities return the funds earned
to their owners and companies with constant growth invest a little and return
the rest.

Shareholders of companies with high growth prospects utilizing funds

for reinvestment activities have to be compensated for parting with their
earnings. Therefore the cost of retained earnings is the same as the cost of
shareholders expected return from the firms ordinary shares. That is,
Kr=Ke

There are three methods one can use to derive the cost of retained
earnings:

(a) Capital-asset-pricing-model (CAPM) approach

To calculate the cost of capital using the CAPM approach, you must
first estimate the risk-free rate (rf), which is typically the U.S. Treasury bond
rate or the 30-day Treasury-bill rate as well as the expected rate of return on
the market (rm).

The next step is to estimate the companys beta (bi), which is an

estimate of the stocks risk. Inputting these assumptions into the CAPM
equation, you can
then calculate the
cost of retained
earnings.

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 (b) Bond-yield-plus-premium approach

This is a simple, ad hoc approach to estimating the cost of retained

earnings. Simply take the interest rate of the firms long-term debt and add a
risk premium (typically three to five percentage points):

ks = long-term bond yield + risk premium

(c) Discounted cash flow approach

Also known as the dividend yield plus growth approach. Using the
dividend-growth model, you can rearrange the terms as follows to
determine ks.
ks= D1 + g;
P0

where:
D1 = next years dividend
g = firms constant growth rate
P0 = price

and

(F+P)/2
Where kd is post tax cost of debenture capital,
I is the annual interest payment per unit of debenture,
T is the corporate tax rate,

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 F is the redemption price per debenture,
P is the net amount realized per debenture,
N is maturity period
13.5(0.52) + (1.8)/ 13.5*.48+2/7
6.51
---------------------------------------
(2+1.8)/2 1.9=3.43
(b) 13.5(1-.52) + (2-2.2)/4 13.5*.48-.2/4
---------------------------------------
(2+2.2)/2 2.1
=6.43/.21=3.06

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 2. Volga is a large manufacturing company in the private sector. In
2007 the company had a gross sale of Rs.980.2 crore. The other
financial data for the company are given below:

Items Rs. In crore

Net worth 152.31

Borrowing 165.47

EBIT 43.17

Interest 34.39

Fixed cost 118.23

(excluding interest)

You are required to calculate:

a. Debt equity ratio

b. Operating leverage

c. Financial leverage

d. Combined leverage. Interpret your results and comment on

the Volgas debt policy

a. Debt equity ratio=Borrowing/Interest

=165.47/34.39
=4.81

b. Operating leverage DOL=Q(S-V)/Q(S-V)-F where F= fixed cost

Now EBIT=Q(S-V)-F
So Q(S-V) =EBIT+F
= 43.17+118.23
=161.47
So DOL=161.47/43.17=3.74

c. Financial leverage DFL=EBIT/{EBIT-I-{Dp/(1-T)}}

Where I is interest, Dp is dividend on preference shares; T is tax

rate
= 4.92

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d. Combined leverage= DOL*DFL
= 3.74*4.92
=18.4

As combined leverage is high so it is risky.

3. Explain Miller and Modigliani Approach to capital structure theory.

The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller)

forms the basis for modern thinking on capital structure. The basic theorem
states that, in the absence of taxes, bankruptcy costs, and asymmetric
information, and in an efficient market, the value of a firm is unaffected by
how that firm is financed. It does not matter if the firm's capital is raised by
issuing stock or selling debt. It does not matter what the firm's dividend
policy is. Therefore, the Modigliani-Miller theorem is also often called the
capital structure irrelevance

Principle Modigliani was awarded the 1985 Nobel Prize in Economics

for this and other contributions. Miller was awarded the 1990 Nobel Prize in
Economics, along with Harry Markowitz and William Sharpe, for their "work in
the theory of financial economics," with Miller specifically cited for
"fundamental contributions to the theory of corporate finance."

Historical background Miller and Modigliani derived the theorem

and wrote their path breaking article when they were both professors at the
Graduate School of Industrial Administration (GSIA) of Carnegie Mellon
University. In contrast to most other business schools, GSIA put an emphasis
on an academic approach to business questions. The story goes that Miller
and Modigliani were set to teach corporate finance for business students
despite the fact that they had no prior experience in corpora the finance.
When they read the material that existed they found it inconsistent so they
sat down together to try to figure it out. The result of this was the article in
the American Economic Review and what has later been known as the MM
theorem.

Propositions The theorem was originally proved under the

assumption of no taxes. It is made up of two propositions which can also b e
extended to a situation with taxes. Consider two firms which are identical
except for their financial structures. The first (Firm U) is unlevered: that is, it
is financed by equity only. The other (Firm L) is levered: it is financed partly
by equity, and partly by debt. The Modigliani-Miller theorem states that the
value of the two firms is the same.

Without taxes

Proposition I: where VU is the value of an unlevered firm = price of

buying a firm composed only of equity, and VL is the value of a levered firm
= price of buying a firm that is composed of some mix of debt and equity.

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 To see why this should be true, suppose an investor is considering
buying one of the two firms U or L. Instead of purchasing the shares of the
levered firm L, he could purchase the shares of firm U and borrow the same
amount of money B that firm L does. The eventual returns to either of these i
investments would be the same. Therefore the price of L must be the same
as the price of U minus the money borrowed B, which is the value of L's debt.
This discussion also clarifies the role of some of the theorem's assumptions.
We have implicitly assumed that the investor's cost of borrowing money is
the same as that of the firm, which need not be true in the presence of
asymmetric information or in the absence of efficient markets.

4. How to estimate cash flows? What are the components of

incremental cash flows?

Cash flow estimation is a must for assessing the investment

decisions of any kind. To evaluate these investment decisions there are some
principles of cash flow estimation. In any kind of project, planning the outputs
properly is an important task. At the same time, the profits from the project
should also be very clear to arrange finances in a proper way. These
forecasting are some of the most difficult steps involved in the capital
budgeting. These are very important in the major projects because any kind
of fault in the calculations would result in huge problems. The project cash
flows consider almost every kind of inflows of cash. The capital budgeting is
done through the coordination of a wide range of professionals who are going
to be involved in the project. The engineering departments are responsible
for the forecasting of the capital outlays. On the other hand, there are the
people from the production team who are responsible for calculating the
operational cost. The marketing team is also involved in the process and they
are responsible for forecasting the revenue.

Next comes the financial manager who is responsible to collect all the
data from the related departments. On the other hand, the finance manager
has the responsibility of using the set of norms for better estimation. One of
these norms uses the principles of cash flow estimation for the process.

There are a number of principles of cash flow estimation. These are the
consistency principle, separation principle, post-tax principle and incremental
principle. The separation principle holds that the project cash flows can be
divided in two types named as financing side and investment side. On the
other hand, there is the consistency principle. According to this principle,
some kind consistency is necessary to be maintained between the flow of
cash in a project and the rates of discount that are applicable on the cash
flows. At the same time, there is the post-tax principle that holds that the
forecast of cash flows for any project should be done through the after-tax
method.

Incremental Principle The incremental principle is used to measure

the profit potential of a project. According to this theory, a project is sound if
it increases total profit more than total cost. To have a proper estimation of
profit potential by application of the incremental principle, several guidelines
should be maintained:

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 Incidental Effects: Any kind of project taken by a company remains
related to the other activities of the firm. Because of this, the particular
project influences all the other activities carried out, either negatively or
positively. It can increase the profits for the firm or it may cause losses.
These incidental effects must be considered.

Sunk Costs: These costs should not be considered. Sunk costs

represent an expenditure done by the firm in the past. These expenditures
are not related with any particular project. These costs denote all those
expenditures that are done for the preliminary work related to the project,
unrecoverable in any case.

Overhead Cost: All the costs that are not related directly with a
service but have indirect influences are considered as overhead charges.
There are the legal and administrative expenses, rentals and many more.
Whenever a company takes a new project, these costs are assigned.

Working Capital: Proper estimation is essential and should be

considered at the time when the budget for the project's profit potential is
prepared.

5. What are the steps involved in capital rationing?

Capital budgeting decisions involve huge outlay of funds. Funds

available for projects may be limited. Therefore, a firm has to prioritize
the projects on the basis of availability of funds and economic
compulsion of the firm. It is not possible for a company to take up all the
projects at a time. There is the need to rank them on the basis of strategic
compulsion and funds availability. Since companies will have to choose
one from among many competing investment proposal the need to develop
criteria for Capital rationing cannot be ignored. The companies may have
many profitable and viable proposals but cannot execute because of
shortage of funds. Another constraint is that the firms may not be able
to generate additional funds for the execution of all the projects. When a
firm imposes constraints on the total size of firms capital budget, it is
requires Capital Rationing.

Capital rationing refers to a situation in which the firm is under a

constraint of funds, limiting its capacity to take up and execute all the
profitable projects. Such a situation may be due to external factors or due to
the need to impose internal constraints, keeping in view of the need to
exercise better financial control.

Capital Rationing may be due to:-

1. External Capital Rationing: External Capital Rationing is due

to the imperfections of capital markets Imperfection may be caused by:

(a) Deficiencies in market information

(b) Rigidities that hamper the force flow of Capital between firms.

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 When capital markets are not favorable to the company the firm
cannot tap the capital market for executing new projects even though the
projects have positive net present values. The following reasons attribute to
the external capital rationing:

Inability of the firm to procure required funds from Capital

market because the firm does not command the required
investors confidence.
National and international economic factors may make the
market highly volatile and instable.
Inability of the firm to satisfy the regularity norms for
issue of instruments for tapping the market for funds.
High Cost of issue of Securities I,e High floatation cost. Smaller
firms smaller firms may have to incur high costs of issue of
securities. This discourages small firms from tapping the capital
markets for funds.

2. Internal Capital Rationing Impositions of restrictions by a firm on

the funds allocated for fresh investment is called internal capital rationing.
This decision may be the result of a conservative policy pursued by a firm.
Restriction may be imposed on divisional heads on the total amount that
they can commit on new projects. Another internal restriction for Capital
budgeting decision may be imposed by a firm based on the need to
generate a minimum rate of return. Under this criterion only projects
capable of generating the managements expectation on the rate of return
will be cleared. Generally internal capital rationing is used by a firm as a
means of financial control.

6. Equipment A has a cost of Rs.75,000 and net cash flow of Rs.20000

per year for six years. A substitute equipment B would cost
Rs.50,000 and generate net cash flow of Rs.14,000 per year for six
years. The required rate of return of both equipments is 11 per cent.
Calculate the IRR and NPV for the equipments. Which equipment
should be accepted and why?

For equipment A
Average cash flow Rs. 20000/- per year
And the initial investment Rs. 75000/-
So the ratio of initial cash flow & initial investment=75000/20000
=3.75

From the PVIFA table for 6 years annuity factor vary near 3.75 is 16%
So PV of cash flow at 16% is 73600/-

For next trial rate 15% so PV of cash flow is 75706

So IRR of the for the equipment A is 16+ (75706-75000)/ (75706-73600)
=16.34%

For equipment B average cash flow Rs. 14000/- per year

And the initial investment Rs. 50000/-

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 So the ratio of initial cash flow & initial investment=50000/14000
=3.57

From the PVIFA table for 6 years annuity factor vary near 3.75 is 18%
So PV of cash flow at 18% is 49000/-

For next trial rate 17% so PV of cash flow is 50257/-

So IRR of the for the equipment A is 18+ (50257-50000)/ (50257-49000)
=18.2%

Now NPV of equipment A = PV of net cash flow initial cost

= (20000/- of PVIF 11% for 6 y)-75000/-
=9610/-

& NPV for the equipment B= PV of net cash flow-initial cost

= (14000/- of PVIF 11% for 6 y)-50000/-
=9227/-
So B is preferable because of highest rate of Profitability index

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