ASSIGNMENT PROBLEMS ON CAPITAL BUDGETING

1. Calculate the pay-back periods of the following projects each requiring a cash
outlay of Rs.1,00,000. Suggest which projects are acceptable if the standard pay-
back period is 5 years.

(Cash Inflows in Rs.)

Year Project A Project B Project C

1 30,000 30,000 10,000
2 30,000 40,000 20,000
3 30,000 20,000 30,000
4 30,000 10,000 40,000
5 30,000 5,000 -

2. A company proposing to expand its production can go either for an automatic

machine costing Rs.2,24,000 with an estimated life of 5 and half years or an
ordinary machine costing Rs.60,000 having an estimated life of 8 years.

The annual sales and costs are estimated as follows:

Automatic Machine Ordinary Machine

Rs. Rs.
Sales 1,50,000 1,50,000
Costs:
Material 50,000 50,000
Labour 12,000 60,000
Variable 24,000 20,000
Overhead

Compare the comparative profitability under the pay-back method.

3. A company has an investment opportunity costing Rs.40,000 with the following

expected net cash flow after taxes and before depreciation.
 Using 10% as the cost of capital determine the following:
(a) Pay back period (b) NPV @ 20% discount factor (c) Profitability index @ 10%
discount factor (d) Internal rate of return with the help of 10% and 15%
discount factor.

Year Net Cash flow Year Net Cash flow

(Rs.) (Rs.)
1 7,000 6 8,000
2 7,000 7 10,000
3 7,000 8 15,000
4 7,000 9 10,000
5 7,000 10 4,000

4. A company can make either of two investments at the beginning of 2007.

Assuming required rate of return of 10% p.a. evaluate the investment proposals
as under:
(a) Return on investment
(b) Payback period
(c) Discounted pay-back period
(d) Profitability index

The forecast particulars are given below:

Proposal A Proposal A
Cost of Investment Rs.20,000 Rs.28,000
Life 4 years 5 years
Scrap Value NIL NIL
Net Income (after depn and Rs. Rs.
taxes)
End of 2007 500 3,400
End of 2008 2,000 3,400
End of 2009 3,500 3,400
End of 2010 2,500 3,400
End of 2011 NIL 3,400
It is estimated that each of the alternative projects will require an additional
working capital of Rs.2000 which will be received back in full after the expiry of
each project life. Depreciation is provided under the straight line method. The
present value of Re.1 to be received at the end of each year, at 10% p.a. is given
below:

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Year 1 2 3 4 5

P.V 0.91 .83 0.75 0.68 0.62

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