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(Ans. EAPVCO, Machine A= 4,96,290, Machine B = 5,84,236)

QUESTION – 27
APZ Limited is considering to select a machine between two machines 'A' and 'B'. The
two machines have identical capacity, do exactly the same job, but designed
differently.

Machine 'A' costs ₹ 8,00,000, having useful life of three years. It costs ₹ 1,30,000 per
year to run.

Machine 'B' is an economy model costing ₹ 6,00,000, having useful life of two years. It
costs ₹ 2,50,000 per year to run.

The cash flows of machine 'A' and 'B' are real cash flows. The costs are forecasted in
rupees of constant purchasing power. Ignore taxes.

The opportunity cost of capital is 10%.

The present value factors at 10% are :

Year t1 t2 t3
PVIF0.10,t 0.9091 0.8264 0.7513
PVIFA0.10,2 = 1.7355
PVIFA0.10,3 = 2.4868

Which machine would you recommend the company to buy?

(Ans. EAPVCO – Machine A = 4,51,699, Machine B = 5,95,722)

QUESTION – 28
A company is faced with the problem of choosing between two mutually exclusive
projects. Project A requires a cash outlay of Rs. 1,00,000 and cash running expenses
of Rs. 35,000 per year. On the other hand, Project B will cost Rs. 1,50,000 and require
cash running expenses of Rs. 20,000 per year. Both the projects have a eight-year life.
Project A has a Rs. 4,000 salvage value and Project B has a Rs. 14,000 salvage value.
The company‟s tax rate is 50% and rate of return is 10%. Assume depreciation on
straight line basis. Which project should be accepted.

QUESTION – 29
The management of a company has two alternative projects under consideration.
Project A requires a capital outlay of Rs. 1,20,000 but Project B needs Rs. 1,80,000.
Both are estimated to provide a cash flow for five years: A – Rs. 40,000 per year and B
– Rs. 58,000 per year. The cost of capital is 10%. Show which of the two projects is
preferable from the viewpoint of
(i) Net Present Value; and

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(ii) Internal rate of Return.

(Ans. (i) NPV= A 31,640, B= 39,878 (ii) IRR= A 19.86%, B 18.34%)

QUESTION – 30
Company X is to choose between machines A and B. The two machines are designed
differently, but have identical capacity and do exactly the same job. Machine A costs
₹1,50,000 and will last for 3 years. It costs ₹40,000 per year to run. Machine B is an
„economy model‟ costing only ₹1,00,000, but will last only for 2 years, and cost
₹60,000 per year to run. These are real cash flows. These costs are forecasted in
rupees of constant purchasing power. Ignore tax. Opportunity cost of capital is 10%.
Which machine the company X should buy ?

(Ans: EAPVCO - Machine A = 1,00,338, Machine B = 1,17,637)

QUESTION – 31
ABC Chemicals is evaluation two alternative systems for waste disposal, System A and
System B, which have lives of 6 years and 4 years respectively. The initial investment
outlay and annual operating costs for the two systems are expected to be as follows

System A System B

Initial Investment Outlay ₹ 5 million ₹ 4 million

Annual Operating Costs ₹ 1.5 million ₹ 1.6 million

Salvage Value ₹ 1 million ₹ 0.6 million

If the hurdle rate is 15%, which system should ABC chemicals choose?

(Ans. EAPVCO = Machine A = 27,06,949, Machine B = 29,00,911)

Missing Value

QUESTION – 32
Given below are the data on a capital project 'M'.

Annual cash inflows ₹ 60,000

Useful life 4 years
Internal rate of return 15%
Profitability index 1.064
Salvage value 0

You are required to calculate for this project M :

(i) Cost of project

(ii) Payback period
(iii) Cost of capital

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(iv) Net present value

PV factors at different rates are given below:

Discount Factor 15% 14% 13% 12%

1 year 0.869 0.877 0.885 0.893
2 year 0.756 0.769 0.783 0.797
3 year 0.658 0.675 0.693 0.712
4 year 0.572 0.592 0.613 0.636

(Ans. (i) Cost of Project = 1,71,300, (ii) Payback Period = 2.855 Years, (iii) Cost of
Capital = 12%, (iv) NPV = 10,963.20)

QUESTION – 33
ANP Ltd. is providing the following information:

Annual cost of saving ₹ 96,000

Useful life 5 years

Salvage value zero

Internal rate of return 15%

Profitability index 1.05

Table of discount factor:

Discount Years
factor 1 2 3 4 5 Total
15% 0.870 0.756 0.658 0.572 0.497 3.353
14% 0.877 0.769 0.675 0.592 0.519 3.432
13% 0.866 0.783 0.693 0.614 0.544 3.52

You are required to calculate:

(i) Cost of the project

(ii) Payback period

(iii) Net present value of cash inflow

(iv) Cost of capital.

(Ans. (i) Cost of Project = 3,21,888 (ii) Payback Period = 3.353 Years, (iii) Cost of
Capital = 13%, (iv) NPV = 16,094.40)

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QUESTION – 34
Following data has been available for a capital project:

Annual cash inflows ₹ 1,00,000

Useful life 4 years

Salvage value 0

Internal rate of return 12%

Profitability index 1.064

You are required to CALCULATE the following this project:

(i) Cost of project

(ii) Cost of capital

(iii) Net present value

(iv) Payback period

PV factors at different rates are given below:

Discount Factor 12% 11% 10% 9%

1 year 0.893 0.901 0.909 0.917
2 year 0.797 0.812 0.826 0.842
3 year 0.712 0.731 0.751 0.772
4 year 0.636 0.659 0.683 0.708

QUESTION – 35
Ae Bee Cee Ltd. is planning to invest in machinery, for which it has to make a choice
between the two identical machines, in terms of Capacity, „X‟ and „Y‟. Despite being
designed differently, both machines do the same job. Further, details regarding both
the machines are given below:

Particulars Machine ‘X’ Machine ‘Y’

Purchase Cost of the Machine (₹) 15,00,000 10,00,000
Life (years) 3 2
Running cost per year (₹) 4,00,000 6,00,000

The opportunity cost of capital is 9%.

You are required to IDENTIFY the machine which the company should buy?

The present value (PV) factors at 9% are:

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Year t1 t2 t3

PVIF0.09,t 0.917 0.842 0.772

NPV V/S IRR

QUESTION – 36
The cash inflows of projects C and D are reproduced below:
Project Cash Flow NPV at IRR
C0 C1 C2 C3 10%
C - ₹ 10,000 +2,000 +4,000 +12,000 + ₹ 4,139 26.5%
D - ₹ 10,000 +10,000 +3,000 +3,000 + ₹ 3,823 37.6%

(i) Why there is a conflict of rankings?

(ii) Why should you recommend project C in spite of lower internal rate of return?

Time Period
1 2 3
PVIF0.10, t 0.9090 0.8264 0.7513
PVIF0.14, t 0.8772 0.7695 0.6750
PVIF0.15, t 0.8696 0.7561 0.6575
PVIF0.30, t 0.7692 0.5917 0.4552
PVIF0.40, t 0.7143 0.5102 0.3644

(Ans. (i) Skewness of cash flows (ii) Project C should be accepted if opportunity
cost is 10%)

QUESTION – 37
The cash flows of two mutually exclusive Projects are as under:

t0 t1 t2 t3 t4 t5 t6
Project „P‟ (₹) (40,000) 13,000 8,000 14,000 12,000 11,000 15,000
Project „J‟ (₹) (20,000) 7,000 13,000 12,000 − − −

Required:

(i) Estimate the net present value (NPV) of the Project „P‟ and „J‟ using 15% as the
hurdle rate.

(ii) Estimate the internal rate of return (IRR) of the Project „P‟ and „J‟.

(iii) Why there is a conflict in the project choice by using NPV and IRR criterion?

(iv) Which criteria you will use in such a situation? Estimate the value at that
criterion. Make a project choice.

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The present value interest factor values at different rates of discount are as under:

Rate of t0 t1 t2 t3 t4 t5 t6
discount
0.15 1.00 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323
0.18 1.00 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704
0.20 1.00 0.8333 0.6944 0.5787 0.4823 0.4019 0.3349
0.24 1.00 0.8065 0.6504 0.5245 0.4230 0.3411 0.2751
0.26 1.00 0.7937 0.6299 0.4999 0.3968 0.3149 0.2499

(Ans. (i) NPV, Project P = 5,376, J = 3,807 (ii) IRR, Project P = 19.73%, J =
25.20% (iii) Reinvestment rate assumption (iv) EANPV, Project P = 1,420.44 , J =
1,667.58)

QUESTION – 38
A firm can make investment in either of the following two projects. The firm
anticipates its cost of capital to be 10% and the net (after tax) cash flows of the
projects for five years are as follows:

(Figures in ₹ „000)
Year 0 1 2 3 4 5
Project-A (500) 85 200 240 220 70
Project-B (500) 480 100 70 30 20

The discount factors are as under:

Year 0 1 2 3 4 5
PVF (10%) 1 0.91 0.83 0.75 0.68 0.62
PVF (20%) 1 0.83 0.69 0.58 0.48 0.41

Required:
(i) Calculate the NPV and IRR of each project.

(ii) State with reasons which project you would recommend.

(iii) Explain the inconsistency in ranking of two projects.

(Ans. (i)NPV- Project A= 1,16,350, Project B = 1,05,100 IRR- Project A = 18.66%,

Project B= 24.10% (ii) Project A due to higher NPV )

(2) REPLACEMENT DECISION

QUESTION – 39
An existing machine in B Ltd. can be sold today for ₹1,00,000 net. The cash flow after
tax(CFAT) for the balance life of 4 years is ₹ 30,000 per annum. At the end of the 4th
year,the existing machine can be sold for ₹20,000 net. A new machine can replace the

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