CAPITAL BUDGETING (INVESTMENT EVALUATION) TECHNIQUES
1. Consider that an investor has an opportunity of receiving Rs.1,000, Rs.2,000, Rs.800, Rs.1,100
and Rs.400 respectively at the end of one through five years. Find out the present value of this
stream of uneven cash flows, if the investor’s required rate of interest is 8%.
2. Suppose, you expect to receive 1000 Rs annually for 5 years . Each receipt occurs at the end of
the year. What is the Present Value of this stream benefits if the discount rate is 10%.
3. A company is considering an investment proposal to install a new machine. The project will
cost Rs.50,000 and will have a life of 5 years and no salvage value. Tax rate is 50%, the
company follows straight-line method of depreciation. The net earnings before depreciation and
tax is as follows
Year 1 2 3 4 5
EBDT(Rs) 10,000 11,000 14,000 15,000 25,000
Evaluate the project using: i)NPV at 10% and ii) PI at 10% discount factor.
4. From the following information calculate the net present value (NPV) and Profitability
index (PI) or Benefit to Cost Ratio (BCR ) of the two projects and suggest which of the two
projects should be accepted assuming a discount rate of 10%.
Project X Project Y
Initial Investment Rs 20,000 Rs 30000
Estimated Life 5years 5 Years
Scrap Value Rs1000 Rs 2000
The profits before depreciation and after taxes ( Cash flows ) are as follows
Year 1 Year 2 Year 3 Year 4 Year 5
Rs Rs Rs Rs Rs
Project X 5000 10,000 10,000 3000 2000
Project Y 20,000 10,000 5000 3000 2000
5. A project costs Rs.1, 00,000 and yields an annual cash inflow of Rs 20,000 for 8 years.
Calculate its payback period.
6. Determine the pay back period for a project which requires a cash outlay of Rs. 10,000
and generates cash inflows of Rs 2000, Rs 4,000, Rs 3000 and Rs.2000 in the first,
second, third and fourth year respectively.
7. A project cost Rs 5,00,000 and yields annually a profit of Rs. 80,000 after depreciation at
12% p.a but before tax of 50%. Calculate the Pay Back Period.
8. X Ltd is producing articles mostly by manual labour and is considering to replace it by a
new machine . there are two alternative models M and N of the new machine .Prepare a
statement of profitability showing the pay back period form the following information.
Machine M Machine N
Estimated life of Machine 4 years 5 years
Cost of Machine Rs.90,000 Rs,190,000
Estimated savings in scrap 5000 8000
Estimated savings in direct 60,000 80,000
wages
Additional cost of 8000 10,000
maintenance
Additional cost of supervision 12,000 18,000
9. A project requires an investment of Rs 5,00,000 and has a scrap value of Rs 20,000 after
five years. It is expected to yield profits after depreciation and taxes during the five years
amounting to Rs 40,000 , Rs 60,000 , Rs 70,000 , Rs 50,000 and Rs 20,000. Calculate the
average rate of return on the investment.
10. Calculate the average rate of return for projects A and B from the following
Project A Project B
Investments Rs.20,000 Rs. 30,000
Expected Life ( No salvage 4 years 5 years
value)
Projected net income ( After
interest , depreciation and
taxes)
Years Project A Project B
1 2000 3000
2 1500 3000
3 1500 2000
4 1000 1000
5 ----- 1000
11. Ltd is considering the purchase of a machine. Two machines are available E and F. The
cost of each machine is Rs 60,000. Each machine has an expected life of 5 years. Net
profits before tax and after depreciation during the expected life of the machines are
given below.
Years Project A Project B
1 15000 5000
2 20,000 15,000
3 25,000 20,000
4 15,000 30,000
5 10,000 20,000
Total 85000 90,000
12. Initial outlay Rs 50,000, Life of the asset – 5 years,
estimated annual cash –flow Rs 12,500.
Calculate the internal rate of return
13. Initial Investment = Rs. 60,000 , Life of the asset = 4 Years
Estimated Net Annual Cash Flows
1st year 15000
2nd year 20,000
3rd year 30,000
4th year 20,000
Calculate the internal rate of return
14. The expected cash flows of a project are as follows:
year 0 1 2 3 4 5
Cash flow 1,00,000 20,000 30,000 40,000 50,000 30,000
The cost of capital is 12%. Calculate the following;
i) NPV ii) Benefit Cost Ratio iii) Payback Period and iv) Discounted Pay Back Period
15. A company is considering an investment proposal to install a new milling control at a cost of
Rs.50,000. The facility has a life expectancy of 5 years and no salvage value. The tax rate is 35%.
Assume the firm uses straight line depreciation and the same is allowed for tax purposes. The
estimated cash flows before depreciation and tax (CFBT) from the investment proposal are as
follows:
Year 1 2 3 4 5
CFBT(Rs) 10,000 10,692 12,769 13,462 20,385
Compute the following:
Payback period (ii) Average rate of return (iii)NPV at 10% discount rate and(iv)Profitability
Index at 10% discount rate.
