Page 154 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 6: Capital Budgeting

Solution: Notes
Option I: Loan in Rupees:

Repayment Interest Other Tax Net Discount Present
Year
of Principal @ 15% expenses savings outflow factor value
0 5 1.75 3.25 1 3.25
1 100 75 26.25 148.75 0.921 137
2 100 60 21 139 0.848 117.872
3 100 45 15.75 129.25 0.781 100.944
4 100 30 10.5 119.5 0.720 86.040
5 100 15 5.25 109.75 0.663 72.764
500 225 5 80.5 649.5 517.87

Option II: As per AS 11, the foreign exchange difference arising out of loan repayment in
foreign currency is to be capitalized. Similarly, the outstanding loan balances at each year-end
have to be converted at foreign exchange rate prevailing at the end of the year and the difference
has to be capitalized.

Option III: Foreign Currency Loan

Exch. Repay. of Interest Other Total Repay. of Other Total
Year Int.
Rate Principal @ 6% charges amount Principal charges payments
US $ in Lakhs. ( Lakhs)
36 0 0.140 0.140 5.04 5.04
38 1 2.8 0.840 3.640 106.4 31.92 138.32
40 2 2.8 0.672 3.472 112 26.88 138.88
42 3 2.8 0.504 3.304 117.6 21.168 138.768
44 4 2.8 0.336 3.136 123.2 14.784 137.984
46 5 2.8 0.168 2.968 128.8 7.728 136.528
14 2.520 0.140 16.660 588 102.48 5.04 695.52

Tax saving on additional depreciation on fixed assets on account of increase in loan amount at
the year-end due to foreign exchange fluctuation and repayment of loan.

Loan Increase in Opening Total Depreciation Tax Closing
Year amount loan due to WDV on 25% on savings on WDV on
o/s foreign addition additions (5) additions additions
exchange @ 35%
in US $
Lakhs fluctuations.
1 2 3 4 5 =3 + 4 25% on 6 7 8 = 5-6
1 14 32 32 8 2.8 24
2 11.2 22.4 24 46.4 11.6 4.06 34.8
3 8.4 16.8 34.8 51.6 12.9 4.515 38.7
4 5.6 11.2 38.7 49.9 12.475 4.366 37.425
5 2.8 5.6 37.425 43.025 43.025* 15.059

* Assumed that full benefit will be claimed for tax purposes.

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