Page 58 - DMGT405_FINANCIAL%20MANAGEMENT
P. 58

Financial Management



                      Notes            Present value of an annuity of  1 is:

                                               Year       6%        7%        10%       14%       15%
                                                 1       0.943     0.935     0.909      0.877     0.870
                                                 2       1.833     1.808     1.736      1.647     1.626
                                                 3       2.673     2.624     2.487      2.322     2.283
                                                 4       3.465     3.387     3.170      2.914     2.855

                                       Solution:

                                       Alternative: Purchase of equipment by financing it through bank loan
                                                  Cost of equipment =  10,00,000
                                                         Useful life = 3 years
                                                       Loan period = 3 years (payment in three equal instalments)
                                                       Interest rate = 10% p.a.
                                             Scrap value after 3 years = NIL

                                                                               10,00,00,000
                                           Annual repayment amount =
                                                                     Annunity factor of 10% of 3 years
                                                                       10,00,00,000
                                                                  =                  =  4.021 crore
                                                                          2,487
                                                    Calculation of Principal and Interest Amount Payments

                                             Year     Principle   Instalment   Interest @   Repayment   Balance
                                                       amount    at the end   10%     of Principal   Amount
                                                                of the year
                                               1        10.00      4.021     1.000       3.021      6.979
                                               2        6.979      4.021     0.698       3.323      3.656
                                               3        3.656      4.021     0.365       3.656

                                                      Calculation of Present Value of Net Cash Outflows

                                              Year     Principle                    1            Balance
                                                                      Depreciation @ 33  % p.a
                                                                                    3
                                               1         10.00                3.333               6.667
                                               2         6.667                2.222               4.445
                                               3         4.445                1.482               2.693

                                                      Calculation of Present Value of Net Cash Outflows

                                        Year   Loan    Principal   Interest  Depreciation   Tax   Net cash   PV   PV of Nt
                                             Instalment  Repayment  @ 10%   1    shield  Outflow  Factor   Cash
                                                                  ( )   @ 33  % p.a   @ 35%    @ 15%  Outflows
                                                                          3
                                                                         (WDV)
                                          1    4.021     3.021    1      3.333    1.517   2.504   0.87   2.178
                                          2    4.021     3.323   0.698   2.222    1.022   2.999   0.756   2.267
                                          3    4.021     3.656   0.365   1.482    0.646   3.375   0.658   2.221
                                                                               Total P.V. of net cash outflows   6.666
                                                                                                           Contd...



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