Page 58 - DMGT405_FINANCIAL%20MANAGEMENT

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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