Page 140 - DMGT409Basic Financial Management

Unit 7: Capital Budgeting

4. A project expected cash flows are as follows: Notes
Year 0 1 2 3 4 5
CFAT (`) 50,000 10,000 15,000 20,000 25,000 20,000

Calculate pay back period.
5. A project costs `30, 00,000 and yields annually `4, 50,000 after depreciation at 15 per cent
but before tax at 40 per cent. Calculate payback period.
6. From the following information calculate pay back period and Accounting Rate of Return
Projects Original Investment CFAT(Rs) Economic life
A 25,000 3,000 10
B 3,000 1,000 5
C 12,000 2,000 8
D 20,000 4,000 10
E 40,000 8,000 2
7. A company is planning to consider any one of the three alternatives A, B and C. Calculate
ARR.
Alternatives CFAT(Rs)
0 1 2
A 5,000 0 6,610
B 5,000 1,080 3,080
C 5,000 5,750 0

8. From the following cash flow (CFAT) stream of X and Y, calculate (a) PBP (b) ARR (c) NPV,

and (d) PI.
Years 0 1 2 3 4 5 6 7 8 9 10
X (Rs. in Lakhs) 4 0.80 0.80 0.80 0.80 0.80 0.80 0.80 0.80 0.80 0.80
Y (Rs. in Lakhs) 6 0.80 0.80 0.80 0.80 0.80 0.60 0.70 0.30 0.30 0.40
Assume 10 per cent discounting rate.
9. VS International co, Ltd, is evaluating a project that costs ` 2,00,000 and it require an all
additional net working capital of ` 1,00,000. It is expected to generate a net cash fl ow of `
1,05,000 for 5 years. What is the NPV and IRR of the project assuming 50 per cent tax rate
and 10 per cent cash of capital. [Answer: NPV: `, 160.155, IRR: 29.86 per cent]

10. XYZ company is considering the following projects P and Q.
Year 0 1 2 3
P 25,000 5,000 5,000 25,640
Q 28,000 12,672 12,672 12,602
Calculate NPV and IRR of both projects. [Answer: NPV:P–Rs.1700, Q–Rs.2436, IRR:P–15
per cent, Q–17 per cent]
11. What is capital budgeting? The process and techniques of capital budgeting.

12. Briefly discuss the techniques of capital budgeting with their merits and limitations.

13. What is capital budgeting? Discuss its nature, importance and deficiencies of capital
budgeting.

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