Cf Probs Pras Chan

1.

(a) Project Cash Flows (Rs. in million)

Year 0 1 2 3 4 5 6 7

1. Plant & machinery (150)

2. Working capital (50)

3. Revenues 250 250 250 250 250 250 250

4. Costs (excluding de-

preciation & interest) 100 100 100 100 100 100 100

5. Depreciation 37.5 28.13 21.09 15.82 11.87 8.90 6.67

6. Profit before tax 112.5 121.87 128.91 134.18 138.13 141.1143.33

7. Tax 33.75 36.56 38.67 40.25 41.44 42.33 43.0

8. Profit after tax 78.75 85.31 90.24 93.93 96.69 98.77100.33

9. Net salvage value of

plant & machinery 48

10. Recovery of working 50

capital

11. Initial outlay (=1+2) (200)

12. Operating CF (= 8 + 5) 116.25 113.44 111.33 109.75 108.56 107.6 107.00

13. Terminal CF ( = 9 +10) 98

14. N C F (200) 116.25 113.44 111.33 109.75 108.56 107.67 205

(a) IRR (r) of the project can be obtained by solving the following equation for r

-200 + 116.25 x PVIF (r,1) + 113.44 x PVIF (r,2)

+ 111.33 x PVIF (r,3) + 109.75 x PVIF (r,4) + 108.56 x PVIF (r,5)

+107.67 x PVIF (r,6) + 205 x PVIF (r,7) = 0

Through a process of trial and error, we get r = 55.17%. The IRR of the project is 55.17%.

5. A. Initial outlay (at time 0)

i. Cost of new machine Rs. 400,000

ii. Salvage value of the old machine 90,000

iii. Net investment 310,000

B. Operating cash flow (years 1 through 5)

Year 1 2 3 4 5

i. Depreciation

of old machine 18000 14400 11520 9216 7373

ii. Depreciation

of new machine 100000 75000 56250 42188 31641

iii. Incremental

depreciation

( ii – i) 82000 60600 44730 32972 24268

iv. Tax savings on

incremental

depreciation

( 0.35 x (iii)) 28700 21210 15656 11540 8494

v. Operating cash

flow 28700 21210 15656...