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BRILLIANT’S Capital Budgeting 415

Post-Tax Profits 45,000
Add : Depreciation @ 10% on ` 4,50,000 45,000
Annual Cash Flow 90,000
Cost of Plant 4,50,000
Pay-Back Period =   5Years
Annual Cash Inflow 90,000

Illustration 5.1.4
A Co. wants to replace the manual operations by new machine. There are two alternative
models of P and Q of the new machine. Using pay-back period, suggest the most profitable
investment. Ignore taxation.
EH$ H§$nZr Z¶r ‘erZ Ûmam ‘oZwAb Am°naoeZ H$mo à{VñWm{nV H$aZm MmhVr h¡& Z¶r ‘erZ Ho$ Xmo d¡H$pënH$ ‘m°S>ëg
P VWm Q h¢& no~¡H$ nr[a¶S> H$m Cn¶moJ H$aHo$ g~go bm^Xm¶H$ {Zdoe H$m gwPmd Xr{OE& Q>¡³goeZ H$s Cnojm H$s{OE&

Particulars Machine-P Machine-Q
({ddaU) (‘erZ-P) (‘erZ-Q)
Original Investment / Am°[aOZb BÝdoñQ>‘|Q> 9,000 18,000
Estimate life of the machine (Years) / ‘erZ H$m AZw‘m{ZV OrdZ (df©) 4 5

Estimated saving in scrap / ñH«o$n ‘| AZw‘m{ZV ~MV (`) 500 800
Estimated saving in wages / doOog ‘| AZw‘m{ZV ~MV (`) 6,000 8,000
Additional cost of maintenance / ‘¢Q>oZ§og H$s A{V[a³V bmJV (`) 800 1,000
Additional cost of supervision / gwna{dOZ H$s A{V[a³V bmJV (`) 1,200 1,800

Solution:

Statement of Pay-Back Period Machine P Machine Q
(`) (`)
Estimated Savings in Scrap & Wages 6,500 8,800
Less: Additional Cost of Maint. & Supervision 2,000 2,800
4,500 6,000
Depreciation (Cost ÷ Life) (-) 2,250 (-) 3,600
Net Gain 2,250 2,400
Add: Depreciation 2,250 3,600
Annual Cash inflow 4,500 6,000

Investment 9,000 18,000
Pay-Back Period (Year) =
Annual Cash inflow 4,500 6,000
2 Years 3 Years

Suggestion: The lowest pay-back period is 2 years in case of Machine P. Hence, the most
profitable investment is on Machine P. 