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BRILLIANT’S Capital Budgeting 419

Illustration 5.1.5

The cost of a project is ` 9,80,000 and the installation charges are ` 20,000. The estimated profit
after tax and depreciation for 5 years are as follows:
àmoOo³Q> H$s bmJV < 9,80,000 h¡ VWm B§ñQ>mboeZ MmO}g < 20,000 h¡& Q>¡³g Ho$ níMmV² AZw‘m{ZV bm^ VWm
5 df© Ho$ {bE S>o{à{eEeZ {ZåZ h¢…

Years Profit after tax and depreciation (`)

1 50,000
2 75,000
3 1,25,000
4 1,30,000
5 80,000
Total 4,60,000

Calculate average rate of return if: / [aQ>Z© Ho$ EdaoO aoQ> H$s JUZm H$s{O¶o, ¶{X…
(a) There is no scrap value of the project. / àmoOo³Q> H$s H$moB© ñH«o$n d¡ë¶y Zht h¡&

(b) If the scrap value at the end of 5 years is ` 80,000. / ¶{X 5 df© Ho$ A§V ‘| ñH«o$n d¡ë¶y < 80,000 h¡&
(c) If scrap value is ` 80,000 and additional working capital is required ` 1,00,000.
¶{X ñH«o$n d¡ë¶y < 80,000 h¡ VWm A{V[a³V d{Hª$J H¡${nQ>b < 1,00,000 Amdí¶H$ h¡&
Solution:

Total PAT 4,60,000
(a) Average Profit = = = ` 92,000
No. of Years 5
10,00,000
Average Investment = = ` 5,00,000
2

Average PAT 92,000
ARR =  100 =  100 = 18.4%
Average Investment 5,00,000
(b) Since there is scrap value ` 80,000; the average investment will be:

 10,00,000 80,000 
80,000 = ` 5,40,000
   `
 2 
92,000
ARR =  100 = 17.04% (Approx.)
5,40,000
(c) When there is scrap value ` 80,000 and additional working capital required is ` 1,00,000;
the average investment will be: