Page 421 - Corporate Finance PDF Final new link

NPP

BRILLIANT’S Capital Budgeting 421

36,875
Machine A   ` 7,375
5
36,875
Machine B  ` 7,375
5

OriginalInvestment ScrapValue
and Average Investment = + Net W.C. + Scrap Value
2

56,125 3,000
Machine A   5,000 3,000 = 26,562.50 + 8,000 = ` 34,562.50
2
56,125 3,000
Machine B   6,000 3,000 = 26,562.50 + 9,000 = ` 35,562.50.

2
7,375
Hence, ARR for Machine A =  100  21.34%
34,562.50
7,375
ARR for Machine B =  100  20.74%
35,562.50
Note: If there is any scrap value and additional working capital, the formula for calculating
Average Investment will be as mentioned above. 
CAPITAL BUDGETING : NET PRESENT VALUE (NPV) METHOD
H¡${nQ>b ~OqQ>J: ZoQ> n«oO|Q> d¡ë¶y (NPV) ‘oWS>

Q.49. "The best method for evaluation of investment proposal is the net present value method
or discounted cash flow technique." Elaborate. / ''{Zdoe àñVmd Ho$ ‘yë¶m§H$Z Ho$ {bE g~go
AÀN>r ‘oWS> ZoQ> àoO|Q> d¡ë¶y ¶m {S>ñH$mC§Q> H¡$e âbmo VH$ZrH$ h¡&'' dU©Z H$s{OE&
OR
Discuss the merits and limitations of NPV method.
NPV ‘oWS> Ho$ JwU VWm gr‘mE§ H$s ì¶m»¶m H$s{OE&

Net Present Value (NPV) Method ZoQ> àoOoÝQ> d¡ë¶y (NPV) ‘oWS>
The best method for evaluation of BÝdoñQ>_|Q> àmoOoŠQ> Ho$ _yë`m§H$Z Ho$ {cE ewÕ dV©_mZ
investment proposal is the net present value _yë` nÕ{V AWdm {S>ñH$mC§Q>oS> H¡$e âcmo Q>opŠZH$ g~go
method or discounted cash flow technique. This
method takes into account the time value of ~ohVa nÕ{V h¡Ÿ& `h nÕ{V _Zr H$s Q>mB_ d¡ë`y H$m Ü`mZ
money. aIVr h¡Ÿ&
Under this method, the first thing to Bg nÕ{V _|, g~go nhco H¡$e AmCQ>âcmo H$mo
determine is the cash outflow. Each project will {ZYm©[aV H$aZm hmoVm h¡Ÿ& àË`oH$ àmoOoŠQ> {ZpíMV g_`md{Y
involve certain investment and commitment of _| H¡$e Ho$ {ZpíMV BÝdoñQ>_|Q> VWm H${_Q>_|Q> H$mo gpå_{cV
cash at certain points of time. These are cash H$aoJm& `o H¡$e AmCQ>âcmoO hmoVo h¢& Bg àH$ma, H$moB©