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426 Corporate Finance BRILLIANT’S

Solution:
Calculation of Net Present Value (Amount in `)

Project I Project II
Year PVF Cash In- PV Cash In- PV
10% flow (CI) (CI × PVF) flow (CI) (CI × PVF)

1 0.909 25,000 22,725 10,000 9,090
2 0.826 15,000 12,390 12,000 9,912
3 0.751 10,000 7,510 18,000 13,518
4 0.683 Nil Nil 25,000 17,075
5 0.621 12,000 7,452 8,000 4,968
6 0.564 6,000 3,384 4,000 2,256
Total of PV of Cash Inflow 53,461 56,819
Less: Cash Outflows 50,000 50,000
N.P.V. NPP + 3,461 + 6,819

Conclusion- Project II should be preferred in comparison to project I, because net present
value (NPV), i.e., excess of cash inflows over cash outflows is more in project II than in project I.

Illustration 5.1.9
A Ltd. is considering to purchase a new machine costing ` 5,85,000. An additional investment
will be required for the following reasons.
A {b{‘Q>oS> < 5,85,000 bmJV H$s EH$ Z¶r ‘erZ IarXZo na {dMma H$a ahr h¡& EH$ A{V[a³V {Zdoe
{ZåZ{b{IV H$maUm| Ho$ {bE Amdí¶H$ hmoJm&
(i) Installation cost ` 15,000. / B§ñQ>mboeZ H$m°ñQ> < 15,000

(ii) Working capital ` 1,00,000. / d{Hª$J H¡${nQ>b < 1,00,000
The machine has a working life of 5 years and salvage value will be ` 1,00,000. The working
capital will also be released after 5 years. Investment allowance benefit will be available @ 20%
on the cost of new machine.
‘erZ H$s d{Hª$J bmB’$ 5 df© h¡ VWm gmëdoO d¡ë¶y < 1,00,000 hmoJr& d{Hª$J H¡${nQ>b 5 df© níMmV² N>mo‹S> Xr
Om¶oJr& B§doñQ>‘|Q> AbmC§g ~oZr{’$Q> Z¶r ‘erZ H$s bmJV na 20% na CnbãY hmoJr&
The estimated cash inflows (before depreciation and tax) are estimated to be as below:
AZw‘m{ZV H¡$e BZâbmo (S>o{à[eEeZ VWm Q>¡³g Ho$ nhbo) {ZåZ{b{IV hmoZo H$m AZw‘mZ h¡…

Years Cash Inflows (`)

1 1,00,000
2 1,80,000
3 2,50,000