Page 427 - Corporate Finance PDF Final new link

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BRILLIANT’S Capital Budgeting 427

4 2,00,000
5 1,50,000
You can assume straight line method for charging depreciation, cost of capital of 15% and
corporate tax rate of 50%.
Amn S>o{à{eEeZ bJmZo H$s ñQ´>oQ> bmBZ ‘oWS>, H¡${nQ>b H$s bmJV 15% VWm H$m°nm}aoQ> Q>¡³g aoQ> 50% ‘mZ gH$Vo h¢&
Should the company purchase the machine ? / ³¶m H§$nZr H$mo ‘erZ IarXZm Mm{hE?
Solution:

Computation of Cash Outflow (`)
Cost of Machine . 5,85,000
Installation Charges 15,000
6,00,000
Less: Tax Benefit due to Investment Allowance
(i.e., 50% of 20% of ` 6,00,000) 60,000
Net Investment Outlay 5,40,000
Add: Working Capital required 1,00,000
6,40,000
Computation of Cash Inflow (Amount in `)

Year Cash Depre- Profits Tax @ Profits Cash
Inflows ciation* Before 50% After Inflow
Tax Tax

1 2 3 4 5 6 7 (3 + 6)
1 1,00,000 1,00,000 0 0 0 1,00,000
2 1,80,000 1,00,000 80,000 40,000 40,000 1,40,000
3 2,50,000 1,00,000 1,50,000 75,000 75,000 1,75,000
4 2,00,000 1,00,000 1,00,000 50,000 50,000 1,50,000
5 1,50,000 1,00,000 50,000 25,000 25,000 1,25,000
*Note : Annual Depreciation is computed as below :

Cost of Machine Installation Charges Salvage Value 
Estimated Working Life of the Machine

Present Value of Net Cash Inflows-

Year Net Cash Inflows (`) PV Factor at 15% Total PV (`)
1 1,00,000 0.870 87,000
2 1,40,000 0.756 1,05,840
3 1,75,000 0.658 1,15,150