Page 429 - Corporate Finance PDF Final new link

BRILLIANT’S Capital Budgeting 429

Solution:
(i) Present Value of Cash Outflows: (Amount in `)
Particulars X Y

Initial Investment 56,125 56,125
Overhauling charges (25,000 × .751) 18,775 –
74,900 56,125
(ii) Present Value of Cash Inflows Machine X (Amount in `)

Year Income Dep. CFAT P.V.F. P.V.
After Tax & (`) (2 + 3)
Dep. (`) (WN 1) (`) (`) (`)
1 2 3 4 5 6

I 3,375 10,625 14,000 0.909 12,726
II 5,375 10,625 16,000 0.826 13,216
7,375
III NPP 10,625 18,000 0.751 13,518
IV 9,375 10,625 20,000 0.683 13,660
V 11,375 10,625 22,000 0.621 13,662
66,782
P.V. of Scrap (3,000 × .621) 1,863
Total 68,645

Present Value of Inflows (Machine Y)
Year Income Dep. CFAT P.V.
After Tax & (`) (2 +3) P.V.F. (`)
Dep. (`) (WN 1) (`) (`)

1 2 3 4 5 6
I 11,375 10,625 22,000 0.909 19,998
II 9,375 10,625 20,000 0.826 16,520
III 7,375 10,625 18,000 0.751 13,518
IV 5,375 10,625 16,000 0.683 10,928
V 3,375 10,625 14,000 0.621 8,694
P.V. of Scrap 1,863
Total 71,521

For Machine X 68,645 < 74,990.
For Machine Y 71,521 > 56,125; So Machine Y is better.