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442 Corporate Finance BRILLIANT’S

If we observe these two examples, we find ¶{X h‘ XmoZm| CXmhaUm| H$mo XoIVo h¢ Vmo h‘ nmVo h¢
that both are opposite but equal ` 16,105 is XmoZm| Anmo{OQ> h¢, bo{H$Z {XE JE Q>mB‘ VWm BÝQ>aoñQ> aoQ>
compounded value of ` 10,000 and ` 10,000 is na XmoZm| g‘mZ ` 16,105, ` 10,000 H$s H$ånmCpÝS>¨J
discounted value of ` 16,105 for a given rate of d¡ë¶y h¡ VWm ` 10,000, ` 16,105 H$s {S>ñH$mCpÝQ>¨J
interest and time. d¡ë¶y h¡&
Hence, it can be said that compounding AV: ¶h H$hm Om gH$Vm h¡ {H$ {S>ñH$mCpÝQ>¨J VWm
and discounting are equal and opposite. H$ånmCpÝS>¨J B³db VWm Anmo{OQ> h¡& 

SOLVED PRACTICAL QUESTIONS
Illustration 5.1.13
A machine will cost ` 3,45,000 before it starts commercial production. At the end of its
4 year life its salvage value is estimated at ` 1,20,000. Working capital required will be ` 65,000.
Annual sales expected are ` 3,00,000 while the cost of sales, including depreciation will be
` 2,20,000. The company charges depreciation under Straight Line Method. It pays tax @ 40%. Its
IRR is 10% after tax. Is the proposal acceptable on quantitative considerations?
EH$ ‘erZ H$s BgH$m ì¶mdgm{¶H$ CËnmXZ àma§^ H$aZo Ho$ nhbo < 3,45,000 bmJV Am¶oJr& BgHo$ 4 df© Ho$ OrdZ
Ho$ A§V ‘| BgH$s gm°ëdoO d¡ë¶y H$m AZw‘mZ $< 1,20,000 h¡& Amdí¶H$ d{Hª$J H¡${nQ>b < 65,000 hmoJr& Ano{jV
dm{f©H$ {dH«$¶ < 3,00,000 h¡ O~{H$ S>o{à{eEeZ g{hV {dH«$¶ H$s bmJV < 2,20,000 hmoJr& ñQ´>oQ> bmBZ ‘oWS> Ho$
A§VJ©V H§$nZr S>o{à{eEeZ bJmVr h¡& ¶h 40% Q>¡³g H$m ^wJVmZ H$aVr h¡& Q>¡³g Ho$ níMmV² BgH$m IRR 10% h¡& ³¶m
àñVmd g§»¶mË‘H$ {dMma na ñdrH$m¶© h¡?
Solution:

Step Particulars Amt. (in `)

I Initial Investment:
Cost of Machine 3,45,000
Working Capital required 65,000
Total Outflow 4,10,000
II Present Value of Annual Inflow:
Expected Sales 3,00,000
Less: Cost of Sales (including Depreciation) 2,20,000
PBT 80,000
Less: Income Tax @ 40% 32,000
PAT 48,000
Add: Depreciation (WN 1) 56,250
CFAT 1,04,250
× PV Annuity Factor × 3.17
3,30,472.50