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452 Corporate Finance BRILLIANT’S

4 8,000 5,000
5 2,000 10,000
You have to use Pay-back period as the criterion.
[Ans. PBP : Project A = 2 Years 10.28 Months, Project B = 3 Years 6.24 Months.
Project A is preferable.]

 When Profit is Given in place of Cash Inflow
5.1.3 X Ltd. has to choose one of the following two mutually exclusive investment proposals.
Both the proposals have to be depreciated on straight line method. The tax rate may be
assumed to be 50%. The details are given below:
Particulars Proposal I Proposal II
(`) (`)
Cost of Outlay 1,50,000 1,50,000
Profit Before Tax :
Year 1 42,000 42,000
2 NPP 48,000 45,000
3 70,000 40,000
4 80,000 50,000
5 20,000 1,00,000
Which proposal should be accepted? Use Pay-back period as criterion for evaluation.
[Ans. P.B.P. Proposal I–2yrs 8.31 Months; Proposal II– 2 yrs. 11.16 Months.
Proposal I should be accepted]
ARR METHOD

5.1.4 ABC Ltd. is proposing to take up a project which will need an investment of ` 40,000. The
net income before depreciation and tax is estimated as follows:
Year (`)
1 10,000
2 12,000
3 14,000
4 16,000
5 20,000
Depreciation is to be charged according to the straight line method. Tax rate is 50%.
Calculate the Average Rate of Return. [Ans. ARR = 16%]

NPV METHOD
5.1.5 Given: (`)
Initial investment 20,000