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BRILLIANT’S Capital Budgeting 453

Net Cash Inflows:
1st year 2,000
2nd year 2,000
3rd year to 10th year 2,500
Work out Net Present Value with a discount rate at 10% and express whether the
investment will be reasonable. The P.V.F. at 10% are :
Year 1 2 3 4 5 6 7 8 9 10

P.V.F. .909 .826 .751 .683 .621 .565 .513 .467 .424 .386
[Ans. N.P.V. ` (-) 5,505; Hence investment is not worthwhile]
5.1.6 A Ltd. Company is considering to purchase a new machine. Two alternative models, A
and B, are available, each costing ` 80,000. Earnings after taxation are expected to be as
follows:
Year Model A Model B
(`) (`)
1 8,000 24,000
2 24,000 32,000
3 32,000 40,000
4 48,000 24,000
5 32,000 16,000
The company has a target return on capital of 10%. On the basis, you are required to
compare the profitability of the models and state which alternative you consider
financially preferable.
[Ans: NPV : ` 84,424 (A) ` 85,256 (B) Model B is more profitable]
Cost of the Project 80,000
[Hint : Depreciation p. a. = = = ` 16,000]
Life 5
IRR METHOD
5.1.7 Goodluck Company Ltd. is considering two capital investment proposals, both requiring
initial outlay of ` 10,000 each and have a life of Five years. The company pays tax @ 50%
and arranges for depreciation on straight line basis. The cash inflows before depreciation
and tax are as follows:

Year 1 2 3 4 5

Project 'A' (`) 4,000 4,000 4,000 4,000 4,000
Project 'B' (`) 6,000 3,000 2,000 5,000 5,000

Which project should be accepted according to Internal Rate of Return Method?
[Ans. IRR Project A: 15.24%; B: 16.824%. Project B is better]