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478 Corporate Finance BRILLIANT’S

Illustration 5.2.2
Ravi Ltd. has funds of ` 2,00,000 which expectedly are not required for next few years and
hence can be deposited in a bank @ 15% interest payable annually. Alternatively, the funds can be
used to install a new machine for the production of a new item. For this, the firm has two options:
Option 1: Machine 1 costing ` 1,80,000 which is expected to give annual cash costing
`, 1,00,000, ` 1,20,000 and ` 40,000 respectively for next three years.
Option 2: Machine 2 costing ` 1,90,000 which is expected to give annual cash inflow of
` 1,00,000, ` 1,00,000 and ` 50,000 respectively for next three years.
Prepare a decision tree and evaluate the options.
a{d {b{‘Q>oS> Ho$ nmg ` 2,00,000 H$m ’§$S> h¡ Omo Ano{jV ê$n go AJbo Hw$N> dfm] Ho$ {bE Amdí¶H$ Zht h¡ VWm Bg
àH$ma EH$ ~¢H$ ‘| dm{f©H$ ê$n go Xo¶ 15% ã¶mO na O‘m {H$¶m Om gH$Vm h¡& d¡H$pënH$ ê$n go ’§$S²>g H$mo EH$ Z¶o Am¶Q>‘
Ho$ CËnmXZ Ho$ {bE Z¶r ‘erZ B§ñQ>mb H$aZo Ho$ {bE Cn¶moJ {H$¶m Om gH$Vm h¡& BgHo$ {bE g§ñWm Ho$ nmg Xmo {dH$ën h¢…
{dH$ën 1… ` 1,80,000> H$m°pñQ>¨J H$s ‘erZ 1 {Oggo AJbo VrZ dfm] Ho$ {bE H«$‘e… dm{f©H$ H¡$e H$m°pñQ>¨J
` 1,00,000, `1,20,000 VWm ` 40,000 XoZo H$s Anojm h¡&
{dH$ën 2… ` 1,90,000 H$m°pñQ>¨J H$s ‘erÝg 2 {Oggo AJbo VrZ dfm] Ho$ {bE H«$‘e… dm{f©H$ H¡$e BZâbmo
`1,00,000, ` 1,00,000 VWm ` 50,000 XoZo H$s Anojm h¡&
EH$ {S>[gOZ Q´>r V¡¶ma H$s{OE VWm {dH$ënm| H$m ‘yë¶m§H$Z H$s{OE&

Solution:
(In )` PVF @ 15% PV ( )`

(2,00,000) 1.000 (2,00,000)

@15% 30,000 0.870 26,100
Bank Deposite @15% 30,000 0.756 22,680
Intt.+
2,30,000 0.658 1,51,340
Deposit
NPV
NPV 1200
12
(1,80,000) 1.000 (1,80,000)
1,00,000 0.870 87,000
1
M 1 1,20,000 0.756 90,720
New Machine
40,000 0.658 26,320
NPV 24,040
20,040
NPV
M
2
(1,90,000) 1.000 (1,90,000)
1,00,000 0.870 87,000
2
1,00,000 0.756 75,600
50,000 0.658 32,900
NPV 5,500
5,500
NPV
Fig.: Decision Tree for Selection of Project