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    Tute5 Capital Budgeting

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    vivek patel
    The company is considering investing in a new product line that requires an initial investment of Rs. 7 lakhs in year 0 and Rs. 1 million in year 1. It is expected to generate cash inflows of Rs. 2.5 lakhs in year 2, Rs. 3 lakhs in year 3, Rs. 3.5 lakhs in year 4, and Rs. 4 lakhs per year from years 5-10. The required rate of return is 15%.

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    Tute5 Capital Budgeting

    Uploaded by

    vivek patel
    277 views1 page
    The company is considering investing in a new product line that requires an initial investment of Rs. 7 lakhs in year 0 and Rs. 1 million in year 1. It is expected to generate cash inflows of Rs. 2.5 lakhs in year 2, Rs. 3 lakhs in year 3, Rs. 3.5 lakhs in year 4, and Rs. 4 lakhs per year from years 5-10. The required rate of return is 15%.

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    Tute5 Capital Budgeting

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    The company is considering investing in a new product line that requires an initial investment of Rs. 7 lakhs in year 0 and Rs. 1 million in year 1. It is expected to generate cash inflows of Rs. 2.5 lakhs in year 2, Rs. 3 lakhs in year 3, Rs. 3.5 lakhs in year 4, and Rs. 4 lakhs per year from years 5-10. The required rate of return is 15%.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    277 views1 page

    Tute5 Capital Budgeting

    Uploaded by

    vivek patel
    The company is considering investing in a new product line that requires an initial investment of Rs. 7 lakhs in year 0 and Rs. 1 million in year 1. It is expected to generate cash inflows of Rs. 2.5 lakhs in year 2, Rs. 3 lakhs in year 3, Rs. 3.5 lakhs in year 4, and Rs. 4 lakhs per year from years 5-10. The required rate of return is 15%.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    Tutorial- Capital Budgeting 1. A company is considering a new product line to supplement its range line.

    It is anticipated that the new product line will involve cash investment of Rs7 lakhs at time 0 and Rs1 million in year 1. The cash inflows of Rs 2.5 lakhs are expected in year 2, Rs3 lakhs in year 3, Rs3.5 lakhs in year 4 and Rs 4 lakhs each year thereafter through year 10. The required rate of return is 15% a. What is the projects payback period? b. What is the discounted payback period? c. What is the NPV of the project? Is it acceptable? An investment of Rs 1000 today will return Rs 2000 at the end of 10 yrs. What is its IRR? An investment of Rs1000 will return Rs. 500 at the end of each of the next three yrs. What is its IRR? How much can be paid for a machine which brings in an annual cash inflow of Rs 25000 for 10 years assume that the discount rate is 12%?

    2. 3

    4.

    5.

    A company is considering the following investment projects: Projects Cash outflow C1 C2 C3 A -10000 +10000 B -10000 +7500 +7500 C -10000 +2000 +4000 +12000 D -10000 +10000 +3000 +3000 Assume the discount rate of 10%. Rank the projects according to each of the following methods: a. Payback b. NPV c. Discounted payback period d. Benefit Cost ratio e. Accounting Rate of Return Assuming the projects are independent, which one should be accepted? If the projects are mutually exclusive, which project is the best?

    6.

    ABC Company is evaluating 3 investment situations. If only the project in question is undertaken, the expected present values and the amounts of investment required are as follows: Project 1 2 3 Investment Required 200000 115000 270000 PV of Future Cash Flows 290000 185000 400000

    If projects 1 and 2 are jointly undertaken, there will be no economies; the investment required and PVs will simply be the sum of the parts. With projects 1 and 3, economies are possible in investment because one of the machines acquired can be used in both production processes. The total investment required for projects 1 and 3 combined is Rs440000. If projects 2 and 3 are undertaken, there are economies to be achieved in marketing and producing the products but not in investment. The expected PV of future cash flows for projects 2 & 3 combined is Rs. 6,20,000. If all three projects are undertaken simultaneously, the economies noted above will still hold. However, a Rs 1,25,000 extension on the plant will be necessary, as space is not available for all three projects. Which project or projects should be chosen?

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