B.Com.-VI Capital Budgeting

 

CAPITAL BUDGETING

Examples

 

Ex. 3 Dharati Company Ltd.

 

Table for Cash flow and Present Value

 

Year

PBT

Tax (50%)

PAT

Depreciation

Cash Flow

Discount Factor (10%)

Present Value

1

100000

50000

50000

40000

90000

0.909

81810

2

100000

50000

50000

40000

90000

0.826

74340

3

80000

40000

40000

40000

80000

0.751

60080

4

80000

40000

40000

40000

80000

0.683

54640

5

40000

20000

20000

40000

60000

0.621

37260

Total

 

 

200000

 

 

 

308130

 

Depreciation =          C – S                 =    200000      = 40000

                                    N                                 5

(1) Pay Back Period

            Pay Back Period = 90000 + 90000 + 20000

                                                                        80000

            Pay Back Period = 1 + 1 + 0.25

            Pay Back Period = 2.25 years

OR       Pay Back Period = 2 years and 0.25 * 12 = 3 months

            Pay Back Period = 2 years and 3 months

(2) Rate of Return on Original Investment

Average Net Profit (PAT) = Total Net Profit

                                                No. of Years

Average Net Profit (PAT) = 200000              = 40000

                                                5

Rate of Return on Original Investment = Average Net Profit (PAT) * 100

                                                                        Original Investment

                                                            = 40000 * 100

                                                               200000

                                                            = 20%

(3) Rate of Return on Average Investment

Average Net Profit (PAT) = Total Net Profit

                                                No. of Years

Average Net Profit (PAT) = 200000              = 40000

                                                5

Average Investment = Total Investment        = 200000         = 100000

                                                2                             2

Rate of Return on Average Investment = Average Net Profit (PAT) * 100

                                                                        Average Investment

                                                            = 40000 * 100

                                                               100000

                                                            = 40%

(4) Net Present Value = Total Present Value of Cash Inflow – Total Investment

                                    = 308140 – 200000

                                    = 108130

 

Ex. 4 Harsh Industries Ltd.

Table for Cash flow and Present Value

Year

PBT

Tax (40%)

PAT

Depreciation

Cash Flow

Discount Factor (10%)

Present Value

1

50000

20000

30000

20000

50000

0.909

45450

2

40000

16000

24000

16000

40000

0.826

33040

3

30000

12000

18000

12800

30800

0.751

23130

4

20000

8000

12000

10240

22240

0.683

15190

5

10000

4000

6000

8192

14192

0.621

8813

Total

 

 

90000

 

 

 

125623

 

Depreciation (WDV)  Cost of Project                      100000

-       Depreciation 1      20000

                              80000

-       Depreciation 2      16000

                              64000

-       Depreciation 3      12800

                                                                        51200

-       Depreciation 4      10240

                              40960

-       Depreciation 5        8192

(1)  Pay Back Period         = 50000 + 40000 + 10000

                                                                                 30800

                                                = 1 + 1 + 0.32

            Pay Back Period         = 2.32 years

 

(2)  Rate of Return on Original Investment

Average Net Profit (PAT) = Total Net Profit

                                                No. of Years

Average Net Profit (PAT) = 90000                = 18000

                                                5

Rate of Return on Original Investment = Average Net Profit (PAT) * 100

                                                                        Original Investment

                                                            = 18000 * 100             = 18%

                                                               100000                                                        

      (3) Rate of Return on Average Investment

            Average Investment = Total Investment        = 100000         = 50000

                                                            2                             2

            Rate of Return on Average Investment = Average Net Profit (PAT) * 100

                                                                                    Average Investment

                                                                        = 18000 * 100             = 36%

                                                                           50000                                                                      

      (4) Net Present Value       = Total Present Value of Cash Inflow – Total Investment

                                                = 125623 – 100000

                                                = 25623

(5) Profitability Index       = Total Present Value of Cash Inflow

                                                            Total Investment

                                                =          125623

                                                            100000

                                                =          1.25623

                                                =          1.26

Ex. 5 Ankur Company

Table for Cash flow and Present Value

Year

PBT

Tax (40%)

PAT

Depreciation

Cash Flow

Discount Factor (10%)

Present Value

1

90000

36000

54000

36000

90000

0.909

81810

2

72000

28800

43200

28800

72000

0.826

59472

3

54000

21600

32400

23040

55440

0.751

41635

4

36000

14400

21600

18432

40032

0.683

27342

Total

 

 

151200

 

 

 

210259

 

Depreciation (WDV)  Cost of Project                        180000

-       Depreciation 1        36000

                              144000

-       Depreciation 2        28800

                              115200

-       Depreciation 3        23040

                                                                          92160

-       Depreciation 4        18432

                             

 

(1)  Pay Back Period         = 90000 + 72000 + 18000

                                                                                 55440

                                                = 1 + 1 + 0.32

            Pay Back Period         = 2.32 years

 

 

(2)  Rate of Return on Original Investment

Average Net Profit (PAT) = Total Net Profit

                                                No. of Years

Average Net Profit (PAT) = 151200              = 37800

                                                4

Rate of Return on Original Investment = Average Net Profit (PAT) * 100

                                                                        Original Investment

                                                            = 37800 * 100             = 21%

                                                               180000                                                        

      (3) Rate of Return on Average Investment

            Average Investment = Total Investment        = 180000         = 90000

                                                            2                             2

            Rate of Return on Average Investment = Average Net Profit (PAT) * 100

                                                                                    Average Investment

                                                                        = 37800 * 100             = 42%

                                                                           90000                                                                      

      (4) Net Present Value       = Total Present Value of Cash Inflow – Total Investment

                                                = 210259 – 180000

                                                = 30259

(5) Profitability Index       = Total Present Value of Cash Inflow

                                                            Total Investment

                                                =          210259

                                                            180000

                                                =          1.17

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