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    Mini Cases FM

    Uploaded by

    Aishwarya
    The document discusses several projects being considered for investment: 1) Purchasing a refinery zone in east, west, or north India, with different anticipated cash flows over 3-5 years. 2) A rubber roller production project with an initial Rs.400 lakh investment over 8 years. 3) Two technology options (A and B) for an automobile component, with different costs and cash flows over 8 years. The document asks to evaluate and rank the projects using various capital budgeting techniques like payback period, accounting rate of return, net present value, internal rate of return, and profitability index. It also asks to consider the impact of tax rates on the evaluation of the rubber roller project

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Mini Cases FM

    Uploaded by

    Aishwarya
    26 views3 pages
    The document discusses several projects being considered for investment: 1) Purchasing a refinery zone in east, west, or north India, with different anticipated cash flows over 3-5 years. 2) A rubber roller production project with an initial Rs.400 lakh investment over 8 years. 3) Two technology options (A and B) for an automobile component, with different costs and cash flows over 8 years. The document asks to evaluate and rank the projects using various capital budgeting techniques like payback period, accounting rate of return, net present value, internal rate of return, and profitability index. It also asks to consider the impact of tax rates on the evaluation of the rubber roller project

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    mini cases FM

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    The document discusses several projects being considered for investment: 1) Purchasing a refinery zone in east, west, or north India, with different anticipated cash flows over 3-5 years. 2) A rubber roller production project with an initial Rs.400 lakh investment over 8 years. 3) Two technology options (A and B) for an automobile component, with different costs and cash flows over 8 years. The document asks to evaluate and rank the projects using various capital budgeting techniques like payback period, accounting rate of return, net present value, internal rate of return, and profitability index. It also asks to consider the impact of tax rates on the evaluation of the rubber roller project

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    26 views3 pages

    Mini Cases FM

    Uploaded by

    Aishwarya
    The document discusses several projects being considered for investment: 1) Purchasing a refinery zone in east, west, or north India, with different anticipated cash flows over 3-5 years. 2) A rubber roller production project with an initial Rs.400 lakh investment over 8 years. 3) Two technology options (A and B) for an automobile component, with different costs and cash flows over 8 years. The document asks to evaluate and rank the projects using various capital budgeting techniques like payback period, accounting rate of return, net present value, internal rate of return, and profitability index. It also asks to consider the impact of tax rates on the evaluation of the rubber roller project

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

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    A refinery company is looking to set out a refinery unit is backward areas to be sold by
    central government. The central government is selling the refinery in 3 zones; east, west
    and north at Rs.200 million each which will have estimated life of 5, 4 and 3 years
    respectively.

    The company proposes to finance the project by raising a 5 year 8% loan. Since this
    investment is more risky, the project must yield a return of 10%. The anticipated Cash
    flow after tax of the three projects is as follows:

    Yea Eas Wes Nort


    r t t h
    Figure in
    Rs.Million
    1 50 80 100
    2 50 80 100
    3 50 80 10
    4 50 30
    5 190 -
    LRL is considering a project to produce rubber rollers with an initial investment of
    Rs.400 lakh. The project would last for 8 years after which 10% of the initial investment
    may be realized. Depreciation is on straight line basis.
    The profit before tax of Rs.52 lakh is expected for next 8 years. The tax rate is 28%
    (due to tax incentives) and the cost of capital for the company is 12%.
    Rank the projects by applying

    a. Payback period, Accounting rate of return, NPV, IRR and PI and recommend which zone
    of refinery the company should purchase. (NPV 76.44,19.37 and (-18.99); ARR 38%,
    17.5%, 3.3%; IRR 21%,15%,3%, PI 1.38,1.09,.90).
    b. Discuss the merits and demerits of each of the methods.
    c. How would you decide the project when each of the methods gives conflicting results?

    REQD:
     Find out the NPV of the project at the current tax rate. 26.69 Lakhs
     Would your decision change if the tax incentive is withdrawn & the regular rate
    of 40% is applicable? -5.31lakhs.
     Calculate the IRR under both the tax rate (13.74%, 11.63%)

    Hint to calculate cash flow:

    The PBT is given, deduct tax at respective rate and then add back the depreciation ( You know
    that it does not involve cash flow) . The Cash flow after tax is now 409.53 lakh with 28% and
    378.53 for 40% tax. Now find out the present value of the salvage value (It happens at the end
    of 8 years so you have to discount the value PVIF at 12% for 8 years. Then you will get
    present value of cash inflows and calculate NPV.

    1. A firm in the automobile component industry wants to consider two mutually exclusive
    technology to produce a component. Option A cost 1600lakh and B, 1850 lakh. 8 years
    cash flow are given in the table. For A, the current cost of capital of 13% is apprioate but
    for B, the management like to use 15% because of the risk involved. Find out
     NPV of option A and B (57.21 and 47.42 respectively)
     IRR of option A and B (14.42%, 16%)
     Which to consider with both the rules.

    Please note: It is a dummy question paper, so please ignore the content

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