is considering an investment proposal to install new milling controls. The proje
ID: 2803843 • Letter: I
Question
is considering an investment proposal to install new milling controls. The project wil 50,000. The facility has life expectancy of 5 years and no salvage value . The company tax The company uses straight line depreclation. The estimated proft before tax from the cost Rs proposed investment are as follows Year1 Profit 10,000 11,000 14,000 15,000 25,000 2 0 4 Before Taxes | 0 826 | 0.75 1 10 683 | 062 1 0.909 ubb 1-36 3.03 @10% Compute Pay back period , Average Rate of Return, NPV discounted at 10%Explanation / Answer
Initial Cost of Investment = Rs 50000
Yearly Depreciation = 50000/5 = Rs 10000
Since Profit before Tax is given in the question, it is assumed that depreciation has already been deducted , therefore depreciation is to be added back for calculating cash flows
Year
1
2
3
4
5
Profit Before Tax
10000
11000
14000
15000
25000
Tax @ 55%
5500
6050
7700
8250
13750
Profit After Tax
4500
4950
6300
6750
11250
Add - Depreciation
10000
10000
10000
10000
10000
Net Cash flows after tax
14500
14950
16300
16750
21250
PVIF @ 10%
0.909
0.826
0.751
0.683
0.621
Discounted
13180.5
12348.7
12241.3
11440.25
13196.25
Payback Period - 3 + 4250/16750 = 3.25 Years
NPV = Sum of discounted Cash flows - initial investment
= Rs 62407- 50000 = Rs 12407
Average Rate of return can be calculated as follows = Sum of net Cash flows after tax = Rs 83750
Net benefit in 5 years = Rs 83750 - 50000 = Rs 33750
Yearly benefit = 6750
So, ARR = 6750/50000 = 13.50%
Year
1
2
3
4
5
Profit Before Tax
10000
11000
14000
15000
25000
Tax @ 55%
5500
6050
7700
8250
13750
Profit After Tax
4500
4950
6300
6750
11250
Add - Depreciation
10000
10000
10000
10000
10000
Net Cash flows after tax
14500
14950
16300
16750
21250
PVIF @ 10%
0.909
0.826
0.751
0.683
0.621
Discounted
13180.5
12348.7
12241.3
11440.25
13196.25
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