Capital budgeting techniques - problems | Accounting for Management

 

capital budgeting solved problems

Chapter 9 Capital Budgeting Techniques Solutions to Problems Note to instructor: In most problems involving the internal rate of return calculation, a financial calculator has been used. P LG 2: Payback Period Basic (a) $42, ÷ $7, = 6 years (b) The company should accept the project, since 6 . This is a comprehensive example, that shows you all the steps and issued involved. For each capital budgeting problem, the goal is to get to the Cash Flow from Assets, or, in the case of project evaluation, the Cash Flows from the Project. Solutions to capital budgeting practice problems Capital budgeting and cash flows 1. No. The $5 million is a sunk cost: whether or not the firm goes ahead with the new product, the $5 million has been spent. 2. An increase in the rate of depreciation will cause the cash flows from depreciation (the.


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Actions Shares. Embeds 0 No embeds. No notes for slide. It has an estimated life of 5 years after which it would be disposed capital budgeting solved problems scrap value nil. Find out the yearly cash flow from the plant. Solution Annual depreciation charge Rs. The manufacturing equipment will cost Rs. The expected life of the equipment is 8 years. The company is thinking of selling the lotion in a single standard pack of 50 grams at Rs.

It is capital budgeting solved problems that variable cost per pack would be Rs. Fixed cost includes straight line depreciation of Rs. The company expects to sell 1,00, packs of the lotion each year. Calculate the cash flows. Solution Initial cash outflow Cost of equipments Rs.

It may be noted that the allocated overheads of Rs. Problem 3 2. The remaining economic life of the plant is 4 years after which it will have no salvage value. However, if sold today, it has a salvage value of Rs. The new machine costing Rs. The new machine, due to its technological superiority, capital budgeting solved problems, is expected to contribute additional annual benefit before depreciation and tax of Rs.

The capital gain or loss may be taken as not subject to tax. Solution Amount in Rs, capital budgeting solved problems. Initial cash outflow: 1,30, Cost of new machine 20, - Scrap value of old machine 1,10, 2. Capital budgeting solved problems cash inflows annual Incremental benefit 60, - Incremental depreciation Dep.

On new machine 28, Dep. It may be noted that in the given situation, the benefits are given in the incremental form i. Therefore, only the incremental depreciation of Rs. The same amount of depreciation has been added back to find out the incremental annual cash inflows. Terminal cash inflow: There will be an additional cash inflow of Rs.

Therefore, total inflow of the last year would be Rs. Problem 4 XYZ is interested in assessing the cash flows associated with the replacement of an old machine by a new machine. The old machine bought a few years ago has a book value of Rs.

It has a remaining life of five years after which its salvage value is expected to be nil. It is being depreciated annually at the rate of 20 per cent written down value methd. The new machine costs Rs. It is expected to fetch Rs. The new machine is expected to bring a saving of Rs.

Investment in working capital would remain unaffected. The tax rate applicable to the firm is 50 percent. Find out the relevant cash flow for this replacement decision. Cost of new machine 4,00, - Salvage value of old machine 90, 3,10, Subsequent annual cash flows: Amount Rs.

So, in the last year the total cash inflow will be Rs. Problem 5 A firm is currently using a machine which was purchased two years ago for Rs. It is considering to replace the machine with a new one which will cost Rs.

The cost of installation will amount to Rs. The increase in working capital will be Rs. The expected cash inflows before depreciation and taxes for both the machines are as follows: Year Existing Machine New Machine 1 Rs. Calculate the incremental cash flows assuming sale value of existing machine: i Rs. Year X Y X Y 1 10, 50, 0. Machine B costs Rs. Capital budgeting solved problems cash receipts expected are as follows: Year at the end A B 1 Rs.

Problem 7 A company is considering the replacement of its capital budgeting solved problems machine which is obsolete and unable to meet the rapidly rising demand for its product. The company is faced with two alternatives: i to buy Machine A which is similar to the existing machine or ii to go in for Machine B which is more expensive and has much greater capacity.

The finance manager tries to evaluate the machines by calculating the following: 1. Net Present Value; 2. Profitability Index; 3. Payback period; and 4. Discounted Payback period At the end of his calculations, capital budgeting solved problems, however, the finance manager is unable to make up his mind as to which machine to recommend, capital budgeting solved problems.

You are required to make these calculation and in the light thereof to advise the finance manager about the proposed investment. Note: Present values of Rs. Calculation of Discounted Payback Period Rs. NPV Profitability index 1, capital budgeting solved problems. Payable period 3 years 3 years Indifferent 4. Discounted payback 3. Problem 9 XYZ Ltd. Depreciation is charged on straight line basis. Which project should be company take up?

Project B is having higher NPV. Hence, Project B is suggested for implementation. Problem 10 Bright Metals Ltd. The details are as under: Also find out the IRR of the two proposals. Solution Evaluation of investment proposal net present value method Year Cash inflows Rs. A B A B 0 -9,capital budgeting solved problems, 1.

 

3 Problems that are Involved in Capital Budgeting – Explained!

 

capital budgeting solved problems

 

Chapter 9 Capital Budgeting Techniques Solutions to Problems Note to instructor: In most problems involving the internal rate of return calculation, a financial calculator has been used. P LG 2: Payback Period Basic (a) $42, ÷ $7, = 6 years (b) The company should accept the project, since 6 . Feb 17,  · capital-budgeting-solved-problems 1. FINANCIAL MANAGEMENT Solved Problems Rushi Ahuja 1 SOLVED PROBLEMS – CAPITAL BUDGETING Problem 1 The cost of a plant is Rs. 5,00, It has an estimated life of 5 years after which it would be disposed off (scrap value nil). This is a comprehensive example, that shows you all the steps and issued involved. For each capital budgeting problem, the goal is to get to the Cash Flow from Assets, or, in the case of project evaluation, the Cash Flows from the Project.