The following details relates to the two machines X and Y:
| Machine X Machine Y | ||
| Cost Estimated Life Estimated salvage value Working Capital required in the beginning | Rs.56,125 | Rs.56,125 |
| 5 years | 5 years | |
| Rs.3,000 | Rs.3,000 | |
| Rs.10,000 | Rs.20,000 | |
| | | |
Annual income after tax and depreciation:
| Year | Rs. | Rs. |
| I | 3,275 | 11,375 |
| II | 5,375 | 9,375 |
| III | 7,375 | 7,375 |
| IV | 9,375 | 5,375 |
| V | 11,375 | 3,375 |
Overhauling charges at the end of third year Rs.25,000 on machine X. Depreciation has been charged at straight line method. Discount rate is 10%? P.V.F. at 10% for five year are 0.909, 0.826, 0,751, 0.683 and 0.621. Suggest which project should be accepted.
Ans.
(A) Calculation of Depreciation p.a
Machine X:
56125 – 3000
SLM Dep. p.a = 5
= 10625
Machine Y:
56125 – 3000
SLM Dep. p.a = 5
= 10625
(B) calculation of Net Operations
| | Particulars | 1 | 2 | 3 | 4 | 5 |
| | Machine X: | | | | | |
| 1) | Annual Income after tax and depreciation | 3275 | 5375 | 7375 | 9375 | 11375 |
| 2) | Depreciation | 10625 | 10625 | 10625 | 10625 | 10625 |
| 3) | Cash Flow (1+2) | 14000 | 16000 | 18000 | 20000 | 22000 |
| | Machine Y: | | | | | |
| 4) | Annual Income after tax and depreciation | 11375 | 9375 | 7375 | 5375 | 3275 |
| 5) | Depreciation | 10625 | 10625 | 10625 | 10625 | 10625 |
| 6) | Cash flow for M/c/ Y(4+5) | 22000 | 20000 | 18000 | 16000 | 14000 |
| 7) | Discount Factor @ 10% | 0.909 | 0.826 | 0.751 | 0.683 | 0.621 |
| 8) | Discounted value of cash flow of m/c ‘X’ (3 x 7) | 12726 | 13216 | 131518 | 13660 | 13662 |
| 9) | Sum of Dis.Value of X (sum of 8) | Rs.66782 | | | | |
| 10) | Dis.Value of m/c ‘Y’ (6-7) | 19998 | 16520 | 131518 | 10928 | 8694 |
| 11) | Sum of DV of m/c Y | Rs.69658 | | | | |
(C) Calculation of NPV
Machine X:
| 1) | Initial Investment | 56125 |
| 2) | Initial Investment in Working Capital | 10000 |
| 3) | Present Value of overhaulding expenses at the end of 3rd Year (25000x0.751 | 18775 |
| 4) | PV of net cash flow of 1 through 5 years | 66782 |
| 5) | PV of terminal value at the end of 5 years Salvage value 3000 Recovery of working Capital 10000 13,000 0.621 | 8073 |
| 6) | Net Present Value (4+5-1-2-3) | 10042 |
Machine Y:
| 1) | Initial Investment | 56125 |
| 2) | Initial Investment in Working Capital | 10000 |
| 3) | PV of net cash flow of 1 through 5 years | 69658 |
| 4) | PV of terminal value at the end of 5 years Salvage value 3000 Recovery of working Capital 10000 13,000 0.621 | 8073 |
| 5) | Net Present Value (4+5-1-2-3) | 11606 |
Decision:
Select M/c ‘Y’ because the NPV of machine ‘Y’ is highest and positive.
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