Question

2. A project requires an initial investment of Rs.6, 00,000. It is estimated to have a
life of 6 years. The estimated net cash flows are as under:
Year Net Cash Flow (Rs.)
1 60,000
2 80,000
3 1,00,000
4 1,10,000

Answer 1

Answer:

Assignment-4

Question 1:-A company XYZ Pvt Ltd. have four alternatives to purchase reactors, but due to

financial reasons they can only purchase one reactors. All cash inflows after taxes

(CF) and initial cost are given below in table and they are unequally spread

throughout year, all reactors have same life span of 7 years. If company wants to

recover all its investment within 4 years, then determine which alternative they

should choose to purchase the reactors on the basis of payback period?

[3 marks]

Alternatives

Cash

Flow (CF)

A B C D

Initial cost Rs.70,000 Rs.12,40,000 Rs.1,80,000 Rs.5,40,000

CF Year 1 Rs.24,000 Rs.47,200 Rs.20,000 Rs.2,04,000

CF Year 2 Rs.24,000 Rs.1,80,000 Rs.17,000 Rs.1,57,000

CF Year 3 Rs.24,000 Rs.73,500 Rs.38,000 Rs.2,50,000

CF Year 4 Rs.24,000 Rs.26,700 Rs.76,000 Rs.75,000

CF Year 5 Rs.24,000 Rs.2,00,000 Rs.27,000 Rs.25,000

CF Year 6 Rs.24,000 Rs.4,50,000 Rs.13,000 Rs.16,000

CF Year 7 Rs.24,000 Rs.73,000 Rs.2,20,000 Rs.0

a) A

b) B

c) C

d) D

Sol. Given:-

Service life of equipment (n) = 7 years

Cut=off year for recovery = 4 years

Initial Cost of equipment’s for alternative:-

IA = Rs.70,000IB = Rs.12,40,000 IC= Rs.1,80,000 ID = Rs.5,40,000

Annual cash inflow after taxes Cumulative annual cash inflow after taxes

Alternative

(A)

Alternative

(B)

Alternative

(A)

Alternative

Years (B)

1 Rs.24,000 Rs.47,200 Rs.24,000 Rs.47,200