Bajaj Ltd. is considering an investment proposar requiring initial investment of 50,000. The estimated life of the project is 5 years and no salvage value. The company uses SLM method of Depreciation. The corporate tax rate is 35%. The estimated profit before depreciation and tax from the investment proposa! are as follows : Year Profit before Depreciation & Tax 11,000. 20,000. 18,000. 15.000. 12,000 Calculate : (i) Net Present Value (NPV) (ii) Profitability Index (PI) both at 10% discount rate.
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DEPRECIATION = COST OF PROJECT / LIFE
= 50,000 / 5
= 10,000
NPV = PV OF FUTURE CASH FLOWS - INITIAL INVESTMENT
= 75,414 - 50,000
= 25,414
PROFITABILITY INDEX = PV OF FUTURE CASH FLOWS / INITIAL INVESTMENT
= 75,414 / 50,000
= 1.508
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