Question

Q. 1. (a) How can you incorporate risk in capital budgeting decisions?
(b) A company is considering computerization of its inventory and billing
procedures at a cost of 22,00,000. Installation charges are 50,000. These outlays
will be depreciated on a straight-line basis to zero book value which will also
be its salvage value at the end of its life of 5 years. The new system will require
two computer specialists with annual salaries of 540,000 per person. It is also
estimated that annual maintenance expenses of 312,000 will have to be incurred.
The new system will lead to reduced production delays, thus saving 320,000
annually. It will also help to avoid stock out cost of 225,000 per year. Timely
billing will increase inflow by 78,000 per year. Six clerical employees, with
annual salaries of 20,000 each, will also become redundant. The company's tax
rate is 30% and required rate of return is 12%. Evaluate the project.
What will be your decision if salvage value is taken as 730,000 for purpose of
calculating depreciation, even though the machine will be worthless in terms of
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resale value after 5 years?​

Answer 1

Answer:

Profit Margin

Debt to Equity

Return on Equity

Inventory Turnover