1.

An iron ore company is considering investing in a new processing facility. The company extracts ore from an open pit mine. During a year 1, 00,000 tonnes of ore is extracted. If the output from the extraction process is sold immediately upon removal of dirt, rocks and other impurities, a price of Rs 1000 per ton of ore can be obtained. The company has estimated that its extraction costs amount to 70% of the net realizable value of the ore. As an alternative to selling all the ore at Rs 1,000 per ton, it is possible to process further 25% of the output. The additional cash cost of further processing would be Rs 100 per ton. The proposed ore would yield 80% final output and can be sold at Rs 1,600 per ton. For additional processing, the company would have to install an equipment costing 100 lakhs. The equipment is subject to 25% depreciation per annum on WDV basis. It is expected to have a useful life of 5 yrs. Additional working capital requirement is estimated at Rs 10 lakhs. The companys cut-off rate for such investment is 15%. Corporate tax rate is 35%. Assuming there is no other plant and machinery subject to 25% depreciation, should the company install the equipment if a) The expected salvage is Rs 10 lakhs & b) There would be no salvage value at the end of the 5th year

For the above company assume that there are other P&M subject to 25% depreciation. What course of action should the company choose?

2. Aryan Industries is considering the replacement of one of its drying machines. The present machine although is in good working condition but is smaller than required if the firm is to expand its operations. It is in use since last 4 years and has a current salvage value of Rs 2, 00,000 and has a remaining life of 6 years. The machines cost was Rs 10 lakhs and is subject to 25% depreciation on WDV basis.

The new machine shall cost 15 lakhs and will be subject to same rate of depreciation. Its life is 6 years, salvage value at the end of which will be Rs 1,50,000. Additional working capital required will be Rs 1 lakh. The new machine will result in an increase in annual revenues by Rs 5, 00,000; variable cost to volume is 30%. Fixed cost excluding depreciation shall remain unchanged. Corporate tax rate: 35% Cost of capital: 10% The block of assets has several machines in the block of 25% depreciation. Should the company replace its existing machine? What course of action would you suggest, if there is no salvage value?

3.
Particulars Investments Expected Life Projected Net Profit (Years) 1 2 3 4 5 2,000 1,500 1,500 1,000 3,000 3,000 2,000 1,000 1,000 Project A Rs 20,000 4 yrs Project B Rs 30,000 5 yrs

Calculate the ARR for projects A & B from the following information and advise the company which project it should undertake if the required rate of return is 12%.

4. X.Ltd is considering the purchase of a machine. Two machines are

available E & F. The cost of each machine is Rs 60,000. Each machine has an expected life of 5 yrs. Following the ARR method ascertain which of the alternatives will be more profitable. The average tax may be taken at 50%. Net profits before tax and after depreciation are given below Yea r 1 2 3 4 5 Tot al Machine E (Rs) 15,000 20,000 25,000 15,000 10,000 85,000 Machine F (Rs) 5,000 15,000 20,000 30,000 20,000 90,000

5. A project costs Rs 1, 00,000 and yields annual cash inflow of Rs 20,000 for 8 yrs. Calculate its pay back period.

6. Determine the pay back period for a project which requires a cash outlay of Rs 10,000 and generates cash inflows of Rs 2,000, Rs 4,000, Rs 3,000 and Rs 2,000 in the 1st, 2nd, 3rd and 4th year respectively.

7. A project costs Rs 5, 00,000 and yields annually a profit of Rs 80,000 after depreciation @12% but before tax of 50%. Calculate the pay back period.

8. Net profit before depreciation and after taxes

Yea rs 1 2 3 4 5

Project Project X Y 1,000 2,000 4,000 5,000 8,000 2,000 4,000 6,000 8,000 -

There are two projects X & Y. Each project requires an investment of Rs 20,000. You are required to rank these projects according to the pay back period from the following information.

9. No project is acceptable unless the yield is 10%. The salvage value of a certain project at the end of the 5th year is Rs 40,000. Calculate the NPV from the cash inflows & cash outflows are given below Yea rs 0 1 2 3 4 5 Outflows Rs 1,50,000 30,000 Inflows Rs 20,000 30,000 60,000 80,000 30,000