Cash Flows Q.1. A company is considering an investment proposal to install new milling controls at a cost of Rs. 50,000.

The facility has a life expectancy of 5 years and no salvage value. The tax rate is 5 per cent. Assume the firm uses straight!line depreciation and the same is allowed for tax purposes. The estimated cash flows "efore depreciation and tax #$%&T' from the investment proposal are as follows( )ear $%&T#Rs.' 1 10000 * 10,,-* 1*,.,+ 1 ,+,* 5 *0, /5

$ompute the 0ay "ac1 period and 203 of the pro4ect at 105 discount rate. Q.*. 6odern 7nterprises 8td. is considering the purchase of a new computer system for its R9: division, which would cost Rs. 5 la1hs. The operation and maintenance costs #excluding depreciation' are expected to "e Rs. . la1h per annum. ;t is estimated that the useful life of the system would "e , years, at the end of which the disposal value is expected to "e Rs. 1 la1h. The tangi"le "enefits expected from the system in the form of reduction on design and draftsmanship costs would "e Rs. 1* la1h per annum. The disposal of used drawing office e<uipment and furniture initially is anticipated to net Rs. - la1h. As this is a capital expenditure in R9:, the new computer system will "e depreciated at 1005 rate of depreciation on written down value "asis. The capital gains arising from disposal of used assets may "e considered tax!free. The effective tax rate is 55. The average cost of capital of the company is 1*5. After appropriate analysis of cash flows, advise the company of the financial via"ility of the proposal. ;gnore tax on salvage value. Q. . =imalaya 8td. ;s considering replacement of its existing machine "y a new machine which is expected to cost Rs. *,00,000. The new machine will have an economic life of five years and is expected to yield annual cash revenues of Rs. *, .0,000 and incur annual cash expenses of Rs. 1,+0,000. The estimated salvage value of the new machine at the end of its economic life is Rs. 50,000. The existing machine has a "oo1 value of Rs. ,0,000 and can "e sold now for Rs. ,0,000.;t can also "e used for another five years "ut is expected to generate annual cash revenues of Rs. *,*0,000 and involve cash expenses of Rs. 1,,0,000 annually. The salvage value of the existing machine after five years is estimated at Rs. *0,000. The company is in 505 tax "rac1et. &oth the machines are depreciated at *55 using written down value method. $ost of capital is 10 5. $alculate 203 and indicate the via"ility of the replacement proposal. Q.+ >wasti1 8td. manufacturers of special purpose machine tools, have two divisions which are periodically assisted "y visiting teams of consultants. The management is worried a"out the steady increase of expenses in this regard over the years. An analysis of last year?s expenses reveals the( #Rs.' $onsultants Remuneration *50000 Travel and $onveyance 150000 Accommodation 7xpenses ,00000 &oarding $harges *00000 >pecial Allowances 50000 Total 1*50000

The management estimates accommodation expenses to increase "y Rs. *00000 annually. As part of a cost reduction drive, >wasti1a 8imited is proposing to construct a consultancy centre to ta1e care of the accommodation re<uirements of the consultants. This centre will additionally save the company Rs.50000 in "oarding charges and Rs. *00000 in the cost of executive training programs hitherto conducted outside the company?s premises every year. The following details are availa"le regarding the construction and maintenance of the new centre( #a' 8and at a cost of Rs. /00000 already owned "y the company will "e used #"' $onstruction cost Rs. 1500000 including special furnishings #c' $ost of annual maintenance Rs. 150000. #d' $onstruction cost will "e written off over 5 years "eing the useful life. Assuming that the write @off of construction cost as aforesaid will "e accepted for tax purposes, that the rate of tax will "e 505 and that the desired rate of return 15 5. )ou are re<uired to analyAe the feasi"ility of the proposal and ma1e recommendations.