Answer to Question #200718 in Economics for waheed

Question

 

A company is considering an investment proposal to install new milling machine. The project will cost Rs.100,000. The facility has a life expectancy of 5 years and no salvage value. The company tax rate is 40%. Firm uses diminishing method (15%) for depreciation. The estimated earnings before tax from the proposed investment plan are as under.

Year   Earning before tax

1     25,000

2    20,000

3   15,000

4   17,000

5    30,000

Compute cash flow for 5 years.

Calculate: 1.Payback period 2.Profitability Index 3.IRR 4. NPV( discount rate is 16%)

Answer 1

Year    Depreciation Tax

1 15000 10000

2 12000 8000

3 9000 6000

4 6000 6800

5 3000 12000