Question

Ganesh ltd is considering an investment proposal to install new milling controls at a cost of Rs50000.The facility has a life expectancy of 5 years and no salvage value .The tax rate is 25%. Assume the firm uses straight line method of depreciation and tax ( CFBDT ) from the investment proposal are as follows.
Year 1 2. 3. 4. 5
CFBDT20000. 10692.12769 13462 20385
COMPUTE the following
1- Net present value at 10%
2- Profitability Index at 10%
3- Payback Period

Answer 1

Pay-back period is

= 3 years +$50,000-45,750 \over 16,750$

=3 years + $4,250 \over 16,750$

=3 years +0.25

= 3.25 years

Step 2 (ii) Calculation of Average rate of return-

=$average net profit \over average investment$

=$16,750 \over 25,000$

=67%

Step 3 (iii) Calculation of NPV at 10% discount rate-

Step 4 (iv) Profitability Index @10%-

PI = $PV of cash inflows \over PV of cashflows$ = $62,417.195 \over 50,000$ = 1.248

Therefore,

i) Payback period is 3.25 years.

ii) Average rate of return is 67%.

iii) NPV is 12,417.20

iv) PI is 1.248