Capital Budgeting (Project Appraisal) Sums

long-term decisions of finance managers

1. Capital Budgeting
by
Gayan Abeyrathna
M.Acc-Uok, BBM (Hons) sp. in Acc. & Fin.-UoJ, ACPM,DICA-SL

2. Example 01
You have provided the following cash flows related to two projects
Year Project A Project B
0 (20,000) (20,000)
1 12,000 3,000
2 8,000 5,000
3 5,000 8,000
4 3.000 8,000
5 5,000
Calculate the payback periods of these two projects

3. Example 02
You have provided the following cash flows related to two projects
Year Project A Project B
0 (20,000) (20,000)
1 12,000 3,000
2 8,000 5,000
3 5,000 8,000
4 3.000 8,000
5 5,000
Calculate the discounted payback periods of these two projects if cost
of capital is 10%

4. Example 03
Payback period of project A is 2 years.
Payback period of project B is 3 years and 6 months.
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you (Target payback period of the company is 3 years) ?
If Projects A & B are independence projects, which project/s will be selected
by you (Target payback period of the company is 4 years) ?

5. Example 04
You have provided the following cash flows related to two projects
Year Project A Project B
0 (20,000) (20,000)
1 12,000 3,000
2 8,000 5,000
3 5,000 8,000
4 3.000 8,000
5 5,000
Calculate the NPVsofthese two projects.
(Cost of capital= 10%)

6. Example 05
NPV of project A is +RS 100,000
NPV of project B is +Rs 250,000
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

7. Example 06
NPV of project A is -RS 100,000
NPV of project B is +Rs 250,000
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

8. Example 07
NPV of project A is -RS 100,000
NPV of project B is -Rs 250,000
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

9. X PLC is evaluating a project to implement in next year.
Project Nature: Installation of a new computer control system
Financial Data:
–Investment: Rs:125,000
–Project life: 5 years
–Scrap value: Rs:50,000
–Annual Revenues: Rs:100,000
–Annual additional expenses:
Labor: Rs:20,000
Material: Rs:12,000
Overhead: Rs:8,000
You are required to calculate NPV of this project and give your
comment related to acceptance / rejection of this project.
(Cost of capital= 10%)
Example 08

10. Example 09
Project Nature: Installation of a new machinery
Financial Data:
–Investment: Rs:1000000
–Project life: 4 years
–Scrap value: Rs200,000
–Annual Revenues: Rs1000,000
–Annual additional expenses: Rs:200,000
–Working Capital Investment Rs:25,000
You are required to calculate NPV of this project and give your
comment related to acceptance / rejection of this project.
(Cost of capital= 10%)

11. Example 10
Calculate the IRR of following scenarios
Discounted Factor NPV
10% 1000
12% -3550
Discounted Factor NPV
10% 1000
8% 5980
Discounted Factor NPV
12% -3550
14% -7880

12. Example 11
IRR of project A is 10%
IRR of project B is 15%
Cost of Capital is 9%
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

13. Example 12
IRR of project A is 10%
IRR of project B is 15%
Cost of Capital is 12%
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

14. Example 13
IRR of project A is 10%
IRR of project B is 15%
Cost of Capital is 16%
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

15. Example 14
PQR Company is evaluation following project. Cost of the asset is Rs.8,000,000.
Year Profit before Depreciation ( Millions)
1 20
2 25
3 35
4 25
Capital assets depreciation rate = 25%
You are required to calculate Accounting rate of return.

16. Example 15
ARR of Project A = 15%
ARR of Project B = 20%
Company is expecting to have a minimum ARR of 10%.
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

17. Example 16
ARR of Project A = 15%
ARR of Project B = 20%
Company is expecting to have a minimum ARR of 18%.
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

18. Example 17
ARR of Project A = 15%
ARR of Project B = 20%
Company is expecting to have a minimum ARR of 25%.
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

19. Example 18
You have provided following information related to project Z.
Year Cashflows (Rs)
0 (200,000)
1 20,000
2 60,000
3 100,000
4 150,000
Cost of Capital= 12%
Calculate the profitability index of this project.

20. Example 19
PI of Project A = 0.5
PI of Project B = 1.5
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

21. Example 20
PI of Project A = 1.5
PI of Project B = 1.6
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

22. Example 21
PI of Project A = 0.4
PI of Project B = 0.8
If Project A & B are mutually exclusive projects, which project/s will be selected
by you?
If Projects A & B are independence projects, which project/s will be selected
by you?

23. ABC company is considering investing in one if the following projects.
Project A Project B
Initial investment (Rs) 1,750,000 2,400,000
Lifetime of the projects (Years) 5 5
Scrap value of the end (Rs) 250,000 250,000
The estimated net profits/ losses after
depreciation are as follows.
Year Project A
(Rs)
Project B
(Rs)
1 350,000 800,000
2 250,000 600,000
3 200,000 400,000
4 (25,000) 100,000
5 (50,000) (50,000)
The cost of capital of the company is 12% per annum.
You are required to calculate the following.
a.Payback period of each project
b.Accounting rate of return of each project
c.Net present value of each project
d.Internal rate of return of each project
e.Profitability index of each project
Example 22

24. XCompanyisevaluatinginvestinginProjectY.Youhaveprovidedthefollowinginformation.
Investment:Rs:10,000,000
Usefullifetime:40years
NetReceiptsperyear:Rs:2,000,000
ScrapValue:Rs:1000,000
WorkingcapitalInvestment:Rs:1,500,000
CalculateNetPresentValueandgiveyouradvicetocompanyX.(CostofCapital=10%)
Example 23

25. X Ltd is evaluating a project of installing new machinery in one of their plants and you
have been given the following summary of related information.

Project Installing new machinery (The company has
already purchased the plant to set up the
machine and the value of it was
Rs:2,300,000)
Objective Increase the productivity of inputs by 50% ය
Useful life / Project life 50 years
Investment Rs: 1,000,000
Estimated annual revenue 1
st
5 years : Rs: 25,000
6-50 years: Rs: 45,000
Estimated annual expenses Rs: 5,000 (Excluding depreciation
Expected Working capital investment
(At the beginning of the project)
Rs: 25,000
The additional working capital
requirement at 2
nd
year of the project
Rs: 5,000
The required rate of return 10%
Assume that you are the financial manager of X Ltd. Based on the above details,
calculate the Net Present Value of the project and instruct management about the
acceptance or rejection of this project. Example 24