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Help!!!! Capital budgeting - npv method

Shobhit Jain (2nd Year Article) (94 Points)

02 March 2012

In NPV method, if in a particular project a machine is used and it has a resale value of 10000 which is equal to its written down value at end of last year then what will be the terminal value as per this method???? I mean do we consider this value of 10000 while calculating the Present Value of Cash Inflows???

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6 Replies

(Guest)

Hi shobhit,

Can u post the question in detail?

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Shobhit Jain (2nd Year Article) (94 Points)
Replied 02 March 2012

Hi Sunitha

Following are the relevant details of the question.

X Ltd is considering an Investment Project of Rs1.5 Lakhs and it will have a scrap value of Rs 10000 at the end of 5 years. Transportation and installation charges are Rs 5000 and 25000 respectively. Also, a spare part inventory of Rs 10000 must be maintained (Scrap Value 60% of Initial cost after 5 years). The depreciation for 5 years is as follows: (Cost of Capital - 12%)

Year 1 - 72000, Year 2 - 43200, Year 3 - 32400, Year 4 - 21600, Year 5 - 800

Tax for 5 years - Year 1 - 11200, Year 2 - 22720, Year 3 - 27040, Year 4 - 31360, Year 5 - 39680

(Guest)

Hi ,

Where is the cash inflows?

Shobhit Jain (2nd Year Article) (94 Points)
Replied 02 March 2012

Expected annual revenue is Rs 170000 and Labour and material and Maintainence expenses are estimated to be Rs 15000, Rs 50000 & Rs 5000 respectively.

(Guest)

Hi,

The sale value is the cash inflow and it should be included in finding the terminal cash inflow.For tax purpose the STCG will be zero since(sale value=WDV).correct me if i am wrong.