Hi All,
Can anyone solve the attached capital budgeting problem and also tell in detail the capacity criteria ?
7 Replies
Amir
(Learner)
(4016 Points)
Replied 03 April 2010
Dear Shweta,
Per Annum Capacity of Each Machine – 1000 bottles
Let’s divide the year in 6 months of Winter & 6 months Summer Season i:e 500 bottles in each season. Hence Annual Production will be as under –
Summer = Capacity x 100% = 500 x 100% = 500 bottles
Winter = Capacity x 50% = 500 x 50% = 250 bottles
Total Production is 750 bottles.
|
Year |
Particulars |
Amount |
PV Factor @ 10% |
Present Value |
|
0 |
Outflow Purchase of 1 Machine |
Rs. 6,000 |
1 |
(6,000) |
|
1 to 5 |
Inflow Tax Saving on Depreciation = Cost x Rate of Depreciation x Rate of Tax |
6,000 x 20% x 40% ð 480 |
3.79 (Annuity For Year 1 to 5 @ 10%) |
= 480 x 3.791 ð 1,820 |
|
1 to Infinite |
Inflow Savings in Operation Expenditure (Net of Tax) = Production x Savings/Bottle x (1-Tax Rate) |
750 x (3-1) x (1-40%) ð 900 |
PV factor of infinite/Perpetual annuity = 1/Rate = 1/.10 ð 10 |
= 900 x 10 ð 9,000 |
|
|
NPV of 1 Machine |
|
|
= (6,000) +1,820 +9,000 ð 4,820 |
|
|
NPV of 2 Machines |
|
|
= 4,820 x 2 ð 9,640 |
Shweta Garg
(CA FINAL Executive(Payables))
(147 Points)
Replied 03 April 2010
how did u calculated the 1 to infinity thng
Amir
(Learner)
(4016 Points)
Replied 03 April 2010
Dear Shweta,
Savings in Operation Expenditure (Net of Tax) = Production x Savings/Bottle x (1-Tax Rate)
= 750 x (3-1) x (1-40%)
This 3-1 = 2 is the saving which u r talking... (3rd Row in the Table Above)
Shweta Garg
(CA FINAL Executive(Payables))
(147 Points)
Replied 03 April 2010
yeah, i didnt take the 1 to infinity period. I took only 5 yrs.
Raj Saxena (1412th Tiger)
(Struggling Student)
(272 Points)
Replied 03 April 2010
Aamir saab ur xplanation skills r 2 gud.
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