rate positively ..
Ans a) | Correct answer is option I: Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. | ||||||||
Hence, it should not be included in the analysis. | |||||||||
Computation of depreciation = | |||||||||
Total cost = 197000+7000 | 204000 | ||||||||
year | 1 | 2 | 3 | ||||||
Depreciation rate | 33.00% | 45.00% | 15.00% | ||||||
Depreciation amt | 67,320 | 91,800 | 30,600 | ||||||
book value at year -3 end | 14,280 | ||||||||
Computation of NPV | |||||||||
year | 0 | 1 | 2 | 3 | |||||
a | initial investment | (204,000) | |||||||
b | Working capital | (7,000) | |||||||
A | Initial investment | (211,000) | |||||||
operating cash flow | |||||||||
i | Annual saving | 55,000 | 55,000 | 55,000 | |||||
ii | Depreciation rate | 33.00% | 45.00% | 15.00% | |||||
iii | depreciation | 67,320 | 91,800 | 30,600 | |||||
iv=i-iii | Profit before tax | (12,320) | (36,800) | 24,400 | |||||
v=iv*35% | Tax@ 35% | (4,312) | (12,880) | 8,540 | |||||
vi=iv-v | Profit after tax | (8,008) | (23,920) | 15,860 | |||||
B=vi+iii | operating cash flow | 59,312 | 67,880 | 46,460 | |||||
Terminal cash flow | |||||||||
i | Release of working capital = | 7,000 | |||||||
ii | Post tax salvage value | ||||||||
88650-(88650-14280)*35% | 62621 | ||||||||
C | NWC + salvage value | 69621 | |||||||
D=A+B+C | Net cash flow | (211,000) | 59,312 | 67,880 | 116,081 | ||||
D | PVIF @ 14% | 1.0000 | 0.8772 | 0.7695 | 0.6750 | ||||
E=C*D | present value | (211,000) | 52,028 | 52,231 | 78,351 | (28,389) | |||
Therefore NPV = | (28,389) | ||||||||
ans b) | Year 0 Cash flow | (211,000) | |||||||
Ans C) | |||||||||
year -1 | 59,312 | ||||||||
year -2 | 67,880 | ||||||||
year -3 | 116,081 | ||||||||
Ans d) | NO : Because NPV is negative | ||||||||
Ans d) | NPV = | (28,389) |
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