Answered: Calculate: 1. Payback period 2.…

Business

Finance

Calculate: 1. Payback period 2. Profitability Index

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 2P

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Concept explainers

Capital Gain

Any capital asset when sold can give the seller a higher or lower price from its purchase price leading to a capital gain or capital loss. The time period of holding an asset is decided based on if it is a long term or short-term capital gain. On that basis, the rate of taxation is decided if it is 20%, 15% or according to the tax brackets. The rate of taxation differs in the case of equity or debt, whether long or short term. The capital gain can be adjusted from capital loss to arrive at a net capital gain. The amount of gains and the exemption has to be reported in the tax return filed in the financial year in which the asset was transferred. The tax return can be filed quarterly, monthly, semi-annually or annually.

Question

Q. A company is considering an investment proposal to install a new milling machine. The project will cost Rs.50,000. The facility has a life expectancy of 5 years and no salvage value. The company tax rate is 40%. The firm uses the straight-line method for depreciation. The estimated earnings before tax from the proposed investment plan are as under.

Year Earning before tax
1 Rs. 22,000
2 18,000
3 14,000
4 15,000
5 25,000

Compute cash flow for 5 years.

Calculate:

1. Payback period
2. Profitability Index
3. IRR
4. NPV( discount rate is 15%)
5. Discounted Payback
6. MIRR

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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