Capital budgeting
1. The alpha company ltd., is considering the purchase of raw machine. Two
alternatives machines A and B have been suggested, each costing
Rs.4,00,000. Earnings after taxation are expected to be as follows.
Years
Cash flows
Machine A (Rs.)
Machine B (Rs.)
1
40,000
1,20,000
2
1,20,000
1,60,000
3
1,60,000
2,00,000
4
2,40,000
1,20,000
5
1,60,000
80,000
The company has a target of return on capital of 10% and on this basis, you
are required to compare the profitability of the machine and state which
alternative you consider financially preferable.
2. X ltd., is considering the purchase of a new machine which will carry out
operations performed by labours, Two alterative models available for it
machine A and B. From the following information, you are requested to
prepare a profitability statement and workout the payback period in
respect of each machine.
Particulars
Machine A
Machine B (Rs.)
(Rs.)
Estimated
life
of
machine
5
6
(years)
1,50,000
1,00,000
Cost of Machine
6,000
8,000
Cost of indirect materials
10,000
15,000
Estimated savings in scrap
19,000
27,000
Additional cost of maintenance
Estimated savings in direct
150
200
wages:
600
600
Employees
not
required
(Numbers)
Wages per employee (Rs.)
Taxation may at 50percent, which model would you recommend? State
your reasons.
3. Mr. Suresh is considering the purchase of a machine. Two machines X and
Y each costing Rs.50,000. Are available. Earnings after tax are expected to
be as under.
Years
Machine X
Machine Y
Discount
Factor
@10% for Re.1
1
15,000
5,000
0.909
2
20,000
15,000
0.826
3
25,000
24,000
0.751
4
18,000
30,000
0.683
5
15,000
20,000
0.620
Evaluate the two alternatives according to.
1. Payback period method
2. Accounting rate of return method
3. Net present value method.
Leverage:
1. Evaluate two companies in terms of financial and operating leverage.
Particulars
Firm A
Firm B
Sales(Rs.)
20,00,000
30,00,000
Variable cost
40% on sales 30% on sales
Fixed cost
5,00,000
7,00,000
Interest
1,00,000
1,50,000
Taxation
40%
40%
2. From the following data. Calculate operating a, Financial and combined
leverage.
Interest Rs. 10,000
Sales 15,000 units @10 per unit
Variable cost Rs.4 per unit
Fixed cost Rs.20,000.
3. Calculate financial leverage and operating leverage under situations A
and B financial plans I and II respectively. From the following details
and capital structure of XYZ ltd.
Installed capacity
1,000 units
Actual production and sales
800 units
Selling price per unit
Rs.20
Variable cost per unit
Rs.15
Fixed cost:
Situation A
Rs.800
Situation B
Rs.1,500
Capital structure:
Paln I
Plan II
Equity capital Rs. 5,000
Rs.7,000
Debt
Rs.5,000
Rs.2,000
Cost of debt @10%
Working capital
1. Cost sheet of a company provides the following data.
Raw materials
50
Direct Labour
20
Overhads
40
Elements
Raw materials
Direct Labour
Overheads
Total cost
Profit
Selling price
Cost per
unit
(in Rs.)
50
20
40
110
20
130
Additional information:
a) Average raw materials in stock is for one month
b) Average materials in progress for half month
c) Credit allowed by suppliers is one month
d) Credit allowed by debtors is one month
e) Average time lag in payment of wages 10 days
f) Average time lag in payment of overhead-30days
g) 25 percent of sales are on cash basis.
h) Cash balance expected to be Rs.1,25,000
i) Finished goods lie in the warehouse for one month.
You are requested to prepare a statement showing the working capital needed to
finance the activity of 50,000 units of output. Production is carried on evenly
throughout the year and wages and overheads accrue similarly.
2. Prepare an estimate of working capital requirement from the following
information of a trading concern.
a) Projected annual sales-1,50,000 units
b) Selling price Rs.10 per unit
c) Percentage of gross profit on sales is @20%
d) Average credit period allowed to customers-10 weeks
e) Average credit period allowed by suppliers-6 weeks
f) Average stock holding in terms of sales requirement -10 weeks
g) Allow 15% for contingencies.
Funds flow statement
1. From the following two balance of xyz company ltd. As on December
31,2014 and December 31,2015. Prepare a schedule of changes in
working capital.
Liabilities
2015
2014
Assets
2015
2014
Rs.
Rs.
Rs.
Rs.
Share capital
3,25,00 3,00,00 Land and
5,00,000
4,00,000
Profit and loss A/C
0
0 Building
1,00,000
1,60,000
9% debentures
1,20,00 1,00,00 Machinery
1,10,000
80,000
Trade creditors
0
0 Stock
30,000
36,000
Outstanding
2,00,00 2,00,00 Debtors
5,000
4,000
creditors
0
0 cash
98,000 75,000
2,000
5,000
7,45,00 6,80,00
7,45,000
6,80,000
0
0
Solution:
Schedule changes in working capital
Details
2014
2015
Changes in working
Capital
Increase decrease
Current Assets:
80,000 1,10,000
Stock
36,000
30,000
Debtors
4,000
5,000
Cash
Current
75,000
98,000
Liabilities:
5,000
2,000
Trade creditors
Outstanding
creditors
Increase in working capital
30,000
1000
6000
-
3000
23,000
-
Total
34,000
5,000
34,000
2. A company is reported current profit is Rs.70,000 after incorporating the
following:
Loss on sale of equipment
Rs.10,000
Premium on redemption on debentures
Rs.1,500
Discount on issue of debentures
Rs.2,000
Depreciation on machinery
Rs. 20,000
Depletion of natural resources
Rs.10,000
Amortization of goodwill
Rs.30,000
Interim dividend
Rs.25,000
Gain from sale of non-current assets Rs.40,000
Excess provision of taxation
Rs.22,000
Dividend income on investment
Rs.4000
Transfer to general reserve
Rs.5,000
Preliminary expenses
Rs.1000
Profit on revaluation of investments. Rs.2,500
Calculate the net inflow of funds from operations.
Solution:
Statement of funds from operations:
Current Profit
Rs.70,000
Add: Items not affected in funds:
Loss on sale of equipment
Rs.10,000
Discount on issue of debentures
Rs.2000
Depreciation on machinery
Rs.20,000
Depletion of natural resources
Rs.10,000
Amortization of goodwill
Rs.30,000
Excess provision of taxation
Rs.22,000
Transfer to general reserve
Rs.5,000
Preliminary expenses
Rs.1000
Add: Items affected in funds:
Premium on redemption n debentures Rs.1,500
Interim dividend
Rs.20,000
------------------ 1,26,500
-----------------1,96,500
Less: Items not improving funds:
Profit on revaluation of investments
2,500
Gain from sale of noncurrent assets
40,000
Dividend income
4000
------------
Funds from operations
46,500
----------------1,50,000
===========
Cash flow statement
1. From the following balances you are required to calculate cash from
operations.
Particulars
December
December
2005
2006
(Rs.)
(Rs.)
Profit and loss account
25,000
1,55,000
45,000
42,000
balance
20,000
26,000
Debtors
12,000
15,000
Creditors
1,600
1,400
Bills receivable
18,000
16,000
Prepaid expenses
1,200
1,600
Bills payable
800
900
Outstanding expenses
250
300
Outstanding income
Income received in advance
Solution
Statement of cash from operations:
Profit and loss account (1550001,30,000
25,000) =
Add:
3,000
Decrease in debtors
Increase in creditors
6000
Decrease in prepaid expenses
200
Increase in outstanding expenses
400
Income received in advance
50
Less:
Increase in bills receivable
3000
Decrease bills payable
2000
Increase in outstanding income
100
Cash from operations
1,34, 550
