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knowledge bank -basic learning Capital Budgeting/Investment Appraisal

Q1.Compare NPV to IRR. Why could there be conflicts in project rankings?

Q2.What is the risk adjusted discount rate (RADR) approach to project selection? How is it similar to the CAPM approach? How is different from a CAPM approach?

Q3.A fully depreciated factory (except cost of land bought 53 years ago fo 10,000) is lying idle for long. Five years back 9,00,000 was offered for the vacant plant. Presently it may sell for 15,00,000. Similar plant elsewhere would cost only 3,00,000.COC is 15%. Tax rate & CG rate 35%. There is a one time chance of getting a five years contract. Investment in building & equipment of 13,00,000 to be depreciated at the income tax rates provided elsewhere.. Additional charge for the same is allowed by income tax authorities in the terminal year. WC investment Rs. 4,25,000 recoverable at end. There is a plan to borrow 50% of the required investment at 10% for 10 years. Compute NPV, IRR and payback period. Following details are also available, • Selling price 25/Unit fixed for project life of 5 years.

• Sales volume 1,00,000 units per annum.

• Cash costs increase with inflation @ 4%

• Expenses (1st year) and other details are as follows RM – 10,00,000 (10/Unit) : DL – 4,00,000 (4/Unit) Other Material – 1,00,000 : Factory OH – 2,50,000 (IT Depreciation – 1st year 2,10,000 : 2nd Year 3,46,000 : 3rd year 2,26,000 : 4th Year 1,50,000 : 5th Year 1,38,000).

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