investment appriasal

1. 1Directors of Nasarani Ltd intended to purchase an additional machine to manufacture one of their new
products. two machines are being considered Alpha and Omega .the company depreciates its
machinery using straight line method
The company will borrow the money required to purchase the machine and pay interest of 10% per
annum on the loan. Estimates for the machines are as follows
Alpha Omega
Cost of the machine 100 000 130 000
Additional receipts Year 1 70 000 72 000
2 80 000 84 000
3 90 000 90 000
4 90 000 100 000
Additional costs Year 1 50 000 60 000
See note 2 60 000 70 000
3 65 000 75 000
4 70 000 80 000
Note: These cost include the charges for depreciation and interest on the loans.
Useful life 4 years 4 years
Value at the end of life nil nil
Present value of 10%
Year 0 1 2 3 4
1 0.91 0.83 0.75 0.68
Calculate the net present value of each machine assuming cost of capital is 10%
2 ABC Institute is a limited liability company that provides higher education progarmmes.
They have planned to construct a sport complex for their students and to earn income by hiring it. The initial
construction cost to be incurred at the commencement of the year as follows
Badminton and volley ball courts 250,000
Swimming pool 400,000
Open area for other sports 100,000
Lighting 100,000
Total cost 850,000
Other cost to be incurred as follows
 Maintenance costs Rs 200,000 per year up to 4 years
 Cost of water for swimming pool is Rs 100,000 in the year one and this is expected to increase by
20%
 Replacement of the carpets of the badminton and volley ball counrts to be incurred in year 2 is Rs
300,000
 Salaries and administration cost 120,000 per year

2.  General operating cost per year Rs 300,000 and this includes Rs 100,000 deprecation per annum
 Sports complex is expected to bring following revenues to the institute
Year 1 Year 2 Year 3 Year 4
Badminton and Volley ball courts 100,000 200,000 300,000 500,000
Swimming pool 300,000 360,000 400,000 560,000
Open area for other sports 200,000 280,000 380,000 500,000
You are also provided with the following discounting factors at 12%
Year 1 Year 2 Year 3 Year 4
0.893 0.797 0.712
0.636
Required
By considering the entire sports complex as a single unit fir the followings
1. Pay back period
2. Accounting rate of return
3. Net present value
Recommendation based on NPV .
3 Tharu PLC which manufacturers industrial equipment is considering a proposal to purchase a new machine
since the efficiency of the existing machine is not satisfactory.
The cost of the new machine is Rs.250 million which should be paid immediately at the time of installing the
machine. If the new machine is purchased or production is outsourced the existing machine can be sold
immediately for Rs.25 million. The current book value of the old machine is Rs.30 million.
Projected demand for the equipment manufactured from the machine for the next 5 years is given below:
Year 1 2 3 4 5
Demand(Units) 120,000 120,000 130,000 100,000 95,000
DCF 10% .909 .826 .751 .683 .626
Other information relating to equipment as follows:
Rs.
Selling Price 2,500 per unit
Variable cost 1,500 per unit
Product Specific Fixed Cost 50 million per annum
Head office cost allocation 05 million per annum
Product specific fixed cost has to be incurred at the beginning of each year. However, another proposal has
been received by the management to outsource the production at a price Rs.1,800/- per unit.
According to the outsourcing proposal the supplier needs a minimum order of 120,000 units per annum. If the
order is below 120,000 units the company will have to pay50% of the price for the deficit (Rs.900/-per unit x
deficit).
Further, if the company is to outsource the product the cost of staff retrenchment will be Rs.100 million which
should be paid immediately.

3. The product specific fixed cost would be reduced to Rs.40 million, if the production is outsourced.
Weighted average cost of capital of the company is 10%.
Assume that the scrap value of the new machine at the end of the 05th year is zero. Ignore inflation and tax.
You are required to:
(a) Calculate NPV of the two options and select the best option.
Calculate the Payback period and ARR