# 2 Estimation of Cash Flow in Capital Budgeting problems with solutions pdf cash flow estimation numerical with solutions pdf cash flow estimation solved problems pdf cash flow estimation solved numericals Financial management notes with solved problems pdf

   http://rblacademy.com

8920884581, 9910719395 

BBA online tuition, B.Com Online tuition, MBA online tuition, MBA projects and assignments help.

Part 2 Estimation of Cash Flow in Capital Budgeting problems with solutions 

6. RBL Ltd. is planning to purchase a machine for Rs. 2,00,000 which will help company to generate following earnings in the next five years

Years	Year 1	Year 2	Year 3	Year 4	Year 5
EBDT	60,000	65,000	68,000	70,000	70,000

 

The purchase of machine will result in increase of working Capital by 20,000. The machine will be depreciated on SLM basis and has salvage value of Rs. 50,000. The company is subject to tax at the rate of 40 per cent. Calculate initial, subsequent and terminal cash flow of the machine.

Solution:

Cash outflow in the beginning = Cost of Machine + Working Capital

= Rs. 2,00,000 + Rs. 20,000 = Rs. 2,20,000

Terminal Cash flow = Salvage value + Working Capital = Rs. 50,000 + Rs. 20,000 = Rs. 70,000.

Depreciation = cost of machine +Salvage value / estimated life of project

= (Rs. 2,00,000 – Rs. 50,000) / 5 = Rs. 30,000

	Year 1	Year 2	Year 3	Year 4	Year 5
EBDT	60,000	65,000	68,000	70,000	70,000
Less: Depreciation	(30,000)	(30,000)	(30,000)	(30,000)	(30,000)
EBT	30,000	35,000	38,000	40,000	40,000
Less: Tax @ 40 %	(12,000)	(14,000)	(15,200)	(16,000)	(16,000)
PAT	18,000	21,000	22,800	24,000	24,000
ADD: Depreciation	40,000	40,000	40,000	40,000	40,000
Annual Cash Inflow	58,000	61,000	62,800	64,000	64,000
Terminal Cash inflow					Rs. 70,000

 BBA home tuition,  b.com home tuition, mba home tuition,  accounts home tuition, business statistics home tuition, financial management home tuition, financial management home tuition, operation research home tuition, operation management home tuition, investment management home tuition, security analysis and portfolio management home tuition, income tax home tuition, cost accounting home tuition, management accounting home tuition, business studies home tuition, economics home tuition, managerial economics tuition

7. Vikalpa Limited is considering to purchase an asset having an estimated life of 4 years which will cost Rs. 13,00,000 with Installation cost of Rs. 2,00,000. There will be an Increase in working capital in the beginning of the year of Rs. 3,50,000. Scrap value of the new asset after 4 years will be Rs. 4,00,000. Revenues for entire life of machine from new asset is 25,00,000 p.a. other information is as follows:

Annual Cash expenses on new asset Rs. 11,00,000

Book value of old asset today is Rs. 5,00,000

Salvage value of old asset if sold today Rs. 6,00,000

Revenue generated from old asset annually Rs. 19,50,000

Annual Cash expenses of old asset Rs. 12,00,000

Depreciation on new asset is to be charged on 80% of the cost in the ratio of 4:8:6:2 over four years.

Existing asset is to be depreciated at a rate of Rs. 1,25,000 p.a. Tax rate is 30 % on revenues as well as on capital gains / losses. Calculate initial, subsequent and terminal cash flow of the machine. Calculate cash inflow from new machine, cash inflow from old machine, incremental cash inflow, terminal cash inflow and cash outflow for the information provided.

Solution

Initial Cash Outflow = Purchase price of asset + installation cost + Working Capital increase – Salvage/Scrap value of old asset ± Tax on Capital gain/loss on sale of old asset

In this case Salvage value of old asset is Rs.6,00,000 and book value is Rs. 5,00,000. Hence there is a capital gain of Rs. 1,00,000

Capital gain = Salvage value of asset – Book value of asset

Capital loss = Book value of asset – salvage value of asset

Note: There is Capital Gain in case Salvage/Scrap value > Book value and Capital loss in case Book value > Salvage /Scrap value.

While calculating initial cash outflow; Tax on capital loss on sale of asset is subtracted from initial cash outflow and tax on capital gain on sale of asset is added to initial cash outflow.

Initial cash outflow = Rs. 13,00,000 + Rs. 2,00,000 + Rs. 3,50,000 – Rs. 6,00,000 + 30 % of (Rs. 6,00,000 – Rs. 5,00,000) = Rs. 12,80,000.

Depreciation calculation:

Depreciation on new asset is to be charged on 80% of the cost in the ratio of 4:8:6:2 over four years.

So, cost of machine for depreciation purpose according to question = 80 % of (purchase price + installation cost) = 80 % of (Rs. 13,00,000 + Rs. 2,00,000) = Rs. 12,00,000.

Rs. 12,00,000 will be depreciated in the ratio of 4:8:6:2 over four years.

ð  4+8+6+2 = 20

Depreciation year wise:

	Year 1	Year 2	Year 3	Year 4
Depreciation	Rs. 12,00,000 × 4/20 = Rs. 2,40,000	Rs. 12,00,000 × 8/20 = Rs. 4,80,000	Rs. 12,00,000 × 6/20 = Rs.3,60,00	Rs. 12,00,000 × 2/20 = Rs.1,20,000

 

Calculation of Subsequent Cash inflow, Incremental Cash inflow & Terminal Cash Inflow

Particulars	Year 1(Rs.)	Year 2(Rs.)	Year 3(Rs.)	Year 4(Rs.)
Revenue	2500000	2500000	2500000	2500000
Less: Cash expenses	(11,00,000)	(11,00,000)	(11,00,000)	(11,00,000)
EBDT	14,00,000	14,00,000	14,00,000	14,00,000
Less : Depreciation	2,40,000	4,80,000	3,60,000	1,20,000
EBT	11,60,000	9,20,000	10,40,000	12,80,000
Less: Tax @ 30 %	3,48,000	2,76,000	3,12,000	3,84,000
PAT	8,12,000	6,44,000	7,28,000	8,96,000
Add: Depreciation	2,40,000	4,80,000	3,60,000	1,20,000
Annual cash inflow from new machine	10,52,000	11,24,000	10,88,000	10,16,000
Less: Cash inflow of old asset	(4,92,500)	(4,92,500)	(4,92,500)	(4,92,500)
Incremental cash inflow	559500	631500	595500	523500
Terminal Cash inflow				7,20,000

 

Calculation of Cash inflow from old machine

Particulars	Year 1 (Rs.)	Year 2(Rs.)	Year 3(Rs.)	Year 4(Rs.)
Revenue	19,50,000	19,50,000	19,50,000	19,50,000
Less: Cash expenses	(12,00,000)	(12,00,000)	(12,00,000)	(12,00,000)
EBDT	6,50,000	6,50,000	6,50,000	6,50,000
Less : Depreciation	(1,25,000)	(1,25,000)	(1,25,000)	(1,25,000)
EBT	5,25,000	5,25,000	5,25,000	5,25,000
Less: Tax @ 30 %	(1,57,500)	(1,57,500)	(1,57,500)	(1,57,500)
PAT	3,67,500	3,67,500	3,67,500	3,67,500
Add: Depreciation	1,25,000	1,25,000	1,25,000	1,25,000
Annual cash inflow from old machine	4,92,500	4,92,500	4,92,500	4,92,500

 

Calculation of terminal cash inflow

In this case there is a capital gain since Rs. 20 % of Rs. 15,00,000 = Rs. 3,00,000 (WDV at the time of disposal as per the question) is less than Rs. 4,00,000 (Salvage value of new asset)

Capital Gain on sale of asset = Scrap/Salvage value of asset – WDV of asset at the time of disposal

= Rs. 4,00,000 - Rs. 3,00,000 = Rs. 1,00,000

Capital gain tax = 30 % of Rs. 1,00,000 = Rs.30,000

Terminal Cash inflow = Salvage value of new machine - Tax on Capital Gain of asset + Working Capital released

= Rs. 4,00,000 - Rs.30,000 + Rs.3,50,000 = Rs. 7,20,000.

Note: While calculating Terminal cash inflow; In case of capital gain, tax amount on gain on sale of asset will be subtracted. In case of capital loss, tax amount on loss on sale of asset will be added as it indicates saving for the company due to appropriation of capital losses with other gains of the company.

8. RBL Academy is interested in assessing the cash flows associated with the replacement of an old machine by a new machine. The old machine bought few years back has a book value of Rs. 1,20,000 which can be sold for Rs.1,20,000. The salvage value of this machine is zero after 5 years. It is being depreciated annually at the rate of 25 % p.a. (written down value method.) The cost of new machine is Rs.5,00,000 and it will not be required after 5 years. It has a salvage of Rs. 2,00,000. It will be depreciated annually at the rate of 25 % p.a. (Written down value method.) The new machine is expected to bring a saving of Rs. 1,40,000 in operating costs. Investment in working capital would remain unaffected. The tax rate applicable to the firm is 30 per cent. Find out the relevant cash flow for this replacement decision. (Ignore Tax on capital gain / loss).

Solution

Initial Cash outflow = Cost of new machine – salvage value of old machine = Rs. 5,00,000 – Rs. 1,20,000 = Rs. 3,80,000.

Subsequent annual Cash inflow calculation

Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
Saving in cost (EBDT)	140000	140000	140000	140000	140000
Less: Incremental Depreciation	(95,000)	(71,250)	(53,437)	(40,078)	(30,059)
EBT	45,000	68,750	86,563	99,922	109,941
Less: Incremental Tax @ 30 %	(13,500)	(20,625)	(25,969)	29,977	32,982
Incremental PAT	31,500	48,125	60,594	69,946	76,959
Add: Incremental Depreciation	95,000	71,250	53,437	40,078	30,059
Net Cash inflow	1,26,500	1,19,375	1,14,031	1,10,023	1,07,018
Terminal cash inflow					2,00,000

Terminal Cash inflow = Salvage value of new machine = Rs. 2,00,000 (Tax ignored as per the question)

New Machine Depreciation calculation

	Year 1(Rs.)	Year 2(Rs.)	Year 3(Rs.)	Year 4(Rs.)	Year 5(Rs.)
WDV	5,00,000	5,00,000 – 1,25,000 = 3,75,000	3,75,000 - 93,750 = 2,81,250	2,81,250 – 70312.5 = 2,10,937.5	2,10,937.5 - 52,734 = 1,58,202
Depreciation	25 % of 5,00,000 = 1,25,000	25 % of 3,75,000 = 93,750	25 % of 2,81,250 = 70,312	25 % of 2,10,937 = 52,734	25 % of 1,58,202 = 39,551

 

Old Machine Depreciation calculation

	Year 1(Rs.)	Year 2(Rs.)	Year 3(Rs.)	Year 4(Rs.)	Year 5(Rs.)
WDV	1,20,000	1,20,000- 30,000= 90,000	90,000–22500 = 67500	67500 - 16,875= 50,625	50,625 - 12,656=37,969
Depreciation	25 % of 1,20,000= 30,000	25 % of 90,000 = 22,500	25 % of 67,500 = 16,875	25 % of 50,625= 12,656	25 % of 37,969 =9,492

 

Calculation of incremental Depreciation

	Year 1(Rs.)	Year 2(Rs.)	Year 3(Rs.)	Year 4(Rs.)	Year 5 (Rs)
Depreciation of new machine	1,25,000	93,750	70,312	52,734	39,551
Less: Depreciation of old machine	(30,000)	(22,500)	(16,875)	(12,656)	(9,492)
Incremental Depreciation	95,000	71,250	53,437	40,078	30,059

 

Amity university BBA home tutor, Amityuniversity b.com home tutor, Amity university mba home tutor,accounts home tutor, business statistics home tutor, financial management hometutor, financial management home tuition, operation research home tutor,operation management home tutor, investment management  operation researchhome tuition, operation management home tuition, investment management hometuition, security analysis and portfolio management home tuition, income taxhome tuition, cost accounting home tuition, management accounting home tuition,business studies home tuition, economics home tuition, managerialeconomics tuition