There are two projects A and B. The initial capital outlay of A and B are Rs. 1,35,000 and Rs. 5,40,000 respectively. There will be no scrap value at the end of the life of both the projects. The Cost of Capital is 16% The company has to choose one project out of the two. The Cash inflows as under: Year Project A (Rs.) Project B (Rs.) 1 — 60,000 2 30,000 84,000 3 1,32,000 96,000 4 84,000 1,02,000 5 84,000 90,000 You are required to calculate and comment for each project: 6 N (a) Discounted payback period (b) Profitability index and (c) Net present value

FROM the data given in Table, set up a compressed monetary record as at March 31, 2002.

Working notes: Current proportion = CA/CL = 2.5, that is, 2.5/1.0

Working capital = CA – CL, that is, 2.5 – 1.00 = 1.5

On the off chance that working capital (1.5) is Rs 2,40,000, at that point CA (2.5) = Rs 4,00,000

Also, CL (1.0) = Rs 1,60,000

WC = Rs 2,40,000 (as given in the inquiry)

Fluid proportion = LA/CL = 1.5, that is, 1.5/1.0

On the off chance that CL (1.0) is Rs 1,60,000, at that point LA (1.5) = Rs 2,40,000

Stock = CA – LA, that is, Rs 4,00,000 – Rs 2,40,000 = Rs 1,60,000

Note: It is expected that bank overdraft is incorporated into current liabilities.

CL — Rs 1,60,000

Less: Bank overdraft — Rs 40,000

Other CL — Rs 1,20,000

iii) Fixed resources exclusive proportion = 0.75

Settled resources/exclusive assets = 0.75,

Working capital/restrictive assets = 0.25

Exclusive assets = 240000/0.25 = Rs 9,60,000

Less: Reserves and excess — Rs 1,60,000

Offer capital — Rs 8,00,000

iv) Fixed resources = Rs 9,60,000 x 0.75 = Rs 7,20,000

Arrangement: The monetary record is introduced in Table 24.

On the other hand: Liquid proportion = LA/CL (barring bank overdraft) = 1.5, that is, 1.5/1.00

Where CL (1.0) = Rs 1,20,000, at that point LA (1.5) = Rs 1,80,000

Stock = CA – LA = Rs 4,00,000 – Rs 1,80,000 = Rs 2,20,000

The option monetary record is introduced in Table 25.

Note: This sort of an issue have seemed a few times — in the December 1990, December 1991, June 1994 and December 1998 CS (Intermediate) examinations.

Speculation choice

A COMPANY needs to pick between ventures An and B. The underlying capital expense of the two ventures are Rs 1,35,000 and Rs 2,40,000 individually. There will be no piece an incentive toward the finish of the life of both the ventures. The open door cost of capital of the organization is 16 for each penny. The yearly salaries are as appeared in Table 26. Figure for each venture: a) the marked down payback time frame; b) the productivity file; and c) the NPV.

Supposition: The yearly wages are accepted as money inflows. The announcement of NPV is appeared in Table 27.

b) The productivity record = PV of trade out stream/PV of money outpouring.

Venture A = 193254/135000 = 1.43

Venture B = 274812/240000 = 1.15

The marked down payback time frame is exhibited in Table 28.

Financing extension

A COMPANY gains a benefit of Rs 3,00,000 for each annum in the wake of meeting its advantage obligation of Rs 1,20,000 on 12 for each penny debentures. The duty rate is 50 for each penny. The quantity of value offers of Rs 10 each are 80,000 and the held profit add up to Rs 12,00,000. The organization proposes to take up a development conspire for which Rs 4,00,000 is required. It is foreseen that after extension, the organization will have the capacity to accomplish an indistinguishable quantifiable profit from at exhibit. The assets required for development can be raised either through obligation at the rate of 12 for each penny, or by issuing value shares at standard.

Required: i) Compute the profit per share (EPS), if: the extra finances were raised as obligation; and the extra supports were raised by issue of value shares. Inform the organization on which source with respect to fund is ideal.

WN 1: Present speculation: Equity capital (Rs 80,000 x 10) — Rs 8,00,000

12 for every penny debentures = 1,20,000/12 for every penny = Rs 10,00,000

(Intrigue is 120000)

Held income = Rs 12,00,000

Display speculation = Rs 30,00,000

WN2: Present EBITRs

Benefit after intrigue = Rs 3,00,000

Include intrigue = Rs 1,20,000

EBIT = Rs 4,20,000

Less: Interest = Rs 1,20,000

PBT = Rs 3,00,000

Less: Tax at 50 for each penny = Rs 1,50,000

PAT = Rs 1,50,000

EPS = 1,50,000/80,000 = Rs 1.875

WN3: Present rate of profitability = EBIT/venture

4,20,000/30 lakh x 100 = 14 for each penny

WN4: Present venture = Rs 30 lakh

Include: Expansion sum = Rs 4 lakh

Venture after extension = Rs 34 lakh

After development, the organization will have the capacity to accomplish same rate of return as at exhibit, that is, 14 for each penny on Rs 34 lakh = Rs 4,76,000 EBIT

Arrangement: The calculation of EPS is appeared in Table 29.

ii) Advice: Debt is best. Why? EPS will be higher at Rs 1.925 if there should arise an occurrence of raising extra subsidizes as obligation.

EPS of Rs 1.925 will be higher than the current EPS of Rs 1.875

Note: This is like a question that showed up in the June 1990 CS (Final) examination.

Working capital

THE data given in Table 30 has been removed from the records of an organization.

What’s more, crude materials are in stock on a normal of two months; the materials are in process on a normal for a month; the level of fulfillment is 50 for each penny; completed merchandise stock on a normal is for one month; the time slack in installment of wages and overheads is 1� weeks; the time slack in regard of continues from account holder is two months; credit permitted by providers is one month; 20 for each penny of the yield is sold against money; the organization hopes to keep a money adjust of Rs1,00,000; the quantity of weeks per annum is taken as 52.

The organization is balanced for a produce of 1,44,000 units in the year. Set up an announcement demonstrating the working capital necessity of the organization.

The creation is 1,44,000 units in the year, that is, 12,000 units for every month.

WN 1: Materials are in process, that is, every one of the materials have been issued. Consummation is 50 for every penny. Thus, work and overheads finished is 50 for each penny.

Materials cost (1,44,000 x 45 x 4/52) = Rs 4,98,462

Work and OH = 144000 x 60 x 4/52 x 50 for every penny = Rs 3,32,308

Add up to = Rs 8,30,770