Numericals for Capital Budgeting Techniques
I. ARR - Average Rate of Return / Accounting Rate of Return
ARR = Average annual Profits after taxes/ Average investment over life of asset *100
Average investment over life of asset = (Initial Investment + Salvage value) / 2
1. A machine is available at cost of Rs.80000. We expect it to have a life of 5 years and
have a scrap value of Rs.10000 at the end of the 5 years period. We have estimated
that it will generate additional profits over its life as follows:
Year 1 2 3 4 5
Amount Rs 20000 40000 30000 15000 5000
These are profits before depreciation. You are required to calculate the return on
capital employed.
II. Payback Period
2. Calculate the Payback Period for the following tow machines:
Year Machine A Machine B
1 Rs14000 Rs.22000
2 16000 20000
3 18000 18000
4 20000 16000
5 25000 17000
, III. Discounted Payback Period
3. Geeta Ltd. is implementing a project with an initial capital outlay of Rs.7600. Its cash
inflows are as follows:
Year 1 2 3 4
Amount Rs. 600 2000 1000 5000
The expected rate of return on the capital invested is 12% pa. Calculate the discounted
payback period.
IV. Net Present Value
4. A firm can invest Rs.10000 in a project with a life of 3 years. Th projected cash
inflows are: Year 1: Rs. 4000, Year 2: Rs.5000 and Year 3: Rs.4000. The cost of
capital is 10 per cent. Should the investment be made?
I. ARR - Average Rate of Return / Accounting Rate of Return
ARR = Average annual Profits after taxes/ Average investment over life of asset *100
Average investment over life of asset = (Initial Investment + Salvage value) / 2
1. A machine is available at cost of Rs.80000. We expect it to have a life of 5 years and
have a scrap value of Rs.10000 at the end of the 5 years period. We have estimated
that it will generate additional profits over its life as follows:
Year 1 2 3 4 5
Amount Rs 20000 40000 30000 15000 5000
These are profits before depreciation. You are required to calculate the return on
capital employed.
II. Payback Period
2. Calculate the Payback Period for the following tow machines:
Year Machine A Machine B
1 Rs14000 Rs.22000
2 16000 20000
3 18000 18000
4 20000 16000
5 25000 17000
, III. Discounted Payback Period
3. Geeta Ltd. is implementing a project with an initial capital outlay of Rs.7600. Its cash
inflows are as follows:
Year 1 2 3 4
Amount Rs. 600 2000 1000 5000
The expected rate of return on the capital invested is 12% pa. Calculate the discounted
payback period.
IV. Net Present Value
4. A firm can invest Rs.10000 in a project with a life of 3 years. Th projected cash
inflows are: Year 1: Rs. 4000, Year 2: Rs.5000 and Year 3: Rs.4000. The cost of
capital is 10 per cent. Should the investment be made?
