# Question 3.PP.26: A new machine is expected to generate the following set of i......

A new machine is expected to generate the following set of incremental CFAT during its 5 year economic useful life:
$\,$  The rate of inflation during the period is expected to be 8 per cent and the project’s cost of capital in real terms would be 10 per cent. Should the machine be purchased if it costs Rs 25 lakh?

 $CFAT$ $Year$ Rs 10,00,000 1 12,00,000 2 15,00,000 3 8,00,000 4 5,00,000 5
Step-by-Step
The 'Blue Check Mark' means that this solution was answered by an expert.

Recommendation: The machine should be purchased as the NPV is positive.

$Determination\> of \>real\>CFAT$
 $Real\>CFAT$ $Deflation\>factor\>at\>0.08^*$ $CFAT$ $Year$ Rs 9,26,000 1/(1.08) = 0.926 Rs 10,00,000 1 10,28,400 1/(1.08)2 = 0.857 12,00,000 2 11,91,000 1/(1.08)3 = 0.794 15,00,000 3 5,88,000 1/(1.08)4 = 0.735 8,00,000 4 3,40,500 1/(1.08)5 = 0.681 5,00,000 5

*As per Table A-3.
Table A-3 The Present Value of One Rupee

 $10\%$ $9\%$ $8\%$ $7\%$ $6\%$ $5\%$ $4\%$ $3\%$ $2\%$ $1\%$ $Year$ .909 .917 .926 .935 .943 .952 .962 .971 .980 0.990 1 .826 .842 .857 .873 .890 .907 .925 .943 .961 0.980 2 .751 .772 .794 .816 .840 .864 .889 .915 .942 .971 3 .683 .708 .735 .763 .792 .823 .855 .888 .924 .961 4 .621 .650 .681 .713 .747 .784 .822 .863 .906 .951 5 .564 .596 .630 .666 .705 .764 .790 .837 .888 .942 6 .513 .547 .583 .623 .665 .711 .760 .813 .871 .933 7 .467 .502 .540 .582 .627 .677 .731 .789 .853 .923 8 .424 .460 .500 .544 .592 .645 .703 .766 .837 .914 9 .386 .422 .463 .508 .558 .614 .676 .744 .820 .905 10 .350 .388 .429 .475 .527 .585 .650 .722 .804 .896 11 .319 .356 .397 .444 .497 .575 .625 .701 .789 .887 12 .290 .326 .368 .415 .469 .530 .601 .681 .773 .879 13 .263 .299 .340 .388 .442 .505 .577 .661 .758 .870 14 .239 .275 .315 .362 .417 .481 .555 .642 .743 .861 15 .218 .252 .292 .339 .394 .458 .534 .623 .728 .853 16 .198 .231 .270 .317 .371 .436 .513 .605 .714 .844 17 .180 .212 .250 .296 .350 .416 .494 .587 .700 .836 18 .164 .194 .232 .227 .331 .396 .475 .570 .686 .828 19 .149 .178 .215 .258 .312 .377 .456 .554 .673 .820 20 .135 .164 .199 .242 .294 .359 .439 .538 .660 .811 12 .123 .150 .184 .226 .278 .342 .422 .522 .647 .803 22 .112 .138 .170 .211 .262 .326 .406 .507 .634 .795 23 .102 .126 .158 .197 .247 .310 .390 .492 .622 .788 24 .092 .116 .146 .184 .233 .295 .375 .478 .610 .780 25 .057 .075 .099 .131 174 .231 .308 .412 .552 .742 30 .036 .049 .068 .094 .130 .181 .253 .355 .500 .706 35 .022 .032 .046 .067 .097 .142 .208 .307 .453 .672 40 .014 .021 .031 .048 .073 .111 .171 .264 .410 .639 45 .009 .013 .021 .034 .054 .087 .141 .228 .372 .608 50
$(Contd.)$
 $20\%$ $19\%$ $18\%$ $17\%$ $16\%$ $15\%$ $14\%$ $13\%$ $12\%$ $11\%$ $Year$ .833 .840 .847 .855 .862 .870 .877 .885 .893 .901 1 .694 .706 .718 .731 .743 .756 .769 .783 .797 .812 2 .579 .593 .609 .624 .641 .658 .675 .693 .712 .731 3 .482 .499 .516 .534 .552 .572 .592 .613 .636 .659 4 .402 .419 .437 .456 .476 .497 .519 .543 .567 .593 5 .335 .352 .370 .390 .410 .432 .456 .480 .507 .535 6 .279 .296 .314 .333 .354 .376 .400 .425 .452 .482 7 .233 .249 .266 .285 .305 .327 .351 .376 .404 .434 8 .194 .209 .225 .243 .263 .284 .308 .333 .361 .391 9 .162 .176 .191 .208 .227 .274 .270 .295 .322 .352 10 .135 .184 .162 .178 .195 .215 .237 .261 .287 .317 11 .112 .124 .137 .152 .168 .187 .208 .231 .257 .286 12 .093 .104 .116 .130 .145 .163 .182 .204 .229 .258 13 .078 .088 .099 .111 .125 .141 .160 .181 .205 .232 14 .065 .074 .084 .095 .108 .123 .140 .160 .183 .209 15 .054 .062 .071 .081 .093 .107 .123 .141 .163 .188 16 .045 .052 .060 .069 .080 .093 .108 .125 .146 .170 17 .038 .044 .051 .059 .069 .081 .095 .111 .130 .153 18 .031 .037 .043 .051 .060 .070 .083 .098 .116 .138 19 .026 .031 .037 .043 .051 .061 .073 .087 .104 .124 20 .022 .026 .031 .037 .044 .053 .064 .077 .093 .112 21 .018 .022 .026 .032 .038 .046 .056 .068 .083 .101 22 .015 .018 .022 .027 .033 .040 .049 .060 .074 .091 23 .013 .015 .019 .023 .028 .035 .043 .053 .066 .082 24 .010 .013 .016 .020 .024 .030 .038 .047 .059 .074 25 .004 .005 .007 .009 .012 .015 .020 .026 .033 .044 30 .002 .002 .003 .004 .006 .008 .010 .014 .019 .026 35 .001 .001 .001 .002 .003 .004 .005 .008 .011 .015 40 .000 .000 .001 .001 .001 .002 .003 .004 .006 .009 45 .000 .000 .000 .001 .001 .001 .001 .002 .003 .005 50
$(Contd.)$
 $30\%$ $29\%$ $28\%$ $27\%$ $26\%$ $25\%$ $24\%$ $23\%$ $22\%$ $21\%$ $Year$ .769 .775 .781 .787 .794 .800 .806 .813 .820 .826 1 .592 .601 .610 .620 .630 .640 .650 .661 .672 .683 2 .455 .466 .477 .488 .500 .512 .524 .537 .551 .564 3 .350 .361 .373 .384 .397 .410 .423 .437 .451 .467 4 .269 .280 .291 .303 .315 .328 .341 .355 .370 .386 5 .207 .217 .227 .238 .250 .262 .275 .289 .303 .319 6 .159 .168 .178 .188 .198 .210 .222 .235 .249 .263 7 .123 .130 .139 .148 .157 .168 .179 .191 .204 .218 8 .094 .101 .108 .116 .125 .134 .144 .155 .167 .180 9 .073 .078 .085 .092 .099 .107 .116 .126 .137 .149 10 .056 .061 .066 .072 .079 .086 .094 .103 .112 .123 11 .043 .047 .052 .057 .062 .069 .076 .083 .092 .102 12 .033 .037 .040 .045 .050 .055 .061 .068 .075 .084 13 .025 .028 .032 .035 .039 .044 .049 .055 .062 .069 14 .020 .022 .025 .028 .031 .035 .040 .045 .051 .057 15 .015 .017 .019 .022 .025 .028 .032 .036 .042 .047 16 .012 .013 .015 .017 .020 .023 .026 .030 .034 .039 17 .009 .010 .012 .014 .016 .018 .021 .024 .028 .032 18 .007 .008 .009 .011 .012 .014 .017 .020 .023 .027 19 .005 .006 .007 .008 .010 .012 .014 .016 .019 .022 20 .004 .005 .006 .007 .008 .009 .011 .013 .015 .018 21 .003 .004 .004 .005 .006 .007 .009 .011 .013 .015 22 .002 .003 .003 .004 .005 .006 .007 .009 .010 .012 23 .002 .002 .003 .003 .004 .005 .006 .007 .008 .010 24 .001 .002 .002 .003 .003 .004 .005 .006 .007 .009 25 .000 .000 .001 .001 .001 .001 .002 .002 .003 .003 30 .000 .000 .000 .000 .000 .000 .001 .001 .001 .001 35 .000 .000 .000 .000 .000 .000 .000 .000 .000 .000 40 .000 .000 .000 .000 .000 .000 .000 .000 .000 .000 45 .000 .000 .000 .000 .000 .000 .000 .000 .000 .000 50
$Determination\> of\> NPV\> using \>real \>rate\> of\> discount$
 $Total\>PV$ $Discount\>factor\>at\>0.10$ $Real\>CFAT$ $Year$ Rs 8,41,734 0.909 Rs 9,26,000 1 8,49,458 0.826 10,28,400 2 8,94,441 0.751 11,91,000 3 4,01,604 0.683 5,88,000 4 2,11,450 0.621 3,40,500 5 31,98,687 Total present value 25,00,000 Less cash outflows 6,98,687 Net present value

Question: 3.17

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Question: 3.PP.29

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Question: 3.RQ.32

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