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Question 3.RQ.32: XYZ Ltd wants to purchase a plant for its expanding operatio......

XYZ Ltd wants to purchase a plant for its expanding operations. The desired plant is available at Rs 10 lakh. The expected earnings before depreciation and taxes (EBDT) during its 5 years economic useful life are as follows:
\,  The rate of inflation during the period is expected to be 8 per cent and the stated EBDT are also expected to grow at this rate of inflation. The management policy of the firm is to evaluate its capital budgeting proposal by using cost of capital in real terms at 10 per cent.
\,  The firm follows the written down value method of depreciation at the rate of 25 per cent on this machine. There are several machines in this block. The machine is expected to a yield salvage value of Rs 1,00,000 at year-end 5. The relevant tax rate is 35 per cent.
\,  Advise the company whether the proposed machine should be purchased. Show your calculations in real terms.

Year EBDT
1 Rs 3,50,000
2 3,80,000
3 4,00,000
4 3,25,000
5 2,50,000
Step-by-Step
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Recommendation: Since NPV is positive, the company is advised to buy the plant.

Determination \>of \>CFAT \>in \>inflationary\> situation
CFAT
(Col.\>7 + 5)
\,
EAT
(Col.\>6 × 0.65)
\,
Taxable
income
(Col.\>4 – 5)
Depreciation
@\> 0.25
on \>WDV
Revised
EBDT
(Col.\> 2 × 3)
Compound
factor\>at\>0.08\>as
per \>Table\>A-1
EBDT
\,
\,
Year
\,
\,
8 7 6 5 4 3 2 1
Rs 3,33,200 Rs 83,200 Rs 1,28,000 Rs 2,50,000 Rs 3,78,000 1.080 Rs 3,50,000 1
      3,53,627     1,66,127       2,55,580        1,87,500       4,43,080 1.166      3,80,000 2
     3,76,819    2,36,194       3,63,375       1,40,625       5,04,000 1.260      4,00,000 3
    3,24,214     2,18,745       3,36,531       1,05,469      4,42,000 1.360      3,25,000 4
    2,57,648     2,03,547       3,13,149            54,101*       3,67,250 1.469      2,50,000 5

*(Rs 2,16,406 × 0.25)

Determination\> of \>real \>CFAT\> and \>NPV
Total\>PV
\,
PV\>factor\>at\>0.10
\,
Real\>CFAT
\,
Deflated\>factor\>at
0.08\>as\>per\>Table\>A-3
CFAT
\,
Year
\,
Rs 2,80,466 0.909 Rs 3,08,543 0.926 Rs 3,33,200 1
      2,50,326 0.826       3,03,058 0.857      3,53,627 2
      2,24,695 0.751       2,99,194 0.794      3,76,819 3
       1,62,757 0.683      2,38,297 0.735     3,24,214 4
     1,08,960 0.621      1,75,458 0.681     2,57,648 5
        42,290


0.621         68,100 0.681        1,00,000** 5
   10,69,494 Total present value
  10,00,000


Less cash outflows
       69,494 Net present value

** Salvage value
Table A-1   The Compound Sum of One Rupee

10\% 9\% 8\% 7\% 6\% 5\% 4\% 3\% 2\% 1\% Year
1.100 1.090 1.080 1.070 1.060 1.050 1.040 1.030 1.020 1.010 1
1.210 1.188 1.166 1.145 1.124 1.102 1.082 1.061 1.040 1.020 2
1.331 1.295 1.260 1.225 1.191 1.158 1.125 1.093 1.061 1.030 3
1.464 1.412 1.360 1.311 1.262 1.216 1.170 1.126 1.082 1.041 4
1.611 1.539 1.469 1.403 1.338 1.276 1.217 1.159 1.104 1.051 5
1.772 1.677 1.587 1.501 1.419 1.340 1.265 1.194 1.126 1.062 6
1.949 1.828 1.714 1.606 1.504 1.407 1.316 1.230 1.149 1.072 7
2.144 1.993 1.851 1.718 1.594 1.477 1.369 1.267 1.172 1.083 8
2.358 2.172 1.999 1.838 1.689 1.551 1.423 1.305 1.195 1.094 9
2.594 2.367 2.159 1.967 1.791 1.629 1.480 1.344 1.219 1.105 10
2.853 2.580 2.332 2.105 1.898 1.710 1.539 1.384 1.243 1.116 11
3.138 2.813 2.518 2.252 2.012 1.796 1.601 1.426 1.268 1.127 12
3.452 3.066 2.720 2.410 2.133 1.886 1.665 1.469 1.294 1.138 13
3.797 3.342 2.937 2.579 2.261 1.980 1.732 1.513 1.319 1.149 14
4.177 3.642 3.172 2.759 2.397 2.079 1.801 1.558 1.346 1.161 15
4.595 3.970 3.426 2.952 2.540 2.183 1.873 1.605 1.373 1.173 16
5.054 4.328 3.700 3.159 2.693 2.292 1.948 1.653 1.400 1.184 17
5.560 4.717 3.996 3.380 2.854 2.407 2.026 1.702 1.428 1.196 18
6.116 5.142 4.316 3.616 3.026 2.527 2.107 1.753 1.457 1.208 19
6.727 5.604 4.661 3.870 3.207 2.653 2.191 1.806 1.486 1.220 20
7.400 6.109 5.034 4.140 3.399 2.786 2.279 1.860 1.516 1.232 21
8.140 6.658 5.436 4.430 3.603 2.925 2.370 1.916 1.546 1.245 22
8.954 7.258 5.871 4.740 3.820 3.071 2.465 1.974 1.577 1.257 23
9.850 7.911 6.341 5.072 4.049 3.225 2.563 2.033 1.608 1.270 24
10.834 8.623 6.848 5.427 4.292 3.386 2.666 2.094 1.641 1.282 25
17.449 13.267 10.062 7.612 5.743 4.322 3.243 2.427 1.811 1.348 30
28.102 20.413 14.785 10.676 7.686 5.516 3.946 2.814 2.000 1.417 35
45.258 31.408 21.724 14.974 10.285 7.040 4.801 3.262 2.208 1.489 40
72.888 48.325 31.920 21.002 13.764 8.985 5.841 3.781 2.438 1.565 45
117.386 74.354 46.900 29.456 18.419 11.467 7.106 4.384 2.691 1.645 50
(Contd.)
20\% 19\% 18\% 17\% 16\% 15\% 14\% 13\% 12\% 11\% Year
1.200 1.190 1.180 1.170 1.160 1.150 1.140 1.130 1.120 1.110 1
1.440 1.416 1.392 1.369 1.346 1.322 1.300 1.277 1.254 1.232 2
1.728 1.685 1.643 1.602 1.561 1.521 1.482 1.443 1.405 1.368 3
2.074 2.005 1.939 1.874 1.811 1.749 1.689 1.630 1.574 1.518 4
2.488 2.386 2.288 2.192 2.100 2.011 1.925 1.842 1.762 1.685 5
2.986 2.840 2.700 2.565 2.436 2.313 2.195 2.082 1.974 1.870 6
3.385 3.379 3.185 3.001 2.826 2.660 2.502 2.353 2.211 2.076 7
4.300 4.021 3.759 3.511 3.278 3.059 2.853 2.658 2.476 2.305 8
5.160 4.785 4.435 4.108 3.803 3.518 3.252 3.004 2.773 2.558 9
6.192 5.695 5.234 4.807 4.411 4.046 3.707 3.395 3.106 2.839 10
7.430 6.777 6.176 5.624 5.117 4.652 4.226 3.836 3.479 3.152 11
8.916 8.064 7.288 6.580 5.936 5.350 4.818 4.334 3.896 3.498 12
10.699 9.596 8.599 7.699 6.886 6.153 5.492 4.898 4.363 3.883 13
12.839 11.420 10.147 9.007 7.987 7.076 6.261 5.535 4.887 4.310 14
15.407 13.589 11.974 10.539 9.265 8.137 7.138 6.254 5.474 4.785 15
18.488 16.171 14.129 12.330 10.748 9.358 8.137 7.067 6.130 5.311 16
22.186 19.244 16.672 14.426 12.468 10.761 9.276 7.986 6.866 5.895 17
26.623 22.900 19.673 16.879 14.462 12.375 10.575 9.024 7.690 6.543 18
31.948 27.251 23.214 19.748 16.776 14.232 12.055 10.197 8.613 7.263 19
38.337 32.429 27.393 23.105 19.461 16.366 13.743 11.523 9.646 8.062 20
237.373 38.591 32.323 27.033 22.574 18.821 15.667 13.021 10.804 8.949 21
55.205 45.923 38.141 31.629 26.186 21.644 17.861 14.713 12.100 9.933 22
66.247 54.648 45.007 37.005 30.376 24.891 20.361 16.626 12.552 11.026 23
79.496 65.031 53.108 43.296 35.236 28.625 23.212 18.788 15.178 12.239 24
95.395 77.387 62.667 50.656 40.874 32.918 26.461 21.230 17.000 13.585 25
237.373 184.672 143.367 111.061 85.849 66.210 50.949 39.115 29.960 22.892 30
590.657 440.691 327.988 243.495 180.311 133.172 98.097 72.066 52.799 38.574 35
1469.740 1051.642 750.353 533.846 378.715 267.856 188.876 132.776 93.049 64.999 40
3657.176 2509.583 1716.619 1170.425 795.429 538.752 363.662 244.629 163.985 109.527 45
9100.191 5988.730 3927.189 2566.080 1670.669 1083.619 700.197 450.711 288.996 184.559 50

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

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