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

Management Accounting and Financial Analysis for CA Final Examination [995093]

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

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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