245
a. Calculate the incremental cash flow at time 0.
b. Calculate the incremental annual operating cash flows that result from the
new machine.
c. Calculate the incremental terminal cash flow.
d. Show the incremental CFs in the table below.
Year
Cash Flow
0 ________
1 ________
2 ________
3 ________
4 ________
e. Calculate the NPV for this project.
Answers: a.
–
Rs.6,040; b. Rs.1,620; c. 1,900; e. 1,349
Pay back period
(A)
When Cash inflows are uniform
Initial investment Rs.2,00,000
Annual cash inflow Rs.50,000
Pay back period
=
Original Investment
Annual cash inflow
=
2,00,000
50,000
=
4 Years
(B) When cash inflows are not uniform
It investment in a project Rs.8,00,000 and net cash inflows after tax but before
depreciation are estimated for the next 6 years as Rs.20,000, Rs.25,000,
Rs,20,000, Rs.30,000, Rs.35,000 and Rs.15,000 Respectively, pay back period is
calculated as follows.
Solution
Year
Cash Inflow
Cumulative cash inflows
1
Rs.20,000
Rs.20,000
2
Rs.25,000
Rs.45,000
3
Rs.20,000
Rs.65,000
4.
Rs.30,000
Rs.95,000
At end of 4
th
year the cumulative cash inflow exceeds the investment of
Rs.80,000
Pay back period
=
3 Years + 15000
30000
=
3 Years + ½ year
=
3.5 Year