CAPEX SOLUTION

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Exec – PGP, Dubai
CAPEX (End Term)
Open book/Notes
Date – May 13, 2016
WEIGHTAGE – 40%
Duration: 120 Mts Marks : 50
Name ……………………………………………………………………
Instructions:
 Question Paper should be returned back with the name written in the
spaceprovided for the same.
 All the answers should bewritten in the answer sheet provided. Don’t
write any answer on the Question Paper.
 All workings should bepartof your answer.
 Each question carries equal marks.
Q. No. 1
A proforma cost sheet of a company provides the following particulars:
Particulars Amount per unit
Elements of cost:
Raw materials Rs. 80
Direct labour Rs. 30
Overhead Rs. 60
Total cost Rs. 170
Profit Rs. 30
Selling price Rs. 200
The following further particulars are available:
Raw materials in stock, on average, one month; Materials in process (completion stage, 50
per cent), on average, half a month; Finished goods in stock, on average, one month. Credit
allowed by suppliers is one month; Credit allowed to debtors is two months; Average time-
lag in payment of wages is 1.5 weeks and one month in overhead expenses; one-fourth of the
output is sold against cash; cash in hand and at bank is desired to be maintained at Rs.
3,65,000.

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You are required to prepare a statement showing the working capital needed to finance a
level of activity of 1,04,000 units of production. You may assume that production is carried
on evenly throughout the year, and wages and overheads accrue similarly. For calculation
purposes, 4 weeks may be taken as equivalent to a month.
Q. No. 2
A manufacturer buys casting equipment from outside supplier @ Rs. 30 per unit. Total
annual needs are 800 units. The following further data are available:
Annual return on investment, 10 per cent
Rent, insurance, taxes per unit per year, Rs 1
Cost of placing an order, Rs. 100
Determine the economic order quantity.
Q. No. 3
Hypothetical Limited is contemplating having an access to a machine for a period of 5 years.
Discussions with various financial institutions have shown that the company can have the use
of machine for the stipulated period through leasing arrangement, or the requisite amount can
be borrowed at 14 per cent to buy the machine. The firm is in the 50 per cent tax bracket. In
case of leasing, the firm would be required to pay an annual end-of-year rent of Rs. 1,20,000
for 5 years. All maintenance, insurance and other costs are to be borne by the lessee.
In the case of purchase of the machine (which costs Rs. 3,43,300), the firm would have a 14
%, 5-year loan, to be paid in 5 equal instalments, each instalment becoming due at the end of
each year. The machine would be depreciated on a straight line basis for tax purposes, with
no salvage value.
Advise the company regarding the option it should go for, assuming lease rentals are paid at
the end of the year.
Q. No.4
Skylark Airways is planning to acquire a light commercial aircraft for flying class clients at
an investment of Rs. 50,00,000. The expected cash flow after tax for the next three years is as
follows:
(Amount in Rs. lakhs)
Year 1 Year 2 Year 3
CFAT Probability CFAT Probability CFAT Probability
14 0.1 15 0.1 18 0.2
18 0.2 20 0.3 25 0.5
25 0.4 32 0.4 35 0.2
40 0.3 45 0.2 48 0.1
The Company wishes to take into consideration all possible risk factors relating to an airline
operations. The Company wants to know:

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(i) The expected NPV of this venture assuming independent probability distribution
with 6 per cent risk free rate of interest.
(ii) The possible deviation in expected value.
(iii) How would standard deviation of the present value distribution help in capital
budgeting decisions?
Q. No. 5
The Modern Chemicals Ltd requires Rs. 25,00,000 for a new plant. This plant is expected to
yield earnings before interest and taxes of Rs. 5,00,000. While deciding about the financial
plan, the company consider the objective of maximising earnings per share.
It has three alternatives to finance the project — by raising debt of Rs 2,50,000 or Rs
10,00,000 or Rs. 15,00,000 and the balance, in each case, by issuing equity shares.
The company’s share is currently selling at Rs 150, but is expected to decline to Rs 125 in
case the funds are borrowed in excess of Rs. 10,00,000.
The funds can be borrowed at the rate of 10 per cent upto Rs. 2,50,000, at 15 per cent over
Rs. 2,50,000 and upto Rs. 10,00,000 and at 20 per cent over Rs. 10,00,000.
The tax rate applicable to the company is 50 per cent. Which form of financing should the
company choose?
END OF PAPER