1. Illustration 2Illustration 2
A firm is using a two year old machine that was purchased
f R Th i i lif i D i ifor Rs. 70,000. The remaining life is 5 years. Depreciation
rate is 40%.
Firm is considering its replacement with a new machineFirm is considering its replacement with a new machine
costing Rs. 1,40,000 which would be used for 5 years. The
installation charges will be Rs. 10,000. The increase in the
working capital requirement will be Rs 20 000 as a resultworking capital requirement will be Rs. 20,000 as a result
of using the new machine. The firm is subject to income
tax rate of 35% and capital gains tax rate of 30%.
Determine the initial cash flow if salvage value of existing
machine is (a) 80,000 (b) 60,000 (c) 50,000 (d) 20,000.
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2. Illustration 3
A machine has a book value of Rs. 90,000. and
remaining life of 5 years. It is depreciable @ 20%. Its
present salvage value is its book value but nil after 5present salvage value is its book value but nil after 5
years.
It can be replaced with a new machine worth RsIt can be replaced with a new machine worth Rs.
4,00,000. It will have a salvage value of Rs. 2,50,000
after 5 years. The new machine will save Rs. 1,00,000
p.a. in manufacturing costs. It will depreciate @
33.33%. The tax rate is 35%.
Determine the post tax incremental cash flowDetermine the post tax incremental cash flow.
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3. Exercise
A machine purchased for Rs. 96,000 has a book value of
Rs. 24,000 and remaining life of 4 years. It is
depreciable @ 50% Its present salvage value is Rsdepreciable @ 50%. Its present salvage value is Rs.
20,000 but nil after 4 years.
It can be replaced with a new machine worth RsIt can be replaced with a new machine worth Rs.
1,30,000. It will have a salvage value of Rs. 8,000 after 4
years. The new machine will save Rs. 60,000 in
manufacturing costs. It will depreciate @ 40%. The tax
rate is 35%.
Determine the post tax incremental cash flowDetermine the post tax incremental cash flow.
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4. Illustration
Find incremental CFAT from the following information:
Purchase price of the new asset 10,00,000
Installation costs 2 00 000Installation costs 2,00,000
Increase in working capital in year zero 2,50,000
Scrap value of the new asset after 4 years 3,50,000
Annual revenues from new asset 21,50,000
Annual cash expenses on new asset 9,50,000
Current book value of old asset 4,00,000, ,
Present scrap value of old asset 5,00,000
Annual revenue from old asset 19,25,000
Annual cash expenses on old asset 11 25 000Annual cash expenses on old asset 11,25,000
Planning period 4 years
Depreciation on new asset 20%
Depreciation on old asset 25%
Tax rate 30%
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5. ExerciseExercise
A company is considering to install a machine costing Rs.
5 00 000 with an additional investment of Rs 1 50 0005,00,000 with an additional investment of Rs. 1,50,000
for its installation. The salvage value at the end of year 10
is estimated at Rs. 2,50,000. The machine is estimated to
generate a sales revenue of Rs. 20,00,000 in the first year
and the sales are expected to grow at 5% p.a. for the
remaining life of the machine The profit after tax isremaining life of the machine. The profit after tax is
expected at 10% of the sales while the working capital
requirement are expected to be 5% of the sales.q p
Compute the cash flows assuming SLM depreciation and
additional working capital is required at the beginning
f h d i f ll l blof each year and is fully salvageable.
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6. Solution
 Initial investment outlay – Rs. 7,50,000
 Fi t Y CFAT R  First Year CFAT – Rs. 2,35,000
 Second Year CFAT – Rs. 2,44,750
 Third Year CFAT Rs 2 54 987 Third Year CFAT – Rs. 2,54,987
 Fourth Year CFAT – Rs. 2,65,737
 Fifth Year CFAT Rs 2 77 024 Fifth Year CFAT – Rs. 2,77,024
 Sixth Year CFAT – Rs. 2,88,875
 Seventh Year CFAT – Rs 3 01 319 Seventh Year CFAT – Rs. 3,01,319
 Eighth Year CFAT – Rs. 3,14,385
 Ninth Year CFAT – Rs 3 28 104 Ninth Year CFAT Rs. 3,28,104
 Tenth Year CFAT – Rs. 7,55,396
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