Corporate Fin Mgt NDLM.PDF

• Cost of equipment B is Rs.18,00,000, and


• Cost of equipment C is Rs.17,00,000

1.24. All the equipment will serve a common purpose i.e., utility. The life span of

each equipment is 5 years.

1.25. Based on initial costs only, the obvious decision would be in favour of

purchasing equipment ‘C’ since it costs least. However, if we apply DCFT

and consider information under indicators like Returns, Operation &

Maintenance expenses and Salvage Value, the decision would clearly be

different. Let us see, how this technique can be applied. Following are the

technical estimations regarding Returns, Operation & Maintenance expenses

and Salvage Value.

Equipment A B C
Initial Cost Rs 19,00,000 Rs 18,00,000 Rs 17,00,000
Year O&M Returns O&M Returns O&M Returns
I 10,000 800,000 12,000 800,000 14,000 700,000
2 11,000 800,000 13,000 700,000 14,000 700,000
3 12,000 700,000 14,000 600,000 14,000 600,000
4 12,500 600,000 14,500 500,000 14,000 500,000
5 13,000 500,000 15,000 400,000 14,000 300,000
Salvage value at the
end of the 5th year
200,000
100,000
50,000

1.26. Now calculate the present value at the Discount Factor of 20 %

Equipment A :

Present Value of estimated cash outflow is:

19,00,000 + (10,000 X 0.8333) + (11,000 X 0.6944) + (12,000 X 0.5787) +

(12,500 X 0.4823) + (13,000 X 0.4019) = Rs.19,34,169.

Present value of estimated cash inflow is:

(800,000 X 0.8333) + (800,000 X 0.6944) + (700,000 X 0.5787) + (800,000 X

0.4823) + (500,000 X 0.4019) + (200,000 X 0.4019) = Rs.21, 97,960

Net present value is equal to benefits in terms of present value minus cost in terms

of present value. That means that in this case: NPV = 2, 63,791