Transcript www.excellentcoaching.in

Problem No. 1
A(N,I) FACTOR = (1+i)^n – 1 / i
Here, (1.1)^4 – 1 / 0.1 = 4.641
FVA = A * A(N,i) = 4000 * 4.641 = 18,564/-
Problem No.2
10000(1+i)^4 = 12625  i = 6% hly or 12% pa
If compounded qly, then
Maturity = 10000(1.03)^8 = 12668/-
Problem No.3
(i) 2000(1.08)^2 = 2332.80
(ii) 2000 (1.04)^4 = 2339.80
(iii) 2000 (1.02)^8 = 2343.40
Problem No.4
3P = P (1+i)^7
•(1+i)^7
= 3 or (1+i) = 3^(1/7)
•1+ i = 1.169931 or i = 16.99%
Problem No.5
P(n,i) factor = [(1.03)^12-1]/[0.03 * (1.03)^12]
= 9.95399
Instalment = Loan / P(n,i) = 500000 / 9.95399
= 50231.11
Problem No.6
Value of Pepetuity = Interest / rate of interest
= 5000 / 0.833%
= ` 6,00,240
Add: First Month Pension = ` 6,05,240/-
Problem No.7
PV of Money outflow under
Outright purchase = ` 500,000
PV of Money Outflow under instalment option
= 102500 * 4.111 = 4,21,378
Note: Instalment : 615000 / 6 = 102500
Conclusion: Instalment Option is better.
Problem No.8
Maturity = 75000 (1.08)^5 = 111108
Interest = ` 36108
Problem No. 9
Effective ROI = [(1.03)^4 -1] * 100 = 12.55%
Problem No.10
PV of ` 50000 = 50000 / 1.7234 = `29012/=

Problem No. 1
Year
1
2
3
4
5
CFAT(`)
300,000
360,000
300,000
264,000
240,000
PVF @ 10%
0.9091
0.8264
0.7513
0.6830
0.6209
DCFAT(` )
272,730
297,504
225,390
180,312
149,016
(` )
272,730
570,234
795,624
975,936
1,124,952
Initial investment of ` 10 lakhs is exceeded in Year 5.Hence the payback
period on time proportion basis as follows:DCAFT earned during the Year 4 = ` 1, 49,016(` 11, 24,952 - ` 9,
75,936), for a period of 12 months.
Hence, time period for earning ` 24,064 in order to recover the initial
investment would be : Payback period = ` 24,064 / ` 1,49,016 * 12 months
= 2 months (approx.)
Hence, Payback period = 4 years, 2 months
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Accept / Reject Criteria for NPV (Net Present Value): If the NPV of
the Project is +, then the project may be accepted else rejected.
NPV = Cum. PVCIF – Initial Cash Out Flow (ICOF)
Points to be noted:
Cum. PVCIF = Sum of Discounted Cash Flows (Cash Flow * PVF)
of all the years.
When Working Capital Requirement is given, remember to take
the same in Initial Cash Outflow and also in Terminal (Last Year)
Cash Inflow.
Remember to take the salvage value of Plant in the last year if
given.
Cash Inflow = PAT + Depreciation
If the cash flows are uniform Cum. PVCIF = Cash Flow * Cum.
PVF
In case of Capital Rationing, If the projects are divisible the
Allocation of Funds should be based on Ranking of PI. Else
Allocation should be considered for various alternatives (mix of
Projects). We should ensure that maximum funds are utilized
and maximum NPV achieved.

Accept/Reject Rule for PI: PI = Cum. PVCIF /
ICOF. IF PI > 1 then Accept the Project, else
Reject. Please note that if PI > 1 then NPV is +.
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Accept/Reject Rule for IRR: IF IRR > Cost of
Capital, then Accept the Project, else Reject.
Three Important Points about IRR:
Internal Rate of Return is the Rate of Return from
the Project.
It is the maximum rate upto which funds can be
borrowed to finance the project.
When IRR = COC then PI = 1, NPV = 0. That is
when we take the IRR as the Cost of capital of the
Project (for Discounting Purpose) then NPV is NIL.

Problem No. 2

Computation of NPV for Project X
Year
PBDT
1
2
3
4
5
6
7
8
25
35
45
65
65
55
35
15
Depn
PBT
Tax @
50%
PAT
(`. Lacs)
CFAT
(PAT+DEPN)
15
10
5
5
20
15
20
10
10
25
15
30
15
15
30
15
50
25
25
40
15
50
25
25
40
15
40
20
20
35
15
20
10
10
25
15
15
Present Value of Cash Inflows
Less: Initial Investment
Net Present Value
DF @15%
PV
0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.327
17.40
18.90
19.74
22.88
19.88
15.12
9.40
4.91
128.23
120.00
8.22
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Problem No. 2

Computation of NPV for Project Y
Year
PBDT
1
2
3
4
5
6
40
60
80
50
30
20
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Depn
PBT
Tax @
50%
PAT
(`. Lacs)
CFAT
(PAT+DEPN)
20
20
10
10
20
40
20
20
20
60
30
30
20
30
15
15
20
10
5
5
20
0
0
0
Present Value of Cash Inflows
Less: Initial Investment
Net Present Value
30
40
50
35
25
20
DF @15%
PV
0.870
0.756
0.658
0.572
0.497
0.432
26.10
30.24
32.90
20.02
12.43
8.64
130.33
120.00
10.33
Conclusion: As project Y has a higher NPV, hence it is
suggested to take up Project Y.
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Problem No. 3
Initial investment + Working Capital = 120 +
15 = `. 135 Lakhs
Additional Equipment required ( beginning of
Year 3 = end of Year 2) =`. 10 Lakhs
Total Cash Outflows (135 + 10 ) = `. 145
Lakhs
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Problem No. 3 Cont…
Note:
Depreciation = ( Original Cost – Scrap Value)
/ Useful Life
First Equipment = `. 120 Lakhs / 8 years =
Rs. 15 Lakhs p.a.
Second Equipment = (`. 10 Lakhs – ` 1
Lakhs) / 6 years = `. 1.50 Lakhs p.a.
In the 8th year, there will be additional cash
flows to the extent of scrap value of
additional equipment `. 1 Lakhs and recovery
of working capital `. 15 Lakhs
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Problem No. 3 Cont…
Sl.
no.
Particulars
1 Sales Quantity ( Capacity x 400000) in
units
2 Sales Value Rs. 100 per unit (Rs. Lacs)
Year 1
Year 2
Year 3-5
Year 6-8
80,000
120,000
300,000
200,000
80.00
120.00
300.00
200.00
3 Variable Cost @ 40% of Sales
32.00
48.00
120.00
80.00
4 Contribution (2-3)
48.00
72.00
180.00
120.00
Production
16.00
16.00
16.00
16.00
Selling (Advertisement)
30.00
15.00
10.00
4.00
Depreciation ( See note)
15.00
15.00
16.50
16.50
61.00
46.00
42.50
36.50
(13.00)
26.00
137.50
83.50
-
13.00
68.75
41.75
(13.00)
13.00
68.75
41.75
15.00
15.00
16.50
16.50
2.00
28.00
85.25
58.25
5 Fixed Cost
Total Fixed Cost
6 PBT (4-5)
7 Tax @ 50%
8 PAT (6-7)
9 Depreciation
10 CFAT (8+9)
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Problem No. 3 Cont…

Computation of NPV
Year
1
2
3
4
5
6
7
8
Total
CFAT (Rs. Lacs)
2.00
28.00-10.00 = 18.00
85.25
85.25
85.25
58.25
58.25
74.25( 58.25+15.00+1.00)
Discounted Cash Inflows
Initial Investment
Net Present Value
PVF @ 12%
0.8929
0.7972
0.7118
0.6355
0.5674
0.5066
0.4523
0.4039
DCFAT (Rs.
Lacs)
1.7858
14.3496
60.6810
54.1764
48.3709
29.5095
26.3465
29.9896
265.3839
135.0000
130.3939
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Problem No. 4
Sales
Less: Operating cost + Depn
Profit Before Tax
Less: Tax – 30% Assumed
Profit After Tax
Net cash inflow (PAT + Depn – Loss of
Commission Income)
In 8th year :
New cash inflow after tax
Add: Salvage value of machine
Net cash inflow in year 8 :
40000
16750
23250
6975
16275
14025
14,025
6,000
20,025
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Problem No. 4
Calculation of Net present value (NPV)
Year
CFAT
PV factor @ 10%
Present value of
cash inflows
1 to 7
14,025
4.867
68260
8
20,025
0.467
9352
77612
Less: Cash Outflows
80,000
NPV
-2388
Profitability Index = Cum. Disc CIF / ICOF = 77612/80000
=0.97
Advise: Since the net present value is negative and profitability
index is < 1, the hospital should not purchase the diagnostic
machine.
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Problem No. 5
Year
CFAT
PVF at 10%
DCFAT
PVF at 12%
DCFAT
1
30,000.00
0.9091
27,273.00
0.8929
26,787
2
40,000.00
0.8264
33,056.00
0.7972
31,888
3
60,000.00
0.7513
45,078.00
0.7118
42,708
4
30,000.00
0.6830
20,490.00
0.6355
19,065
5
20,000.00
0.6209
12,418.00
0.5674
11,348
Total DCFAT
138,315.00
131,796
Less: Initial Investment 136,000.00
136000
Net Present Value
2,315.00
(4,204)
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Problem No. 5
From the above i.e. with one positive NPV and
negative NPV, IRR is estimated using the
interpolation method as under:-
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NPV @ 10% = 2315 (Positive NPV)
NPV @ 12% = 4204 (Negative NPV)
Diff
2% = 6519
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2315 / 6519 * 2 = 0.71%
IRR (from the +ve side)= 10% + 0.71% =10.71%
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4204 / 6519 * 2 = 1.21%
IRR (from the –ve side) = 12% - 1.29% =10.71%
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Problem No. 6
Year
0
1
2
3
4
5
(680)
-
-
Before tax Cash Flows
-
240
275
210
180
160
Tax @ 35%
After Tax cash flows
-
84
156
96.25
178.75
73.5
136.5
63
117
104
( Depreciation * Tc )
Working Capital
Released
-
42
42
42
42
42
-
0
0
0
0
80
Net Cash Flow
-
198
220.75
178.5
159
226
PVF @ 12%
1
0.8929
0.7972 0.7118
0.6335 0.5674
-PV
(680)
176.79
175.98 127.06
101.04 128.24
-NPV
29.12
1
0.8696
0.7561 0.6575
0.5718 0.4972
(680)
172.18
166.91 117.36
90.92 112.37
Initial Cost
- (Rs. ‘ 000)
-
Tax Saving on Depn.
PVF @ 15%
-PV
-NPV
(20.26)
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Problem No. 6
Internal Rate of return
IRR
= 12% + (29.12/49.38) * 3%
= 13.77%
Discounted Payback Period
Discounted Cash Flows at K = 12% considered
= 176.79 + 175.98 + 127.06 + 101.04 + 12 *
99.13/128.24
= 4 years and 9.28 months
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Payback Period (Net Cash flows are considered)
= 198 + 220.75 + 178.5 + 12 * 82.75/159
= 3 years and 6.25 months
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Problem No. 7
Calculation of Annualised CF for Machine A
Year
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Cash Outflow
Dep. Factor @ 10%
Dep. Factor
0
6,00,000
0
6,00,000
1
1,20,000
0.9091
1,09,092
2
1,20,000
0.8264
99,168
3
1,20,000
0.7513
90,156
2.4868
8,98,416
Annualized cash Outflow = 8,98,416 / 2.4868
= Rs. 3,61,274
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Problem No. 7
Calculation of Annualised CF for Machine B
Year
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Cash Outflow
Dep. Factor @ 10%
Dep. Factor
0
4,00,000
0
4,00,000
1
1,80,000
0.9091
1,63,638
2
1,80,000
0.8264
1,48,762
1.7355
7,12,400
Annualized cash Outflow = 7,12,400 / 1.7355
= Rs. 4,10,486
Conclusion: Machine ‘A’s Annualized cash out flow is lower than
machine ‘B’. Therefore machine ‘A’ should be purchased.

Problem No. 8
Sl.no. Project
2
Initial
Investment (Rs.
in Lakhs)
NPV
3
PI
4
Rank based on
PI
1
A
B
C
D
E
1.00
3.00
0.50
2.00
1.00
0.20
0.35
0.16
0.25
0.30
1.200
1.117
III
V
1.320 1.125 1.300
I
IV
II
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Problem No. 8

If the Projects are Divisible then
Rank
1
2
3
4
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Project
C
E
A
D (1/4)
Investment
(Rs. In Lacs)
0.50
1.00
1.00
0.50
Cum.
Investment
(Rs. In Lacs)
0.50
1.50
2.50
3.00
Total
NPV
(Rs. In Lacs)
0.16
0.30
0.20
0.06
0.72
If the projects are divisible, then allocation should be based
on Rank.
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Problem No.8
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If the Projects are Indivisible then
Option Combination of Projects
1
2
3
4
5
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A,D
B
D,E
A,C,E
C,D
Total
Investment
(Rs. In Lacs)
3.00
3.00
3.00
2.50
2.50
NPV
(Rs. In Lacs)
0.45
0.35
0.55
0.66
0.41
If the projects are indivisible, then various combination of
investsments should be considered. Combination with
maximum NPV should be chosen.
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Problem No.1
Cost of Equity
Ke = (1 / 20) * 100 + 5 = 10%
Cost of Pref. Share
Kp = [ 5 + (100 – 108)/10]/ [(100+108)/2] = 4.04%
Cost of Debenture
Kd = [10 (1 – 0.5) + (100 – 101)/10] / [ (100+101)/2]
 = 4.88%

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Problem No.1
COMPUTATION OF WACC – BV WEIGHTS
CAPITAL
EQUITY

COST
AMOUNT IN RS.
WEIGHT
10.00
1,000,000.00
2
PREFERENCE
4.04
500,000.00
1
DEBENTURE
4.88
500,000.00
1
WACC = [ 10 * 2 + 4.04*1 + 4.88*1] / 4 =
7.23%
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Problem No.1
COMPUTATION OF WACC – MV WEIGHTS
CAPITAL
EQUITY

COST
AMOUNT IN RS.
WEIGHT
10.00
24,00,000
96
PREFERENCE
4.04
5,50,000
22
DEBENTURE
4.88
5,25,000
21
WACC = [ 10 * 96 + 4.04*22 + 4.88*21] / 139 =
8.28%

Problem No.2

I = 16, t = 35%
Kd = I ( 1 – t) / NP * 100 %
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(a) If issued at par: Kd = 16(.65) / 100 = 10.4%
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(b) If issued at 10% Discount Kd = 16(.65) / 90 = 11.56%
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(c) If issued at 10% Premium Kd = 16(.65) / 110 = 9.45%
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Problem No.3
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D0 = 2; G = 10%, D1 = 2*(1.10) = 2.20
P0 = 40
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Ke = (2.2 / 40) * 100% + 5% = 15.50%
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(ii) Ke = 15.50%, D0 = 2, G = 11%, then D1 = 2 * 1.11 = 2.22
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P0 = D1 / (Ke – g) = 2.22 / 4.5% = Rs.49.33
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(iii) Ke = 16%, G – 10%, D = 2, then P = ?
P = 2 / (16% - 10%) = Rs.33.33
Problem No. 1
•
•
•
•
•
•
•
•
•
•
Let the Equity Capital be 10x
Debt Funds = 6x
Total Capital Employed = 16x
Given ROCE = 20%, Hence EBIT = 3.20x
Less: Interest 6x * 10%
= 0.60x
Profit Before Tax
= 2.60x
Less: Tax 40%
= 1.04x
Profit after tax
= 1.56x
Equity Capital
= 10x
Return on Equity = 1.56x / 10x = 15.60%
Problem No. 2
Net Sales: Rs. 30 crores
EBIT Rs. 3.6 crores @ 12% on sales
ROI = EBIT Capital Employed = {3.6 (10+2+6)100} = 20%
2. Degree of Financial Leverage
= EBIT / EBIT- Interest
= {3.6 (3.6-0.9)}
= 1.3333
Degree of Combined Leverage
= DFL DOL
3
= 1.3333 DOL
DOL
= 3 1.3333
Degree of Operating Leverage
= 2.25
Problem No. 2
EBIT
Add: Interest on Debt
EBT
Less: Tax @ 40%
EAT
Less:
Preference
dividend
Earnings available for
Equity Shareholders
Rs.( In Crores)
3.6
0.9
2.7
1.08
1.62
0.26
1.36
ROE = 1.36 / 10 = 13.6%
Problem No. 3
(i) Financial leverage:
Combined Leverage= Operating Leverage (OL) x
Financial Leverage (FL)
2.8 = 1.4 x FL
FL = 2
Financial Leverage = 2
Problem No.3
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Sales = 30,00,000
Less: Variable Cost = 22,86,000
Contribution = 7,14,000
Less: Fixed Cost = 2,04,000
EBIT = 5,10,000
Less: Interest = 2,55,000
EBT =2,55,000
Less: Tax = 76,500
EAT = 1,78,500
PV Ratio = 23.8%
EPS = 1,78,500 / 170000 = Rs.1.05
• OL = 1.40
• C / C – 204000 =
1.40
• C = 714000
Problem No. 3
(iii)
Assets turnover:
Sales
30,00,000
Assets turnover ratio =
=
= 0.784
Total Assets 38,25,000
0.784 < 1.5 means lower than industry turnover.
Problem No.3
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To Find, Sales Value at which EBIT = NIL
Contribution = EBIT + Interest + Fixed Cost =
2.55+2.04 = 4.59
Sales = Contribution / PVR = 4.59/23.8%
= Rs.19.29 Lacs
Problem No.4
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SALES
LESS: VARIABLE COST
CONTRIBUTION
LESS: FIXED COST
EBIT
LESS: INTEREST
EBT
LESS: TAX
EAT
COMPANY A
 91000
 56000
 35000
 20000
 15000
 12000
 3000
 900
 2100

COMPANY B
 105000
 63000
 42000
 31500
 10500
 9000
 1500
 450
 1050
NET INCOME APPROACH
• NET OPERATING APPROACH
• MODIGLIANI – MILLER
APPROACH
• TRADITIONAL APPROACH
•
•
•
•
•
•
CAPITAL STRUCTURE IS NOT RELEVANT TO
THE VALUE OF THE FIRM
S=V-D
V = VALUE OF THE FIRM
S = VALUE OF EQUITY
D = VALUE OF DEBT
•
•
•
•
•
CAPITAL STRUCTURE IS
RELEVANT TO THE
VALUE OF THE FIRM
V=S+D
V = VALUE OF THE
FIRM
S = VALUE OF EQUITY
D = VALUE OF DEBT
Ke
Kd
Leverage
Problem No. 5
NOI / EBIT
5,00,000
Less: Interest on Deb 10% on Rs.15 Lacs
1,50,000
Earnings available to ESH
3,50,000
Overall cost of capital
15%
Value of the Firm = 500000 / 0.15
33,33,333
Market Value of Debt
15,00,000
Total Value of the Firm (V = S + D)
18,33,333
Cost of Equity = 350000 / 18,33,333
19.09%
Problem No. 6
NOI / EBIT
5,00,000
Less: Interest on Deb 10% on Rs.20 Lacs
2,00,000
Earnings available to ESH
3,00,000
Equity Capitalisation Rate
16%
Market Value of Equity (350000/16%)
18,75,000
Market Value of Debt
20,00,000
Total Value of the Firm (V = S + D)
38,75,000
Overall Cost of Capital = EBIT / Value of Firm =
500000/3875000
12.90%
PARTICULARS
EBIT
INTEREST
EBT
LESS: TAX
EAT
LESS: PD
E.ESH
NO. E.SHARES
EPS
62,500
62,500
25,000
37,500
37,500
312,500
0.12
FINANCIAL PLAN 1
125,000 250,000 375,000
125,000 250,000 375,000
50,000 100,000 150,000
75,000 150,000 225,000
625,000
625,000
250,000
375,000
225,000
312,500
0.72
375,000
312,500
1.20
75,000
312,500
0.24
150,000
312,500
0.48
PARTICULARS
EBIT
INTEREST
EBT
LESS: TAX
EAT
LESS: PD
E.ESH
NO. E.SHARES
EPS
FINANCIAL PLAN 2
62,500 125,000 250,000 375,000
125,000 125,000 125,000 125,000
(62,500)
125,000 250,000
50,000 100,000
(62,500)
75,000 150,000
625,000
125,000
500,000
200,000
300,000
(62,500)
156,250 156,250
(0.40)
-
300,000
156,250
1.92
75,000
156,250
0.48
150,000
156,250
0.96
PARTICULARS
EBIT
INTEREST
EBT
LESS: TAX
EAT
LESS: PD
E.ESH
NO. E.SHARES
EPS
FINANCIAL PLAN 3
62,500 125,000 250,000 375,000
62,500 125,000 250,000 375,000
25,000
50,000 100,000 150,000
37,500
75,000 150,000 225,000
125,000 125,000 125,000 125,000
(87,500) (50,000) 25,000 100,000
156,250 156,250 156,250 156,250
(0.56)
(0.32)
0.16
0.64
625,000
625,000
250,000
375,000
125,000
250,000
156,250
1.60




Problem No. 7
EBIT – EPS INDIFF. (PLAN 1 & PLAN 2)
[(E-0)*.6 – 0] / 325000 = [(E-125000)*.6 – 0]
/ 156250
SOLVING THIS E = 250000/=




Problem No. 7
EBIT – EPS INDIFF. (PLAN 1 & PLAN 3)
[(E-0)*.6 – 0] / 325000 = [(E-0)*.6 – 125000]
/ 156250
SOLVING THIS E = 416,667/=











Problem No. 8
PLAN 1:
NO. EQUITY SHARES = 60000
INT. ON DEB = 48000
PLAN 2:
NO. EQUITY SHARES = 40000
INT. ON DEB = 48000
PREF. DIVIDEND = RS.28000
EBIT – EPS INDIFF. (PLAN 1 & PLAN 2)
[(E-48000)*.65 – 0] / 60000 = [(E-48000)*.65 –
28000] / 40000
SOLVING THIS E = 1,77,231/=

Problem No. 9
Particulars
P
Q
R
Equity Share Capital
20,00,000 10,00,000 10,00,000
Retained Earnings
20,00,000 10,00,000 10,00,000
Debt
- 20,00,000
Preference Share Capital
- 20,00,000
40,00,000 40,00,000 40,00,000

Problem No. 9
Calculation of EPS
Particulars
Expected EBIT
Less: Int. @ 10% on Debt
EBT
Less: Tax @ 50%
EAT
Less: Preference dividend @ 10%
Earnings available for Equity Shareholders (A)
No. Of Equity Shares (B)
EPS [(A)/(B)]
P
18,00,000
18,00,000
9,00,000
9,00,000
9,00,000
2,00,000
Rs.4.5
Q
18,00,000
2,00,000
16,00,000
8,00,000
8,00,000
8,00,000
1,00,000
Rs.8
R
18,00,000
18,00,000
9,00,000
9,00,000
2,00,000
7,00,000
1,00,000
Rs.7

Problem No. 9
Financial Break Even Point
Particulars
Earnings available for Equity Shareholders (A)
Add: Preference dividend
Add: Tax @ 50% on EBT
Add: Interest
EBIT
P
-
Q
R
2,00,000
2,00,000
2,00,000
2,00,000
2,00,000
4,00,000
4,00,000

Problem No. 9
Indifference Point
Between Plan P & Q
[(EBIT – I1)(1 – t) – Preference Dividend] / N1 =
[(EBIT – I2) (1 – t) – Pref. Dividend] / N2
(EBIT – NIL) (1 – 0.50) –NIL/ 2, 00,000 = (EBIT – 2, 00,000) (1 – 0.50) –
NIL / 1, 00,000
0.50 EBIT / 2
0.50 EBIT
EBIT
EBIT
=
=
=
=
0.50 EBIT – 1, 00,000
EBIT – 2, 00,000
2, 00,000 / 0.50
Rs. 4, 00,000

Problem No. 9
Between Plan P & R
(EBIT – NIL) (1 – 0.50) – NIL / 2, 00,000 = (EBIT – NIL) (1 – 0.50) – 2, 00,000
/ 1, 00,000
0.50 EBIT / 2
= 0.50 EBIT – 2, 00,000
0.50 EBIT
= EBIT – 4, 00,000
EBIT
= 4, 00,000 / 0.50
EBIT
= Rs. 8, 00,000

Problem No. 9
Between Plan Q & R
(EBIT –2, 00,000)(1 – 0.50) –NIL/1, 00,000 =
(EBIT–NIL) (1 – 0.50) – 2, 00,000/ 1, 00,000
0.50EBIT – 1, 00,000
= 0.50EBIT – 2, 00,000
Indifference point is not possible for this plan.
Plan Q is best among others because EPS is Maximum in this case.
Working Capital Days
Raw Material
Work in Progress
Finished goods
=
-
-
Debtors
-
Less: Creditors Period
-
Day CA - Day CL
50000
*
360
600000
30000
*
360
500000
40000
*
360
800000
=
30
=
22
=
18
45
115
30
85
No. of Cycles
No. of Operating Cycles
Days
=
360
/85
4.24
= times
Cash Cost
Current Assets
Raw materials
( 9,00,000 * 1/12 )
Debtors ( Refer WN )
Finished goods ( Refer WN )
Cash
Sales promotion expenses ( 120000 * 1/4 )
CA
Less:
Current Liabilities
Creditors
Wages
Mfg. Overheads
Admn. Overheads
( 9,00,000 * 2/12 )
( 7,20,000 * 1/12 )
( 2,40,000 * 1/12 )
CL
Add:
Working Capital ( CA - CL )
Safety Margin 20%
Working Capital Requirement
Amount (inRs.)
75,000
4,90,000
2,35,000
1,00,000
30,000
9,30,000
1,50,000
60,000
80,000
20,000
3,10,000
6,20,000
1,24,000
7,44,000












WN – 1 Debtors (Cash Cost)
Sales = 36,00,000
Less: GP = 9,00,000
Fact. Cost = 27,00,000
Less: Mat, Lab, Manu. Exp
Depn = Rs.1,20,000
Fact. Cash Cost = 27,00,000 – 1,20,000
= 25,80,000
Add: Admn. Exp = 2,40,000
Add: Selling Exp = 1,20,000
Cash Cost of Sales = 29,40,000
Debtors = 29,40,000 * 60/360 = 4,90,000






WN – 2 Finished Goods (Cash Cost)
Fact. Cash Cost = 27,00,000 – 1,20,000
= 25,80,000
Add: Admn. Exp = 2,40,000
Cash Production = 28,20,000
Finished Goods = 28,20,000 * 30/360 =
2,35,000
Annual Production
Production
Sales
Op. stock
Production
Sales
Closing Sock
= 12000 units
= 6000 units
= 5000 units
Year 1
6,000
5,000
1,000
Year 2
1,000
9,000
8,500
1,500
Profit Calculation
Sales @ Rs.96 - (A)
4,80,000
8,16,000
Production (Units)
Raw Material @ 40
Labour& Variable OH @ 20
6000
2,40,000
1,20,000
9000
3,60,000
1,80,000
Manufacturing expenses (Fixed) (6*12000)
Depreciation ( 10*12000)
Administration OH
Cost of Production
Opening stock (Units) - (I)
Add: Cost of Production on (I)
Closing stock (Units)- (II)
Less: Cost of Production on - (II)
Total Cost of Production [ (8) + (10) - (12) ]
72,000
1,20,000
48,000
6,00,000
1000
1,00,000
5,00,000
72,000
1,20,000
48,000
7,80,000
1000
100000
1500
1,32,000
7,48,000
Selling Expenses - Variable @ Rs. 4
Fixed Cost
Cost of Sales - (B)
Profit [ (A) - (B) ]
20,000
( 5000 * 4)
34,000
(8500 * 4)
12,000
5,32,000
(52,000)
12,000
7,94,000
22,000
Working Capital Requirements
Year 1
Current Assets
- Raw Materials
- Debtors
- Finished Goods
- Cash
CA
Current Liabilities
- Creditors [ Refer WN ]
- Expense [ Refer WN ]
CL
Working Capital Requirements [ (CA - CL) ]
Year 2
45,000
40,000
1,00,000
10,000
1,95,000
67,500
68,000
1,32,000
10,000
2,77,500
23,750
22,667
46,417
31,875
28,833
60,708
1,48,583
2,16,792
Working Notes
Purchases = Consumption + Cl. Stock - Op. Stock
Year 1
Consumption
Cl. Stock (Units)
Op. Stock (Units)
Purchases
2,40,000
45,000
2,85,000
Creditors for Expenses
22667
(Labour + Fixed OH
(272000/12)
+ Variable OH + Admi OH )
Year 2
3,60,000
67,500
45,000
3,82,500
28833
(346000/12)
Current Delay in Invoicing:
3*20% + 4*10% + 5*40% + 6*30% = 4.8 Days
Delay on Account of Outsourcing:
0*40% + 1 * 40% + 3 * 20% = 1.0 Day
Saving in Delay by outsourcing = 3.8 Days
Debtors Equivalent = 730 * 3.8 / 365 = 7.6 Lacs
Saving in ROI @ 20% = 7.6 * 20% = ` 1,52,000
Saving in Postage = 4000 * 12 = ` 48,000
Total Saving on Account of O/s = ` 2,00,000
Current Collection Period: 36 Days
Collection Period Account of Outsourcing: 30
Saving in Colln Period by O/s = 6 Days
Debtors Equivalent = 730 * 6 / 365 = 12 Lacs
Saving in ROI @ 20% = 12 * 20% = `.2,40,000
Particulars
Cost
`
Benefit
`
Invoicing
2,00,000
2,00,000
Monitoring
Collections
2,50,000
2,40,000
(10,000) Reject
4,00,000
(after
discount of
Rs.50000)
4,40,000
40,000 Accept
Both
Net
Benefit
`
Remarks
0 Indifferent