Roma Ltd. has to choose one of the machines from two mutually exclusive machines. Two proposals are: Machine Rani and Machine Prince. The required amount of cash outlays for Machine Rani is ₹ 8,35,000; while for Machine

CS Executive · Corporate and Management Accounting · PYQS · June 2019
Roma Ltd. has to choose one of the machines from two mutually exclusive machines. Two proposals are: Machine Rani and Machine Prince. The required amount of cash outlays for Machine Rani is ₹ 8,35,000; while for Machine Prince is ₹ 9,00,000. The current rate of yield on Government of India's bond is 7%, and the management is of the opinion to use the same as discount rate. The expected net cash inflows by deployment of both the machines are as under: Year end Machine Rani Machine Prince 1 3,60,000 4,05,000 2 3,50,000 3,60,000 3 2,50,000 3,50,000 The Present value interest factor for the year 1, 2 and 3 are 0.9346, 0.8734 and 0.8163 respectively, for 7% discount rate. You have to advise the management with respect to selection of either Machine Rani or Machine Prince.

Answer & Explanation:

Appraisal of machines using Net Present Value (NPV) Machine Rani Year end Cash flow (Rs.) P.V. Factor @ 7% P.V. (Rs.) 1 3,60,000 0.9346 3,36,456 2 3,50,000 0.8734 3,05,690 3 2,50,000 0.8163 2,04,075 Total PV of Inflows 8,46,221 Less: cash outlay (8,35,000) NPV 11,221 Machine Prince Year end Cash flow (Rs.) P.V. Factor @ 7% P.V. (Rs.) 1 4,05,000 0.9346 3,78,513 2 3,60,000 0.8734 3,14,424 3 3,50,000 0.8163 2,85,705 Total PV of Inflows 9,78,642 Less: cash outlay (9,00,000) NPV 78,642 Decision: As the NPV of Machine Prince (₹ 78,642) is higher than the NPV of Machine Rani (₹ 11,221), Machine Prince is preferable .

Topics: Capital Budgeting

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