A company is planning to purchase a machine. It costs ₹50,000 and has no salvage value. The expected life of machine is 5 years and company applies straight line method of depreciation. The estimated earnings after tax a

Initial Investment: ₹50,000 Depreciation (Straight Line): (Cost - Salvage Value) / Useful Life = (₹50,000 - ₹0) / 5 years = ₹10,000 per year Required Rate of Return: 12% Calculation of Cash Flow After Tax (CFAT): CFAT = Earnings After Tax (EAT) + Depreciation CFAT = ₹5,000 + ₹10,000 = ₹15,000 per year for 5 years NPV Calculation: Year EAT (₹) Depreciation (₹) CFAT (₹) PV @ 12% PV of CFAT (₹) 1 5,000 10,000 15,000 0.8929 13,393.50 2 5,000 10,000 15,000 0.7972 11,958.00 3 5,000 10,000 15,000 0.7118 10,677.00 4 5,000 10,000 15,000 0.6355 9,532.50 5 5,000 10,000 15,000 0.5674 8,511.00 Σ PV of CFAT 54,072.00 Less: Cash outflow (Initial Investment) (50,000.00) NPV 4,072.00 Advice: As the NPV is coming out to be positive i.e. ₹4,072, hence the company should purchase the machine. Alternatively, using PVAF (Present Value Annuity Factor) for 5 years at 12%: PVAF 12%, 5 Years = 3.6048 (from annexed table) PV of CFAT = ₹15,000 * 3.6048 = ₹54,072 NPV = PV of CFAT - Initial Investment NPV = ₹54,072 - ₹50,000 = ₹4,072 Advice: As the NPV is coming out to be positive i.e. ₹4,072, hence the company should purchase the machine.