ABC Chemicals Ltd. is considering two mutually exclusive proposals. Your advice is sought for choice between the two options under consideration: (i) Purchase of petrol truck (ii) Purchase of a battery powered truck. Yea

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2015
ABC Chemicals Ltd. is considering two mutually exclusive proposals. Your advice is sought for choice between the two options under consideration: (i) Purchase of petrol truck (ii) Purchase of a battery powered truck. Year Petrol truck Battery powered truck Purchase cost (₹) 0 1,50,000 2,50,000 Operating cost (₹) 1 24,000 12,000 2 34,000 12,000 3 29,000 12,000 4 31,000 12,000 5 12,000 Assume an investment incentive of 100% initial depreciation allowance and a 30% incidence of corporate tax. No depreciation is allowed on subsequent years. Taxes are promptly paid. A return of 10% after tax as investment incentives is required. You are required to find out equivalent cost for two options.

Answer & Explanation:

Calculation of Equivalent cost for two options Year PV Factor @ 10% Petrol truck Cost (1-tax rate) PV adjusted cost Battery powered truck Cost (1-tax rate) PV adjusted cost Purchase cost 0 1 1,05,000 1,05,000 1,75,000 1,75,000 Operating cost 1 0.909 16,800 15,271 8,400 7,636 2 0.826 23,800 19,659 8,400 6,938 3 0.751 20,300 15,245 8,400 6,308 4 0.683 21,700 14,821 8,400 5,737 5 0.621 - - 8,400 5,216 Total cost 1,69,996 2,06,835 Divided by annuity PV Factor @ 10% corresponding to life of project 3.17 3.79 Equivalent cost (₹) 53,626 54,574 Conclusion As the annualised cost of Petrol Truck is cheaper, it is advisable to choose petrol truck.

Topics: Capital Budgeting

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic