Snowman Enterprises is considering the possibility of manufacturing a particular component which at present is being bought from outside. The manufacture of the component would call for an investment of ₹7,50,000 in a ne

Cash outflows (₹) Cost of new machine 7,50,000 Add: Additional working capital 50,000 Total cash outflow 8,00,000 Calculation of CFAT Particulars Amount (₹) Cost savings 1,80,000 Less: depreciation (₹7,50,000 - ₹50,000)/10 70,000 Net cost savings/earnings before tax 1,10,000 Less: tax @ 50% (55,000) Earnings after tax 55,000 CFAT (EAT + Depreciation) 1,25,000 Terminal cash inflow Salvage value 50,000 Add: Release of working capital 50,000 1,00,000 Calculation of NPV Amount (₹) PV of operating CFAT (1,25,000 * PV factor @ 10% for 10 years annuity i.e. 6.145) 7,68,125 PV of terminal cash inflow (1,00,000 * PV factor @ 10% for 10 years i.e. 0.386) 38,600 Total PV of cash inflows 8,06,725 Less: Initial cash outflow (8,00,000) NPV 6,725 Advise: Since NPV is positive, the company is advised to buy the new machine to manufacture components.