Table of Contents
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex- 15. Nuha Ltd. is considering the purchase of a new machine which costs Tk 1,00,000. It is estimated that the machine have a life of 5 years at the end of which it will have a salvage value of Tk 5,000. The company is in the 50% tax bracket. The estimated annual cash flows are as follows :
| Year | CFBT (Tk) |
| 1 | 25,000 |
| 2 | 25,000 |
| 3 | 23,000 |
| 4 | 24,000 |
| 5 | 22,000 |
Required : (1) PBP. (2) ARR. (3) ROI. [ Ans : (1) 4.66 years. (2) 4.57%. (3) 2.40% ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex-16. A machine costing Tk 55,000 will have 5 useful years having a salvage value of Tk 5,000. Cash flows before depreciation and tax per year of the machine are as follows :
| Year | Cash flow |
| 1 | 15,000 |
| 2 | 20,000 |
| 3 | 22,000 |
| 4 | 25,000 |
| 5 | 30,000 |
Depreciation has been charged on the straight-line method. The tax rate is 50%.
Required : (1) PBP. (2) ARR. (3) ROI. [ Ans : (1) 3.66 years. (2) 20.67%. (3) 11.27% ]
Ex- 17. Dina Enterprise is considering a new product line. The details of the investment proposal are as follows :
Initial cash outlay Tk 1,00,000
Expected life 5 years
Scroll value 10,000
Working capital Tk 20,000
| Year | Cash inflow (Tk) |
| 1 | 25,000 |
| 2 | 30,000 |
| 3 | 32,000 |
| 4 | 35,000 |
| 5 | 40,000 |
The project cost of capital is 10% and the tax rate is 45%. Depreciation will be on a straight-line basis. You are required to calculate :
(1) PBP. (2) ROI. (3) ARR. [ Ans: 4.02 years. (2) 6.60%. (3) 10.56% ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex- 18. Rakib Co. is considering a new product line. The details of the investment proposal are as follows :
Initial cash outlay Tk 2,50,000
Expected life 5years
Scroll value 20,000
Working capital Tk 30,000
| Year | Cash inflow (Tk) |
| 1 | 35,000 |
| 2 | 50,000 |
| 3 | 60,000 |
| 4 | 70,000 |
| 5 | 62,000 |
The project cost of capital is 14% and the tax rate 50%. Depreciation will be on a straight-line basis. You are required to calculate :
(1) PBP. (2) ARR. (3) ROI. [ Ans: 4.94 years. (2) 2.85%. (3) 1.69% ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Net Present Value ( NPV)
Ex-19. From the following information calculate net present value and comment on whether the project is accepted or not Investment of a project is Tk 50,000. The cost of capital is -10%.
| Year | Amount (Tk) |
| 1 | 10,000 |
| 2 | 7,000 |
| 3 | 11,000 |
| 4 | 6,000 |
| 5 | 7,000 |
[ Ans : NPV = (18,416). Comment: Since the NPV is negative, So the Project should not be accepted. ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex-20. A firm whose cost of capital is 10% is considering two mutually exclusive projects X and Y, the details of which are.
|
Investment |
Project- A | Project-B |
| 70,000 | 70,000 | |
| Year | Cash inflow | Cash inflow |
| 1 | 10,000 | 50,000 |
| 2 | 20,000 | 40,000 |
| 3 | 30,000 | 20,000 |
| 4 | 45,000 | 10,000 |
| 5 | 60,000 | 10,000 |
Compute net present value at 10%. [ Ans : (A) NPV = 46,149. (B) NPV = 36,578 ]
Ex-21. Rakib Ltd. Considering to purchase a machine. The machine will cost Tk 2,00,000. The cash flows after-tax per year is Tk 25,000. The machine’s economic life is 10 years and the cost of capital is 12%. Calculate the NPV of the machine. [ Ans : NPV = (58,750) ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex-22. Rupa Ltd. Considering to purchase a machine. The machine will cost Tk 3,00,000. The cash flows after-tax per year is Tk 45,000. The machine’s economic life is 10 years and the cost of capital is 15%. Calculate the NPV of the machine. [ Ans : NPV = (74,155) ]
Ex-23. Initial cash outlay of a Project Tk 5,00,000, Net cash Benefit for the project Tk 2,00,000 per year. Cost of capital 10%, expected life 5 years.
Calculate (1) Discounted (PBP). (2) NPV and (3) PI.
[Ans: (1) 3.30 years. (2) 2,58,200. (3) 151.64%. (4) 51.64% ]
Ex-24. Initial cash outlay of a Project Tk 1,00,000, Net cash Benefit for the project Tk 25,000 per year. Cost of capital 12%, expected life 6 years.
Calculate (1) Discounted (PBP). (2) NPV and (3) PI.
[Ans: (1) 5.84 years. (2) 2,785. (3) 102.79%. (4) 2.79% ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex-25. A Company is considering the purchase of a machine. The cost of the machine is Tk 1,00,000. In comparing the profitability of machines a discount rate of 12.50% is to be used. Earning after turning EAT are expected to be as follows :
| Year | Cash flows (Tk) |
| 1 | 15,000 |
| 2 | 20,000 |
| 3 | 25,000 |
| 4 | 15,000 |
| 5 | 10,000 |
Required : (1) NPV. (2) Present Value (PBP). [ Ans : (1) 32,820 (2) 3.26 years ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex-26. A Company is considering the purchase of a machine. The cost of the machine is Tk 2,00,000. In comparing the profitability of machines a discount rate of 10% is to be used. Earning after turning EAT are expected to be as follows :
| Year | Cash flows (Tk) |
| 1 | 50,000 |
| 2 | 60,000 |
| 3 | 70,000 |
| 4 | 75,000 |
| 5 | 80,000 |
Required : (1) NPV. (2) Present Value (PBP). [ Ans : (1) 2,00,163 (2) 2.43 years ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex-27. Jamun Ltd. is considering the purchase of a machine costing Tk 1,50,000. The salvage value of the machine after 5 years will be Tk 30,000. Assume the cost of capital is 15%, should the company buy the machine. The cash inflows will be as follows?
| Years | Cash inflows |
| 1 | 50,000 |
| 2 | 65,000 |
| 3 | 80,000 |
| 4 | 40,000 |
| 5 | 30,000 |
Calculate (1)Net present value (NPV). (2) Discount /Present value PBP.
[ Ans :- (1) 47,927 (2) 3.21 year ]
Ex-28. Suppose you have a plant purchase of a machine costing Tk 1,50,000. The salvage value of the machine after 5 years will be Tk 40,000. The cash inflows will be as follows: 1st year Tk 50,000; 2nd year Tk 55,000; 3rd year Tk 70,000; 4th year Tk 30,000; 5th year Tk 20,000. Assume the cost of capital is 14%, should the company buy the machine?
Calculate (1)Net present value (NPV). (2) Discount /Present value PBP.
[ Ans :- (1) 32,351 (2) 3.93 year ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex- 29. Suppose you have a plant purchase of a machine costing Tk 1,00,000. The salvage value of the machine after 5 years will be Tk 10,000. The cash inflows 25,000per year. Assume a required rate of return of 15% and a 30% tax rate. The company has a policy of charging depreciation of the straight-line method.
Required : (1)Net present value (NPV). (2) Discount /Present value PBP.
[ Ans :- (1) -18,263 (2) 1.22 year ]
Ex- 30. Mr. Rakib Co.purchase of a machine costing Tk 3,00,000. The salvage value of the machine after 10 years will be Tk 30,000. The cash inflows 70,000per year. Assume a required rate of return of 14% and a 25% tax rate. The company has a policy of charging depreciation of the straight-line method.
Calculate (1)Net present value (NPV). (2) Discount /Present value PBP.
[ Ans :- (1) 17,146 (2) .94594 year ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex- 31. Bloom Enterprise is considering a new product line. The details of the investment proposal are as follows :
Initial cash outlay Tk 1,20,000
Expected life 5 year
Scrap value Tk 10,000
Working capital Tk 20,000
| Year | Cash inflow (Tk) |
| 1 | 28,000 |
| 2 | 30,000 |
| 3 | 37,000 |
| 4 | 35,000 |
| 5 | 40,000 |
The project cost of capital is 10% and the tax rate is 45%. Depreciation will be on a straight-line basis. You are required to calculate :
(1) Pay Back Period (PBP). (2) Net present value (NPV).
[ Ans :- (1) ( -14,115 ) (2) 5.76 years ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Internal rate of return (IRR)
Ex-32. Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is Tk 18,250 and the project is expected to yield after-tax cash inflows of Tk 4,000 per year for 7 years. The firm has a 10% cost of capital.
(a) Determine the net present value (NPV) for the project. [Ans : 1,224 ]
(b) Determine the Internal rate of return (IRR) for the project. [Ans: 12.11% ]
Ex-33. Onik Enterprises accepts projects earnings more than the firm’s 15% cost of capital. Oak is currently considering a 10-year project that provides annual cash inflows of Tk 10,000 and requires an initial investment of Tk 61,450 (Note All amounts are after taxes )
(a) Determine the Net present value (NPV) for the project. [ Ans : (-11,262) ]
(b) Determine the Internal rate of return (IRR) for the project. [ Ans : (10.17%) ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex-34. A Company is considering the purchase of a new machine which cost Tk 5,00,000. The cost of capital is 15%. cash inflows from the machine are :
| Year | Cash inflow |
| 1 | 1,00,000 |
| 2 | 1,20,000 |
| 3 | 1,50,000 |
| 4 | 1,90,000 |
| 5 | 2,50,000 |
- Calculate the Net present value (NPV). [ Ans: 9,250 ]
(b) Determine the Internal rate of return (IRR). [ Ans: 15.67%
Ex-35. A Company is considering the purchase of a new machine which cost Tk 3,25,000. The cost of capital is 20%. Cash inflows from the machine are :
| Year | Cash inflow |
| 1 | 1,40,000 |
| 2 | 1,20,000 |
| 3 | 95,000 |
| 4 | 70,000 |
| 5 | 50,000 |
(a)Calculate the Net present value (NPV). [ Ans : (16,172 ]
(b) Determine the Internal rate of return (IRR). [ Ans: 17.30% ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex-36. Projects A and B of equal risk, are alternatives for expanding the Rouse Company’s capacity. The firm cost of capital is 13%. The cash flows for each project are shown in the following table.
| Year | Project (A) | Project (B) |
| Cost (Tk) 80,000 | Cost (Tk) 50,000 | |
| 1 | 15,000 | 15,000 |
| 2 | 20,000 | 15,000 |
| 3 | 25,000 | 15,000 |
| 4 | 30,000 | 15,000 |
| 5 | 35,000 | 15,000 |
[Ans : Project- A = (1) 3.67 years. (2) 3,658 (3) 14.63% Project-B = (1) 3.33 years. (2) 2,758 (3) 15.27% ]
Average Rate of Return / Return on Investment ( ARR/ROI)
Ex-37. Projects A and B of equal risk, are alternatives for expanding the Rouse Company’s capacity. The firm cost of capital is 15%. The cash flows for each project are shown in the following table.
| Year | Project (A) | Project (B) |
| Cost (Tk) 3,25,000 | Cost (Tk)
30,725 |
|
| 1 | 1,40,000 | 10,000 |
| 2 | 1,20,000 | 10,000 |
| 3 | 95,000 | 10,000 |
| 4 | 70,000 | 10,000 |
| 5 | 50,000 | 10,000 |
(a) Calculate each project’s Pay Back Period.