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Average Rate of Return / Return on Investment ( ARR/ROI)

Average Rate of Return / Return on Investment ( ARR/ROI)

Average Rate of Return / Return on Investment ( ARR/ROI)
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% ]

Average Rate of Return / Return on Investment ( ARR/ROI)
Average Rate of Return / Return on Investment ( ARR/ROI)

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)
Average Rate of Return / Return on Investment ( ARR/ROI)

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.

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