Question 1

The cost of a plant is $ 5,00,000. It has an estimated life of 5 years after which it would be disposed
off (scrap value nil). Profit before depreciation, interest and taxes (PBIT) is estimated to be $ 1,75,000
p.a. Find out the yearly cash flow from the plant. Tax rate 30%

Question 2

A cosmetic company is considering introducing a new lotion. The manufacturing equipment will cost
$5,60,000. The expected life of the equipment is 8 year. The company is thinking of selling the lotion in a
single standard pack of 50 grams at $ 12 each pack. It is estimated that variable cost per pack would be $
6 and annual fixed cost $ 4,50,000. Fixed cost includes (straight line) depreciation of $ 70,000and
allocated overheads of $ 30,000. The company expects to sell 1,00,000 packs of the lotion each year.
Assume that tax is 40% and straight line depreciation is allowed for tax purpose. Calculate the cash
flows.

Question 3

ABC and Co. is considering a proposal to replace one of its plants costing $ 60,000 and having a written
down value of $ 24,000. The remaining economic life of the plant is 4 years after which it will have no
salvage value. However, if sold today, it has a salvage value of $ 20,000. The new machine costing $
1,30,000 is also expected to have a life of 4 years with a scrap value of $ 18,000. The new machine, due
to its technological superiority, is expected to contribute additional annual benefit (before depreciation
and tax) of $ 60,000. Find out the cash flows associated with this decision given that the tax rate
applicable to the firm is 40%. (The capital gain or loss may be taken as not subject to tax).

Question 4

XYZ is interested in assessing the cash flows associated with the replacement of an old machine by a
new machine. The old machine bought a few years ago has a book value of $ 90,000 and it can be sold
for $ 90,000. It has a remaining life of five years after which its salvage value is expected to be nil. It
isbeing depreciated annually at the rate of 20 per cent (written down value method).The new machine
costs $ 4,00,000. It is expected to fetch $ 2,50,000 after five years when it will no longer be required. It
will be depreciated annually at the rate of 33 1/3 per cent (written down value method). The new
machine is expected to bring a saving of $ 1,00,000 in manufacturing costs. Investment in working
capital would remain unaffected. The tax rate applicable to the firm is 50 percent. Find out the relevant
cash flow for this replacement decision. (Tax on capital gain / loss to be ignored).