Question
Raman Ltd. is evaluating a new machine costing ₹60 lakhs with a useful life of 5 years. The expected annual operating cash inflows (after-tax) are ₹18 lakhs. The machine will be depreciated straight-line to zero but will have a salvage value of ₹10 lakhs at the end of 5 years. The company’s tax rate is 30%, and the cost of capital is 12%. The present value factors (12%) for 5 years are: Year 1: 0.893, Year 2: 0.797, Year 3: 0.712, Year 4: 0.636, Year 5: 0.567 PV of ₹1 after 5 years = 0.567 Cumulative PV factor = 3.605 What is the NPV of the project?
Solution
Annual inflows = ₹18L for 5 years PV of inflows = 18 × 3.605 = ₹64.89L Tax on salvage = ₹10L × 30% = ₹3L → Net Salvage = ₹7L PV of Salvage = 7 × 0.567 = ₹3.969L Total PV = 64.89 + 3.969 = ₹68.86L NPV = 68.86 – 60 = ₹8.86L
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