Unit 3 Investment Decision PDF

SPONSERED BY ASIA CHARITABLE TRUST SCHOOL OF MANAGEMENT iMBA/BBA(Hons.) Semester: 1 Subject: Financial Management Unit: 3 Investment Decision Compiled By: Dr. VISHVAS SHAH  Unit 3 Investment Decision (Capital Budgeting) Introductio...

SPONSERED BY ASIA CHARITABLE TRUST SCHOOL OF MANAGEMENT iMBA/BBA(Hons.) Semester: 1 Subject: Financial Management Unit: 3 Investment Decision Compiled By: Dr. VISHVAS SHAH  Unit 3 Investment Decision (Capital Budgeting) Introduction, objective and significance Nature of capital Budgeting Data Requirement: Identifying Relevant cash flow Evaluation Techniques Limitation Of Capital Budgeting Payback Period Method Accounting rate of return Method Profitability Index Terminal Value Capital rationing Problems And solutions 1. Meaning of Capital Budgeting: Capital Budgeting is the art of finding assets that are worth more than they cost, to achieve a predetermined goal i.e., optimising wealth of a business enterprise. Capital Investment involves a cash outflow in the immediate future in anticipation of returns at a future date. Charles T. Horngren, “capital budgeting is long-term planning for making and financial proposed capital outlays” Prof. I. M. Pandey, “capital budgeting decisions may be defined as the firm’s decisions to invest its current funds most efficiently in long-term activities in anticipation of an expected flow of future benefits over a series of years. A capital investment decision involves a largely IRREVERSIBLE commitment of resources that is generally subject to significant degree of risk. Such decisions have a far- reaching efforts on an enterprise’s profitability and flexibility over the long-term. Acceptance of non-viable proposals acts as a drag on the resources of an enterprise and may eventually lead to bankruptcy. 2. Objectives of Capital Budgeting: 1. Valuation of Proposed Capital Expenditure: With the help of this budget, evaluation of capital expenditure to be incurred on various assts by the firm during the budget period can be made. This is enables to measure the viability of each expenditure. 2. Determination of Priority: It means arranging various projects in order of their profitability. In capital budgeting, the priority among various capital projects is determined so that can select most profitable project. 3. Co- ordination between Capital Expenditures: The object of capital expenditure is also to establish coordination among different capital expenditures. This helps in maintaining equilibrium among capital expenditures to be incurred by various departments. 4. Control over Capital Expenditures: Like other budgets, the objective of capital budgeting is also to control the capital expenditures of various departments. With this, an effective control can be exercised by comparing actual expenditure with pre-determined expenditure. 5. Financial for Capital Expenditures: Capital Budgeting enables to know the expenditures to be incurred in future on various assets, so that the management can arrange for it in time. 6. Analysis of Past Decisions: Expenditures incurred in the past are analysed in capital budgeting. This enables the management to know the extent to which these decisions were correct. 7. Valuation of Fixed Assets: Data for valuation of fixed assets for the purpose of balance sheet to be prepared at the end of the budget period are made available. With these data, the projected balance sheet can easily be prepared. 3. Significance of Capital Budgeting Decisions: 1. Long-term Effects: Perhaps, the most important feature of capital budgeting decisions is that these decisions have long-term effects on the future profitability and cost structure of the firm. They influence the rate and direction of firm’s growth. An appropriate decision can yield amazing returns, whereas a wrong investment decision can endanger the very survival of the firm. That is why, it may be stated that capital budgeting decisions determine the future destiny of the firm. 2. Associated with Risk: Ling-term investment of funds is exposed to different types of risks. As a result of an investment proposal the average return of the firm increases but simultaneously it causes frequent fluctuations in its earnings. It may be due to change in the tastes and fashions of the customers because of technological advancement and continuous research. The longer is the period of the project, the greater may be the risk and uncertainity. 3. Large Expenditure: A large amount of money is to be spent on capital projects. To purchase latest machinery, lakhs of rupees will have to be invested. In some industries, the cost of a modern machine may run into even crores of rupees. It is due to large amount of investment that capital projects must be planned very carefully. Planning is necessary for the procurement of required funds also. 4. Long Term Effects: The capital projects have long term effects on business of the firm. As against this, the effects of investment in current assets are short-lived. For instance, even a large stock of goods gets depleted within a year. On the other hand, if factory building is enlarged to meet additional demand for its product, the effect will be long-lasting. If contrary to expectation, increase in demand turns out to be temporary, the project cannot be left incomplete. If demand does not increase to the level of new production capacity built, this investment will become a dead- weight for the firm. This proves, that since capital projects are long- lasting, they are subject to a greater degree of risk and hence planning is essential. 5. Estimates and Uncertainty: Most of the investment decisions are based on future expectations. But, since future is always uncertain, accurate estimation of future trends is too difficult. There is every possibility that estimates may turn out to be wrong. Hence, it is true to say that among all financial decisions, the decisions with regard to capital investment are most difficult. The future is uncertain because future events are influenced by all sorts of variables such as political, social and economic ones. 6. Effect on Profitability: Profitability of business is influenced by permanent assets more than by current assets. In fact, the earning capacity of a business unit depends mainly on the level of fixed assets it possesses. If the factory building  expanded fully, latest machinery is installed and future trends are also correctly predicted, the unit will earn handsome profits. Conversely, if the business unit is insufficiently equipped in terms of building and machinery, and if its estimates go wrong, its profit will decline considerably. 7. Irreversible Decisions: Capital expenditure decisions once made are not easily reversible without much loss. As stated above, if, in anticipation of an increase in demand, plant expansion is undertaken and then if this anticipation proves to be incorrect, the expansion programme 4. Capital Investment Process: Available Investment Opportunities Organisational Goals Stakeholders's Expectations Search for Opportunities Screening Evaluation Selection Implementation Review 5. Methods of Capital Budgeting: There are different methods for capital budgeting which is based on different criteria. Some methods are based on profitability, some methods are based on time value of money, and some method based on recognize payback of capital employed. Major methods are as follows. 1. Pay-Back Period Method 2. Average/Accounting Rate of Return Method (ARR) 3. Net Present Value Method (NPV) 4. Profitability Index Method 5. Internal Rate Return Method (IRR) Pay Back Period Method It shows the capital recovery period.(during which you are going to get your capital back) The shorter payback period is preferred Main advantages: It is easy to understand Main Limitation It ignores the TVM Concepts It ignores future cash profitability once the capital is recovered back. It is possible to use this method in the industry having frequent changes i.e. technology. Discounted pay back period It shows the capital recovery period in terms of discounted cash flows Limitation:It ignores the future cash profitability 2. Net present Value Method NPV = Total Present Value – Initial Investment The NPV calculation results into rupees amount. To apply NPV method the discounting factor Ko is required and that is the compensation to the fund provider against the risk & Time associated. Benefits It considers TVM Concepts It considers all the future cash flows Limitation The method depends on Ko ,so more accurate the ko be, More accurate the NPV would be It is not possible to select the project when NPV of both the projects are same. Profitability Index Or Desirably Factor or Cost Benefit Ratio: 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 PI= 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 It shows how much will get investing a “Rupee” If Project Should be PI > 1 Accepted PI < 1 Rejected PI = 1 indifference NPV NPV’s Are same If Indifferent ONLY PI Fund Scare Enough PI NPV Note: Subject to 1. Cant invest more than required 2. Surplus fund will never have Other opportunity Though the above will be consider to select the project,PV is consider to be the best method as it expresses the profitability in absolute terms where as PI Expresses relative profitability. Internal Rate of return Method The internal rate of return method considers the time value of money, the initial cash investment, and all cash flows from the investment. But unlike the net present value method, the internal rate of return method does not use the desired rate of return but estimates the discount rate that makes the present value of subsequent cash inflows equal to the initial investment. This discount rate is called IRR. IRR Definition: Internal rate of return for an investment proposal is the discount rate that equates the present value of the expected cash inflows with the initial cash outflow. This IRR is then compared to a criterion rate of return that can be the organization’s desired rate of return for evaluating capital investments. Calculation of IRR: The procedures for computing the internal rate of return vary with the pattern of net cash flows over the useful life of an investment. Scenario 1: For an investment with uniform cash flows over its life, the followingequation is used: Step 1: Total initial investment = Annual cash inflow × Annuity discount factor of the discount rate for the number of periods of the investment’s useful lifeIf A is the annuity discount factor, then: 𝑻𝒐𝒕𝒂𝒍 𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒄𝒂𝒔𝒉 𝒅𝒊𝒔𝒃𝒖𝒓𝒔𝒆𝒎𝒆𝒏𝒕𝒔 𝒂𝒏𝒅 𝒄𝒐𝒎𝒎𝒊𝒕𝒎𝒆𝒏𝒕𝒔 𝒇𝒐𝒓 𝒕𝒉𝒆 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 A= 𝑨𝒏𝒏𝒖𝒂𝒍 (𝑬𝒒𝒖𝒂𝒍)𝑪𝒂𝒔𝒉 𝒊𝒏𝒇𝒍𝒐𝒘𝒔 𝒇𝒓𝒐𝒎 𝒕𝒉𝒆 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 Step 2: Once A is calculated, the interest rate corresponding to project’s life, the value of A is searched in Present Value Annuity Factor (PVAF) table. If exact value of ‘A’ is found the respective interest rate shall be IRR. However, it rarely happens therefore we follow the steps discussed below: Step 1: Compute approximate payback period also called fake payback period. Step 2: Locate this value in PVAF table corresponding to period of life of the project.The value may be falling between two discounting rates. Step 3: Discount cash flows using these two discounting rates. Step 4: Use following Interpolation Formula: 𝑁𝑃𝑉 𝑎𝑡 𝐿𝑅 LR+𝑁𝑃𝑉 𝑎𝑡 𝐿𝑅−𝑁𝑃𝑉 𝑎𝑡 𝐻𝑅*(HR-LR) 𝑃𝑉 𝑎𝑡 𝐿𝑅−𝐶𝐼 LR+𝑃𝑉 𝑎𝑡 𝐿𝑅−𝑃𝑉 𝑎𝑡 𝐻𝑅*(HR-LR) Where, LR = Lower Rate HR = Higher Rate CI = Capital Investment  Practical Sums 1. Dharti Company Ltd. Is considering Stet in a project requiring a capital of Rs. 200000. Forecast for annual income after depreciation but before tax is as follows. 100000, 100000, 80000, 80000, 40000 Depreciation may be taken at 20% on original cost and taxation at 50% of Net profit. You are required to evaluate the project according to each of the following methods 1. Payback period 2. Rate of return on original investment 3. Rate of return on Average investment 4. Discounted cash flows method taking cost of capital 10% 5. Net present value Index [Ans. Net cash flow Rs. 90,000, 90,000, 80,000, 80,000 and Rs. 60,000 respy; and present value Rs. 81,820, 74,340, 60,080, 54,640, 37,260 total Rs. 3,08,130. (1) Pay-back period 2 years and 3 months, As per discounted cash flow: Pay-back period 2.73 years. (2) 20% return on original investment. Here average profit after depreciation and taxation is Rs. 40,000 and original investment is Rs. 2,00,000. (3) Rate of return on average investment 40%. Average profit Rs. 40,000 and Average investment Rs. 1,00,000. (4) Discounted cash flow method: Total present value Rs. 3,08,130 and original investment Rs. 2,00,000. So project is acceptable. (5) Net Present Value is 1,08,130, So project is profitable.] 2. Nidhi Company is considering to invest Rs. 300000 in a capital project. The expected profit after Depreciation but before tax) are as follows Year 1 2 3 4 5 6 7 8 9 10 Profit 60000 45000 60000 52500 15000 75,000 45,000 67,500 60,000 45,000 Rs. The company follows the straight-line method of depreciation. Income tax rate is 50% Assuming the cost of capital 10% (discount rate). Calculate. (1) Payback period (2) Net Present value (3) Profitability index (4) Rate of Return on average investment method. Discount Factor:0.909 0.826 0.751 0.687 0.621 0.564 0.513 0.467 0.424 0.368 [Ans. (1) Pay back period : At the end of fifth year and six year, cumulative cash flow is Rs. 2,66,250 and Rs. 3,33,750 respy. so pay back period is 5 year and six months or 5 1/2 years. (2) Total present value Rs. 3,44,430, Net present value + Rs. 44,430, (3) Profitability index 1.148. (4) Average investment Rs. 1,50,000, Average profit Rs. 26,250 and average accounting rate of return 17.5%.] 3. Ankur Company is considering to invest Rs. 1,80,000 in a capital project. The expected annual income after depreciation but before tax is as follows: Year 1 2 3 4 RS. 90000 72000 54000 36000 Depreciation may be taken at 20% as per Written Down Value (WDV) method. The company's required rate of return is 10% and pays tax at 40% rate. You are requested to evaluate the project according to each of the following methods: (1) Payback period method. (2) Rate of return on original investment method. (3) Rate of return on average investment method (4) Net present value method (5) Profitability index method [Ans. (1) Pay-back period: 2.32 years (2) Rate of return on original investment: 21% [Average profit Rs. 37,800 (Total profit 1,51,200/ 4 years = 37,800, Rate of return on original investment =21%, Average Profit 37,800 x 100/ Investment 1,80,000 21%] (3) Rate of return on average investment 42% [Average profit 37,800 x 100/ Average investment 90,000 = 42%] Average investment Rs. 90,000 (Total investment 1,80,000/2), (4) Net present value Rs. +30,259 (Total present value 2,10,259- Total investment 1,80,000 = +30,259. (5) Profitability index method 1.17 (Total present value 2,10,259/Total investment1,80,000 = 1.17). Cashflow: Rs. 90,000, 72,000, 55,440 and 40,032. Present value at 10% discount rate: 81,810, 59,472, 41,635 and 27,342 : Total = 2,10,259. Depreciation: Rs. 36,000, 28,800, 23,040 and 18,432.] 4. The J.P. Ltd. wants to purchase a machine at the cost of Rs. 2,00,000. Estimated life of the machine is 5 years. There is no scrap value of the machine. Expected rate of return is 12%. Tax rate applicable is 50%. Estimated income before depreciation and tax is as follows: Rs. 70,000, Rs. 80,000, Rs. 1,30,000, Rs. 1,00,000, Rs. 60,000. Calculate: (1) Pay back period, (2) Average rate of return, (3) Net present value Note: At 12% discount factor, the present value of Re. 1 for first five years is 0.893, 0.797, 0.712, 0.636 and 0.567 respectively. [Ans.: (1) Pay back period 3 years, (2) Average rate of return 24% (Profit after tax Rs. 15,000, 20,000, 45,000, 30,000 and 10,000 Total 1,20,000 ÷ 5 = Average Annual Profit 24,000 ÷ Average Investment 1,00,000 × 100 = 24%), (3) Net Present Value Rs. 30,325 (Present Value Rs. 2,30,325 less Original investment 2,00,000 = 30,325). Cashflow: Rs. 55,000, Rs. 60,000 Rs. 85,000 Rs. 70,000 and Rs. 50,000. Discounted Cashflow: Rs. 49,115, 47,820, 60,520, 44,520 and 28,350 = Total  discounted cashflow Rs. 2,30,325, Depreciation for every year Rs. 40,000.] 5. A company is considering purchase of a new machine, with a view to increase its production capacity. The data relating to two machines are as follows: Machine A Machine B Rs. Rs. Initial investment 7000 7500 Net Earnings after depreciation and taxes: At the end of 1st year 2250 1625 At the end of 2nd year 2250 1625 rd At the end of 3 year 1250 1625 th At the end of 4 year 250 1625 (1) The economic life of both machines is expected to be four years (2) Depreciation is to be charged on both the machines only straight-line method. (3) The rate of return on capital is to be considered at 10%. (4) The present value of Re. 1 at the discount rate of 10% is as under 1st year -0.91, 2nd year-0.83, 3rd year-0.75, 4th year- 0.68 Find out the profitability by following methods. 1. Net present Value 2. Profitability Index [ANS: NPV: Machine A Rs3570 and Machine B RS.3595, Profitability Index: A- 1.51 And B-1.48. As per first method machine B is more profitable but according to second method Machine A is more important Net Cashflow A: Rs. 4000,4000,3000,2000, Discounted Cashflow: 3640, 3320, 2250, and 1360=total Rs 10570, net cash flow B: Every year Rs. 3500, discounted cash flows RS.3185, 2905, 2625 and 2380=total Rs 11095.] 6. The ABC Ltd. wants to purchase a machine at the cost of Rs. 8,50,000 and scrap value of machine is Rs. 50,000 at the end of 5 years useful life. The tax rate is 50%. The required rate of return is 12%. The expected earnings before depreciation and tax for the machine are as follows: Years 1 2 3 4 5 440000 520000 320000 240000 280000 Earnings The present value of Re. 1 at the discount rate of 12%: 0.893, 0.797, 0.712, 0.636 and 0.567. Calculate: (1) Pay-back period (2) Average rate of return (3) Net present value. [Ans.: Pay-back period 2.88 years, Average rate of return 22.22% (1,00,000 x100/4,50,000), Average Profit Rs. 1,00,000 (5,00,000+ 5), Average Investment 8,50,000+50,000+2)= 4,50,000, Net present value Rs. 1,40,050 (Present value Rs.  9,90,050 Investment Rs. 8,50,000). Cash Flow: Rs. 3,00,000, Rs. 3,40,000, Rs. 2,40,000, Rs. 2,00,000 and Rs. 2,70,000 (2,20,000+ Rs. 50,000 Scrap Value), Present value: Rs. 2,67,900, Rs. 2,70,980, Rs. 1,70,880, Rs. 1,27,200 and Rs. 1,53,090 Rs. 9,90,050. 7. A company is considering two mutually exclusive proposals A and B. Proposal A will require the initial cost of Rs. 8,00,000 with salvage value of Rs. 50,000 and will also require an increase in the level of inventories and receivables of Rs. 4,50,000 over its life. The project will generate an additional Sales of Rs. 10,00,000 and will require cash expenses of Rs. 3,50,000 in each year of its 5 year life. It will be depreciated as per straight line method. Proposal B will require an initial capital of Rs. 13,50,000 with salvage value of Rs. 1,00,000 and will be depreciated on straight line basis. The expected earnings before depreciation and taxes during its life are: Year Rs. 550000 1 650000 2 450000 3 550000 4 750000 5 The company has to pay corporate income-tax at the rate of 50% and is evaluating Projects at 12% cost of capital. (i) Which of the project is acceptable under the present value method? (ii) Will it make any difference to the above decision, if profitability index is employed? The present value of Re. 1 at the discount rate of 12% for the first five years is 0.893, 0.797, 0.712, 0.636 and 0.567. Ans.: Proposal A: Investment Rs. 8,00,000+ Working Capital Rs. 4,50,000 Rs. =12,50,000; Annual Cashflow- Sales Rs. 10,00,000-Expenses Rs. 3,50,000 - Depreciation Rs. 1,50,000 Net Profit Rs. 5,00,000-50% tax Rs. 2,50,000-Profit after tax Rs. 2,50,000+ Depreciation Rs. 1,50,000 = Annual Cashflow Rs. 4,00,000, Fifth year Cashflow Rs. 9,00,000 (Rs. 4,00,000+ Rs. 4,50,000 Working capital relieved+ Rs. 50,000 Scrap value realised= Rs. 9,00,000), Discounted Cashflow: Rs. 3,57,200, Rs. 3,18,800, Rs. 2,84,800, Rs. 2,54,400 and Rs. 5,10,300 Total Rs. 17,25,500, Net Present Value = Total Discounted Cashflow Rs. 17,25,500-Total Investment Rs. 12,50,000=+4,75,500, Profitability Index 1.38 (17,25,500/ 12,50,000). Proposal B: Cashflow: Rs. 4,00,000, Rs. 4,50,000, Rs. 3,50,000, Rs. 4,00,000 and Rs. 6,00,000 (Rs. 5,00,000+ Rs. 1,00,000 Scrap value realised), Discounted Cashflow: Rs. 3,57,200, Rs. 3,58,650, Rs. 2,49,200, Rs. 2,54,400 and Rs. 3,40,200  =Total Rs. 15,59,650, Net Present Value Total Discounted Cashflow Rs. 15,59,650 -Total Investment Rs. 13,50,000+2,09,650, Profitability Index 1.16 (15,59,650 +13,50,000). Hence, Proposal A is acceptable.] 8. A company is considering two mutually exclusive Proposals 'A' and 'B'.. Proposal 'A' will require the initial cost of Rs. 1,60,000 with a salvage value of Rs. 10,000 and will also require an increase in the level of inventories and receivables of Rs. 90,000 over its life. The project will generate an additional sales of Rs. 2,00,000 and will require cash expenses of Rs. 70,000 in each year of its 5 year life. It will be depreciated as per straight line method. Proposal 'B' will require an initial capital of Rs. 2,70,000 with a salvage value of Rs. 20,000 and will be depreciated on straight line basis. The expected earnings before depreciation and taxes during its life are: First year 110000 Second Year 130000 Third Year 90000 Fourth Year 110000 Fifth year 150000 The company has to pay corporate income-tax at the rate of 50% and is evaluating projects with 12% as the cost of capital. (i) Which of the project is acceptable under the present value method? (ii) Will it make any difference to the above decision if profitability index is employed? The present value of Re. 1 at the discount rate of 12% for the first five years is 0.893, 0.797, 0.712, 0.636 and 0.567. Answer: Project A Cash Inflow Rs Sales 200000 Less: Costs 70000 Less: Depreciation 30000 Profit 100000 Less: 50% tax 50000 Earnings after tax 50000 + Depreciation 30000 Annual Cash flow 80000 Cash outflow(investment) Cost 160000 +Stores 90000 Total Investment 250000 Cash inflow in fifth year 80000 +Scrap Value 10000 +Amt Released from stores 90000 180000 Project A Cash flow: 80000 for four years, fifth year 180000 Discounted cash flow= 71440,63760,56960,50880,102060=345100 NPV=345100-250000=95100. PI=1.38 Project B Cash flow=80000,90000,70000,80000,120000 Discounted cash flow = 71440,71730,46840,50880,68040=311930 NPV=311930-270000=41930 PI=1.16 Practice Sums: 1. Pavan Industries Ltd is considering investing in a project requiring a capital outlay of Rs. 100000. Forecasted annual income after depreciation but before tax is as follows: Year Rs. 1 50000 2 40000 3 30000 4 20000 5 10000 Depreciation may be taken as 20% on cost as per written down value method. The company’s required rate of return is 10% and pays tax at a 40% rate. You are required to evaluate the project according to each of the following method: A) Payback Period Method B) Rate of Return of Original Investment C) Rate of Return of Average Investment D) Net Present Value Method E) Profitability Index Note: Present Value of Rs. 1 at 10% Discount rate is, 1 – 0.909, 2 – 0.826, 3 – 0.751, 4 – 0.683, 5 – 0.621. 2. Arav Communication Ltd. is contemplating either of two mutually exclusive projects having 5 years estimated life. The following details are available: Project A Project B Initial Investment 105000 165000 Profit after taxes: 1 10000 15000 2 15000 20000 3 20000 25000 4 25000 30000 5 35000 40000 Scrap Value at the end of 5th year 5000 15000 Select the best project under following methods: A. Payback Period Method B. Average Rate of Return C. Net Present Value Method D. Profitability Index Note: Present Value of Rs. 1 at 11% Discount rate is, 1 – 0.901, 2 – 0.812, 3 – 0.731, 4 – 0.659, 5 – 0.593. 3. JG University wants to purchase one machine from below mentioned 3 machines. Super, Delux, and Best, each costing Rs. 25,00,000. An estimated life of each machine is 5 years. There is no scrap value. Expected rate of return is 10%. There is no scrap value. Expected rate of return is 10%. The expected earning after depreciation and taxes for the 3 machines are as follows: Year Super Delux Best 1 400000 300000 200000 2 500000 400000 400000 3 700000 200000 700000 4 400000 1800000 1500000 5 200000 500000 400000  With the help of following methods which machine would you advise to purchase? You are required to evaluate the project according to each of the following method: A) Payback Period Method B) Net Present Value Method C) Profitability Index Note: Present Value of Rs. 1 at 10% Discount rate is, 1 – 0.909, 2 – 0.826, 3 – 0.751, 4 – 0.683, 5 – 0.621. 4. Veer Co. Ltd. wishes to purchase a machine. Machine A and Machine B are available in the market at cost of Rs. 12,00.000 and Rs. 10,00,000 respectively. Estimated life of each machine is 5 years. There is scrap value of Rs. 10000 and Rs. 30000 respectively. Expected rate of return is 12%. Tax rate applicable is 50%. Estimated Profit before depreciation and tax is as under: Year Machine A Machine B 1 650000 350000 2 500000 400000 3 400000 650000 4 350000 500000 5 250000 300000 You are required to evaluate the project according to each of the following method: A) Payback Period Method B) Average Rate of Return Method C) Net Present Value Method D) Profitability Index