Q1) Mahima Enterprises is considering replacing an old machine by a new machine. The old machine bought a few years ago has a book value of Rs. 90,000 and it can be sold for Rs. 90,000. It has a remaining life of five years after which its net salvage value is expected to be Rs. 10,000. It is being depreciated annually at the rate of 20 percent as per the WDV method.

The new machine costs Rs. 400,000. It is expected to fetch a net salvage value of Rs. 25,000 after 5 years. It will be depreciated annually at the rate of 25 percent as per the WDV method. Investment in working capital will not change with the new machine. The tax rate for the firm is 35 percent.

Required:

Estimate the cash flow associated with the replacement proposal, assuming that other costs remain unchanged.

Q2. You are the financial manager of Hindustan Extrusion Products Limited (HEPL). HEPL is planning to set up an extrusion plant at Indore. Your project staff has developed the following cash flow forecast for the extrusion plant project.

		Rs. In million
	Year 0	Years 1-10
Investment	(250)
Sales		200
Variable costs (60% of sales)		120
Fixed costs		20
Depreciation		25
Pre-tax profit		35
Taxes		10
Profit after taxes		25
Cash flow from operations		50
Net cash flow		50

What is the NPV of the extraction plant project? Assume that the cost of capital is 13 percent. The range of values that the underlying variables can take is shown below:

Underlying variable	Pessimistic	Expected	Optimistic
Investment (Rs. in millions)	300	250	200
Sales (Rs. In millions)	150	200	275
Variable cost as a percent of sales	65	60	56
Fixed costs (Rs. In millions)	30	20	15
Cost of capital (%)	14	13	12

Required:

a) Calculate the effect of variations in the values of the underlyng variables on NPV

b) Calculate accounting BEP and financial BEP the plant.

ANSWER BOTH QUESTION IN Detail