capital budgeting exam perspective

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Aravind.. (Querist)

09 December 2009 A hospital is considering to purchase a diagnostic machine costing Rs. 80,000. The projected life of the machine is 8 years and has an expected salvage value of Rs. 6,000 at the end of 8 years. The annual operating cost of the machine is Rs. 7,500. It is expected to generate revenues of Rs. 40,000 per year for eight years. Presently, the hospital is outsourcing the diagnostic work and is earning commission income is Rs. 12,000 per annum; net of taxes.

in the above question, is the assumption of a tax rate is mandatory for calculating cash inflow?

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)

10 December 2009 I can give some tips

In your question
Cash Inflow Income Rs.40000 P.a

Less: Cash Out flow
Annual operating cost Rs.7500

Opporunity cost Rs.12000/ p.a commission income

and calcluate dep (80000-6000)/8

Balance less tax %

add back to Depreciation

you can arrive the Net cash flow and apply the method what ever Pay back,Accounting rate of return or internal rate of return or NPV

Aravind..

Aravind.. (Querist)

11 December 2009 i think that no tax rate is given here, so y to assume an imaginary rate of tax...
so no tax rate implies no need of deducting depreciation and adding it back...

my view is that
cash inflow= 40000-7500-12000
=20500

is this a correct r wat?

y i am saying is because assumption of everybody wont be same. so how will be they valued if they had not made an assumption of tax?
need ur help in this matter

thanks in advance

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