Capital Budgeting(20 Marks)

Rehan is considering automating his pin factory with the purchases of a Rs500,000 machine. Rehan has calculated that automation would result in sales Rs90,000in 1^st year, Rs85,000 in the 2^nd year, Rs95,000 in the 3^rd year, Rs100,000 in the 4^th year. Material cost would be Rs30,000 in the 1^st year and it will increase by 10% p.a.

Labour cost would be 20% of material cost.The machine has useful life of 4 years. Company uses SLM for calculation of depreciation.

Required:

Calculate NPV and Profitability Index of machine at 10% discount rate, while tax rate 30%