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Determination of NPV (Rs.in lakhs) Pipeline dia CFAT PV factor Total PV NPV (inches) for 10 years @ 15% 10 yrs. 3 3.3 5.019 16.5627

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Determination of NPV (Rs.in lakhs) Pipeline dia CFAT PV factor Total PV NPV (inches) for 10 years @ 15% 10 yrs. 3 3.3 5.019 16.5627 16 4 5.2 5.019 26.0988 24 5 9.3 5.019 46.6767 36 6 18.2 5.019 91.3458 64 7 32.5 5.019 163.1175 150 Cash Outflow 0.5627 2.0988 10.6767 27.3458 13.1175 Suggestion: Pipeline of 6 inches diameter has highest NPV and it is recommended for installation. Illustration 14 : Indo Plastics Ltd. is a manufacturer of high quality plastic products. Rasik, President, is considering computerizing the company's ordering, inventory and billing procedures. He estimates that the annual savings from computerization include a reduction of 424 4 clerical employees with annual salaries of Rs. 50,000 each, Rs. 30,000 from reduced production delays caused by raw materials inventory problems, Rs. 25,000 from lost sales due to inventory stock outs and Rs. 18,000 associated with timely billing procedures. The purchase price of the system in Rs. 2, 50,000 and installation costs are Rs. 50,000. These outlays will be capitalised (depreciated) on a straight line basis to a zero books salvage value which is also its market value at the end of five years. Operation of the new system requires two computer specialists with annual salaries of Rs. 80,000 per person. Also annual maintenance and operating (cash) expenses of Rs. 22,000 are estimated to be required. The company's tax rate is 40% and its required rate of return (cost of capital) for this project is 12%. Your are required to- (i) evaluate the project using NPV method; (ii) Evaluate the project using Pl method; (iii) Calculate the Project's payback period. Note: (a) Present value of annuity of Re. 1 at 12% rate of discount for 5 years is 3.605. (b) Present value of Re. 1 at 12% rate of discount, received at the end of 5 years is 0.567

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