Solution of Pb 20.14 (5ed) and Pb 20.27(6th ed)

Current Budgeted ROCE = Return / Capital Employed (330 / 1,155) x 100

28.57 %

Capital employed = SHE + Total Liab OR Capital employed = Total assets

W-1: Capital Employed: 1 Net Current assets 375 2 Net Fixed Assets:

Cost of Fixed assets 1,500 Less: Accumulated dep (720) 780

Capital Employed 1,155

Required a) Suggestion for 4 transactions:

Transaction A: Profit decrease by 8,000 due to cash discount given to customer.

Revised ROCE = Return / Capital Employed (322 / 1,125) x 100

28.62 %

Return: Capital Employed: Budgeted profit 330 Net Current assets Less: Cash discount (8) Budgeted Net current asset

322 Less; decrease in debtors

Net Fixed Assets: Cost of Fixed assets 1,500 Less: Accumulated dep (720)

Capital Employed

Transaction B:

Revised ROCE = Return / Capital Employed (345 / 1,195) x 100

28.87 %

Return: Capital Employed: Budgeted profit 330 Net Current assets add: Increase in contribution 15 Budgeted Net current asset

345 Add: Increase in stock

Net Fixed Assets: Cost of Fixed assets Less: Accumulated dep

Capital Employed

Transaction C:

Revised ROCE = Return / Capital Employed (320 / 1,095) x 100

29.22 %

Return: Capital Employed: Budgeted profit 330 Net Current assets Less: Loss due to sale of fixed asset (25) Budgeted Net current asset Less: Reduction in profit (45) add: Reduction in depreciation b/c Net Fixed Assets: asset is sold 60 Cost of Fixed assets

RETURN 320 Less: Accumulated dep

Capital Employed Assumption:

Loss on sale of fixed assets: Cash received from sale of asset is remitted to Cost of fixed asset 300,000 HO, that is why there is no impact on increase Less: Accumulated depreciation of cash on net current asset.(Book) because,

(300,000 x 4/5) (240,000) Cash is normally hold at head office.

Written Down Value 60,000 Sold at 35,000 Loss on sale of FA 25,000

Transaction D:

Revised ROCE = Return / Capital Employed (347 / 1,299) x 100

26.67 %

Return: Capital Employed: Budgeted profit 330 Net Current assets add: Decrease in revenue cost (Inc in CM) 52.50 less: Increase in depreciation (180 / 5 y) (36) Fixed Asset:

347 Cost of Fixed asset (1,500+180) Less: Accumulated dep (720 + 36)

Assumption: Cash paid on purchase on asset is provided by

HO, that is why there is no impact on decrease of cash on net current asset.(Book)

Required no. 2: Evaluation of 4 non - routine transactions are in the best interest of group:

Tra Year Cash Inflow Cash outflow Net Cash PV factor NPV Flow 15%

A 1 30 (8) 22 0.8696 19.1312 2 - 4 (8) 1.9854 (15.8832)

NPV 3.2480

OR

A 1 30 (8) 22 0.8696 19.1304 2 - (8) (8) 0.7561 (6.0491) 3 - (8) (8) 0.6575 (5.2601) 4 - (8) (8) 0.5718 (4.5740)

3.2471

Rs. 30 inflow cash is due to decrease in account receivable in year 01 and decrease of Rs 8 is due to cash discount given to customer.

Tra Year Cash Inflow Cash outflow Net Cash PV factor NPV

Flow 15%

B 1 15 (40) (25) 0.8696 (21.7400) 2 - 4 15 15 1.9854 29.7810

NPV 8.0410

Increase in contribution margin per year and Increase in stock in first year,resulting decrease in cash

1 15 (40) (25) 0.8696 (21.7391) 2 15 - 15 0.7561 11.3422 3 15 - 15 0.6575 9.8627 4 15 - 15 0.5718 8.5763

8.0421

Tra Year Cash Inflow Cash outflow Net Cash PV factor NPV Flow 15%

C - 35 - 35 1.0000 35.0000 1 (45) (45) 0.8696 (39.1320)

NPV (4.1320)

Sale of asset is made at the start of the year. On time line diagram the value of the year is zero at the start of the year as well PV factor is 01. The profit reduce after one year that is why it is taken at 0.8696 (discounted value)

Tra Year Cash Inflow Cash outflow Net Cash PV factor NPV Flow 15%

D - (180) (180) 1.0000 (180.0000) 1- 5 52.50 52.50 3.3520 175.9800

NPV (4.0200)

0 - (180) (180) 1.0000 (180.0000) 1 52.50 - 52.5000 0.8696 45.6522 2 52.50 - 52.5000 0.7561 39.6975 3 52.50 - 52.5000 0.6575 34.5196 4 52.50 - 52.5000 0.5718 30.0170 5 52.50 - 52.5000 0.4972 26.1018

(4.0119)

CONCULSION: Transaction A and B yeild positive NPV, therefore it will be undertaken Transaction C and D yeild negative NPV, therefore it will be rejected.

375

(30) 345

780

1,125

375

40 415

1,500 (720) 780

1,195

375

1,200

(480) 720

1,095

Cash received from sale of asset is remitted to HO, that is why there is no impact on increase of cash on net current asset.(Book) because, Cash is normally hold at head office.

375

Cost of Fixed asset (1,500+180) 1,680 Less: Accumulated dep (720 + 36) (756) 924

1,299

Solution of Ques. 20.18 (5th ed) + 20.19(6th ed)

Aromatic Plant:

Particulars 2001 2002 2003 2004

Net Cash in flow, before tax (in M) 2.4 2.4 2.4 2.4 Less: Depreciation (6.4 / 4) (1.6) (1.6) (1.6) (1.6)

Net Profit before I/ Tax(Accounting Profit) 0.8 0.8 0.8 0.8 Less: Cost of Capital (16%) of WDV (1.02) (0.77) (0.51) (0.26)

Residual Income (DCF Profit) (0.22) 0.03 0.29 0.54

Summary: Benefit obtain from Aromatic plant 2.4 2.4 2.4 2.4

Less: Cost on Aromatic Plant a) depreciation cost (1.60) (1.60) (1.60) (1.60) b) Cost of investment (1.02) (0.77) (0.51) (0.26)

Total Cost (2.62) (2.37) (2.11) (1.86)

Net Result (0.22) 0.03 0.29 0.54

Calculation of WDV of Aromatic Plant Cost / WDV of aromatic plant 6.4 6.4 4.8 3.2 Less: Depreciation expenses (1.6) (1.6) (1.6)

WDV at the Opening of the year 6.4 4.8 3.2 1.6

WDV means Capital Employed.

RETURN ON CAPITAL EMPLOYED:

12.50 16.67 25.00 50.00 ROCE = Net Income / Capital Employed % % % %

Capital Employed = Net Current asset + BV of fixed asset

Zomin Plant:

Particulars 2001 2002 2003 2004

Net Cash in flow, before tax (in M) 2.6 2.2 1.5 1.0 Less: Depreciation (5.2 / 4) (1.3) (1.3) (1.3) (1.3)

Net Profit before I/ Tax 1.3 0.9 0.2 (0.3) Less: Cost of Capital (16%) of WDV (0.83) (0.62) (0.42) (0.21)

Residual Income 0.47 0.28 (0.22) (0.51)

Calculation of WDV of Aromatic Plant Cost / WDV of aromatic plant 5.2 5.2 3.9 2.6 Less: Depreciation expenses (1.3) (1.3) (1.3)

WDV at the Opening of the year 5.2 3.9 2.6 1.3

RETURN ON CAPITAL EMPLOYED:

ROCE = Net Profit / WDV 25.00 23.08 7.69 (23.08) ROCE = Net Income / Capital Employed % % % %

Capital Employed = Net Current asset + BV of fixed asset

Total

9.6 (6.4)

3.2 (2.56)

0.64

Total

7.3 (5.2)

2.1 (2.08)

0.02

Aromatic

PV of Cash outflow -6.4 1 -6.4

PV of Cash inflow 2.4 0.862069 2.0689655172.4 0.743163 1.7835909632.4 0.640658 1.5375784162.4 0.552291 1.325498635

315,634