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ENGINEERING ECONOMY AND FINANCE
Prof. Jitesh ThakkarINUSTRIAL MANAGEMENT (IM41081)
Department of Industrial Engineering & Management
Indian Institute of Technology Kharagpur
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Function of finance department
Is concerned with money
± Bringing into company
±
Looking at how it used± Paying it out
The Aim of finance department is to ensure
that it provides the organization with the
financial stability to meet it corporate goals
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Organization of finance department
� Medium and large size organization : usually withdirector of the company
� Small company under owner or an executive director
� Other staff:±
Accountants� Ledger clerk
� Payroll clerk
� Taxation clerk/ officer
� Purchasing clerk/ officer
�
Defining spending limits and procedure of committingexpenditure
� Deal with other organizations such as revenue, banks,customers and suppliers
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Activities of finance department
1. Bringing money into company
2. Using money
3. Paying money out
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Activities of finance department
1. Bringing money into company:
i. Capital planning
ii. Indication of implications of proposed plans
iii. Manage funding e.g. taking loans, using reserves
or increasing share holding
iv. Accounting activities
v. Invoicing for payments of the goods
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Activities of finance department
2. Using money:
To ensure that its money is being usedeffectively
± How much its products cost± Sales prices to be set
± Cash flow requirements
The data is provided by operations departments
products costprofit margin, turnover budgets
Production data cash flow forecasting
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Activities of finance department
3. Paying money out:
i. Payments for goods and services
ii. Payments to labours (taxes, insurance, PF, etc)
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Activities of finance department
4. Reporting on financial activitiesi. Financial information for internal use
Budgets
Sales figures
Capital spend
Cost of overheads Cash flow
ii. Preparation for financial statements required bylaw Balance sheet
Profit and loss accounts
iii. Financial information for other external sourcese.g. for loan
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The ideal financial system
� The most cot effective method of ensuring that the
organization can operate its financial affairs in such a way
that the organization goals may be best served
± Annual audited accounts for government
requirements : financial accounting
± Business performance data with sufficient accuracy
for internal use : management accounting
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financial accounting
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The Balance sheet
1. A Financial snap shot of the organization
2. Generally prepared on last day of the financial year
3. The balance sheet is to be considered along with other
documents such as profit and loss account
4. It operates on the principle that if you have something it musthave been paid for somehow
5. To represent this on a balance sheet :
one side would show where money comes from
The other side shows what has done been with it
6. Assets equal the sources of the funds
Assets = Liabilities
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The Balance sheet
Assets
1. Fixed assets
2. Current assets
Total assets
Liabilities
1. Long term liabilities
2. Current liabilities
Total liability3. Capital and reserves
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Assets & Liabilities
Fixed assets:
a. Tangible assets: plant, machinery, building,(depreciation is allowed for and value of given asset
falls down with time), goodwill (loyal customerprepared to pay over market rates)
b. Investments : long term investments (more than 1financial year, such as loan made to other
companies, fixed deposits, mutual funds,debentures purchased),
Total fixed assets =a +b
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Assets & Liabilities
Current assets:a. Cash on hand
b. Cash in bank
c. Stock (useful components , raw materials, work in progress)
d. Debtor (someone who is shortly to pay money)
e. short term investments (known as money market investments)
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Assets & Liabilities
Liabilitiesa. Long term liabilities (due after more than 1 year)
Loan taken
Debenture sold (an agreement with lender to repay money at
fixed rate over a period of time in return for lump sump)b. Current liabilities (due in less than 1 year)
Creditor (people to whom organization owes money, normalperiod 30 days)
Tax
Unpaid bills to be paid within 1 year
Total liabilities =a +b
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Capital and Reserves
1. Called-up share capital : money raised through sale of
shares at their nominal value.
2. Reserves : the reserve transferred out profit to at
discretion of the directors. Reserve may includebalancing amounts of money caused by revaluation of
property.
3. Share premium account : the amount of money raised
by issuing share at a price above their nominal value.
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Profit and loss account
profit and loss
=total assets (total liabilities + total
capital and reserves)
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Example: 1
Prepare a balance sheet for CNZ Limited as on
date with the help of given financial details
along with the entry of profit and loss account
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Financial detailsDetails
1. Building
2. Cash in hands
3. Debentures purchased for 5 years
4. Debentures sold for 3 years
5. Equipment
6. Finished products7. Loan from ICICI
8. Loan given to XYZ for 10 years
9. Payment collected
10.Raw material
11.Reserve12.Share capital
13.Unpaid bills
14.WIP
Consider depreciation @10% for tangibleassets
Value in Lakh Rs.82.0
30.0
60.0
20.0
48.0
16.040.0
10.0
22.0
18.0
15300
25.0
12.0
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Identify assetsDetails1. Building
2. Cash in hands
3. Debentures purchased for 5 years
4. Debentures sold for 3 years
5. Equipment
6. Finished products7. Loan from ICICI
8. Loan given to XYZ for 10 years
9. Payment to be collected
10.Raw material
11.Reserve
12. Share capital13.Unpaid bills
14.WIP
Asset/ liabilities/surplus82.0 A
30.0 A
60.0 A
20.0
48.0 A
16.0 A40.0
10.0 A
22.0 A
18.0 A
15
30025.0
12.0 A
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Identify Financial LiabilitiesDetails
1. Building
2. Cash in hands
3. Debentures purchased for 5 years
4. Debentures sold for 3 years
5. Equipment
6. Finished products7. Loan from ICICI
8. Loan given to XYZ for 10 years
9. Payment collected
10.Raw material
11.Reserve12.Share capital
13.Unpaid bills
14.WIP
Value in Lakh Rs.82.0
30.0
60.0
20.0 L
48.0
16.040.0 L
10.0
22.0
18.0
15300
25.0 L
12.0
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Identify capital and reservesDetails1. Building
2. Cash in hands
3. Debentures purchased for 5 years
4. Debentures sold for 3 years
5. Equipment
6. Finished products7. Loan from ICICI
8. Loan given to XYZ for 10 years
9. Payment collected
10.Raw material
11.Reserve12.Share capital
13.Unpaid bills
14.WIP
Value in Lakh Rs.82.0
30.0
60.0
20.0
48.0
16.040.0
10.0
22.0
18.0
15 C300 C
25.0
12.0
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Financial detailsDetailsBuilding
Equipment
Debentures purchased for 5 years
Loan given to XYZ for 10 years
Cash in hands
Raw materialWIP
Finished products
Payment collected
Loan from ICICI
Debentures sold for 3 years
Unpaid billsReserve
Share capital
CategoryA1
A2
A3
A4
A5
A6A7
A8
A9
L1
L2
L3C1
C2
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Profit and loss and appropriation
1. It is the objective of the business is to make profit
Buying raw material / thingspvalue additionp selling at
sufficient high pricep pay labour, material cost and cost of
running business p the money left is Profit
2. The profit is disposed as per desire:� Payments to shareholders
� Purchase of new assets
� Bonuses to employees
3. Unlike the balance sheet , the profit and loss account applies toa period of time and shows the cumulative effect of all the
transactions over a period of time, usually a year
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Profit and loss and appropriation
� Turn over
� Net operating cost
� Profit before tax
� Tax
� Profit after tax
� Dividends
� Profit retained
Year 5year 4
9070083800
7150066600
1920017200
6200 5800
1300011400
1900 1700
111009700
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Cash flow projections
� Cash flow projections are covered to any
situation where the disbursement of cash is
important
Year sale cost profit loan repayment outstandingloan
5. - - - - 30
6. 105 80 19 2 28
7. 125 95 22 10 18
8. 130 89 33 12 6
9. 130 87 35 6 00
10. 139 87 35 0 00
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Financial Ratios
The Use Of Financial Ratios
Analyzing Liquidity
Analyzing ActivityAnalyzing Debt
Analyzing Profitability
A Complete Ratio Analysis
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Groups of Financial Ratios
1.Liquidity
2.Activity3.Debt
4.Profitability
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Analyzing Liquidity
1. Liquidity refers to the solvency of thefirm's overall financial position, i.e. a
"liquid firm" is one that can easily meet its
short-term obligations as they come due.2. A second meaning includes the concept of
converting an asset into cash with little or
no loss in value.
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Three Important Liquidity Measures
Net Working Capital (NWC)
NWC = Current Assets - Current Liabilities
Current Ratio (CR)
Current AssetsCR =Current Liabilities
Quick (Acid-Test) Ratio (QR)
Current Assets - Inventory QR =
Current Liabilities
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Return on capital employed
(ROCE)
ROCE= (Pre tax Profit) / capital employed
The capital employed means the capital usedin creation of the profit, which is defined as
total asset less current liability
it indicates how much money was used in the
generation of the profit.
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Profit margin
Profit margin=
(trading profit) / (total sales)
= (value of sales cost of sales) / sales value
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(stock) Turnover (ST)
Inventory (stock) Turnover (ST)
(stock)
Cost of Goods Sold=
Inventory (stock)
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Analyzing Debt
Debt is a true "double-edged" sword as it allows
for the generation of profits with the use of
other people's (creditors) money, but creates
claims on earnings with a higher priority thanthose of the firm's owners.
Financial Leverage is a term used to describe the
magnification of risk and return resulting fromthe use of fixed-cost financing such as debt and
preferred stock.
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Four Important Debt Measures
Debt Ratio
(DR)
Debt-Equity Ratio
(DER)
Times Interest Earned
Ratio (T
IE
)
Fixed Payment Coverage Ratio (FPC)
T otal LiabilitiesDR=
T otal Assets
Long-T erm Debt DER=
Stockholders· Equity
Earnings Before Interest & T axes (EBIT )
T IE=Interest
Earnings Before Interest &T axes + Lease Payments
FPC=Interest + Lease Payments+{(Principal Payments +Preferred Stock Dividends)
X [1 / (1 -T )]}
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Analyzing Profitability
± Profitability Measures assess the firm's ability to
operate efficiently and are of concern to owners,
creditors, and management
± A Common-Size Income Statement, whichexpresses each income statement item as a
percentage of sales, allows for easy evaluation of
the firms profitability relative to sales.
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Seven Basic Profitability Measures
Gross Profit Margin (GPM)Operating Profit Margin
(OPM)
Net Profit Margin (NPM)
Return on Total Assets(ROA)
Return On Equity (ROE)
Earnings Per Share (EPS)Price/Earnings (P/E) Ratio
Gross ProfitsGPM=
Sales
Operating Profits (EBIT )OPM =
Sales
Net Profit After T axes
NPM= Sales
Net Profit After T axesROA=
T otal AssetsNet Profit After T axes
ROE=Stockholders· Equity
Earnings Available for Common Stockholder·s
EPS =Number of Shares of Common
Stock Outstanding
Market Price Per Share of Common Stock
P/E =Earnings Per Share
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Other ratios
�Output per employee = (value of sales)/
Number of employees
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Example : 1
Liquidity ratio
Quick (Acid-Test) Ratio (QR)
Current Assets - Inventory QR = Current Liabilities
= (98-18-12-16)/25 = 2.08
A measure of firms ability to pay off short-term
obligation without relying on the sales of its
inventories
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management accounting
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Costing
1. It is the process of calculating how much something costs tomake.
2. The most important use of information is in determining the
realistic selling price.
3. Helps to determine which product areas are worth investing4. Provides information for decisions relating to making or
buying-in parts
5. Allows to decide which product need further developments
for desired profit6. The term costing generally applies to existing products
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Components of costing
1. Material
2. Labour
3. Lighting
4. Heating
5. Transportation
6. Professional services
7. Human resources development
8. Administration
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Methods of costing
1. The first method is based on direct and
indirect costs.
2. The second is based on variable and fixed
cost.
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Direct and indirect costs
1. Direct costs: can be directly attributed to the
product for which a cost is being prepared.
i. Direct labours for the particular product
ii. Direct material based on bill of material for a particular
product
iii. Direct expenses relates to the costs incurred in buying
services for the particular product
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Direct and indirect costs
2. Indirect costs: are also called overheads, are the costsassociated with operating the business which can not be
directly assigned to product or services being provided.
i. Material used for other products also: e.g. soldering flux,
rags, cutting fluid etc.ii. Indirect Labour would include design engineers,
supervisors and administrative staff
iii. Indirect expenses would include heating, lighting and
rent of premises
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Recovery of overheads
1. Apportionment (distribution) to cost centre
2. Absorption (inclusion) by product
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Apportionment to cost centre
1. A Cost centre is part of business that can be
identified for the purpose of determining the costsi. Whole factory
ii. Particular departmentiii. Specific machine
iv. Particular product
v. Particular person
2. Each cost centre should bare a fair share of indirect
costs
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Apportionment to cost centre
3. Typical bases for apportionment
i. Floor area for rent
ii. Number of employees for indirect labour and personnel
costsiii. Book value of assets for depreciation and insurance
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Absorption of overhead by product
1. Indirect costs charged to a individual product
2. Calculated on the bases of :
i. Standard or expected rate , volume of production
ii. Units of output and machine hours
iii. Material rates is divided by the actual or
expected costs of direct materials
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Full costing
1. The cost of product based on both direct and
overhead costs
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fixed and variable costs
1. Sometimes the cost of a product is divided into: fixed andvariable costs
2. The variable costs are those that vary in proportion to the
amount of output and so would include:
i. Direct materialsii. Use of temporary labour
iii. Overtime charges
3. The fixed costs are paid irrespective of output
i. Cost of employing people
ii. Cost of having premises
iii. Cost of machinery available
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Break-even point for
the manufacture of any product
� This the point at which the income from sales
is equal to the cost of manufacture, where no
profit or loss is made, and company breaks
even.
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Example : 2
Following data is the cost incurred by amanufacturing company
Department Overhead in
Rs.
Direct material
cost in Rs.
Number of
employees
Personnel 52,000 - 4
Purchase 65,000 - 2
Machine shop 1,25,000 6,20,000 8
Assembly shop 1,00,000 1,75,000 6
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Example : 2
Above mentioned job is manufactured in a
machine shop for which direct material cost is
Rs. 25; direct labour cost is Rs. 18 and direct
expenses is Rs. 10 per unit. The overhead
should be absorbed on the basis of direct
material rate. Find the total cost of the job.
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Example : 2- solution
1.T
he problem is to be solved by apportion and absorption of overhead costs
2. Eliminate the cost of personnel department by distributing theoverhead of personnel department proportionately to otherdepartments.
Basis of distribution= number of employees in a particulardepartment
i. Total number of employees from other than personnel = 2+8+6 = 16
ii. Towards purchase department = (2/16)*52,000 = 6,500
iii. Towards m/c shop = (8/16)*52,000 = 26,000
iv. Towards assembly shop = (6/16)*52,000 = 19,5003. Total overhead purchase dept. =6,50,000+ 6,500
=71,500
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Example : 2- solution
3. Apportioning of purchase overheads to production shopsBasis of distribution= direct material cost in a particular department
TOTAL DIRECT MATERIAL COST= 6,200,00 + 1,75,000=
7,95,000
i. Towards machine shop =
(71,500* 6,20,000) / 7,95,000= 55,761
i. Towards assembly shop =
(71,500*1,75,000) / 7,95,000= 15,738
4. Total overhead of machine shop =
m/c shop overhead +personnel portion + purchase portion =
1,25,000+26,000+55,761=2,06,761
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Example : 2- solution
5. Total overhead of assembly shop =assembly shop overhead +personnel portion + purchase portion =
1,000,00 + 19,500 + 15,738
= 1,35,238
6. Total overheads of production shops = overhead of machine shop
+ overhead of assembly shop= 2,06,761 + 1,35,238 = 3,42,000
7. Material recover rate (MRR) :
for processing every Rupee of material in machine shop the
overhead = machine shop overhead / direct material cost =
2,06,761 / 6,20,000=
0.33, As the cost of direct material is Rs. 25 ,MRR = 25+25*0.33 = 33.25
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Example : 2- solution
8. Total cost of job which is manufactured in machine shop = 25+ 8.25 + 18 + 10 = 61.25
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Example : 3
The running cost of a machine is as follows:
Values are in Rs.
1. Tooling cost 35,000
2. Maintenance 18,000
3. Spare parts 23,000
4. Power cost 4.5 per hour
� The machine is depreciated at the rate of Rs. 6,000 every
year
� The expected run time is 313 days with two shifts of 8 hours
each day i.e. 16 hours per day
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Example : 3
� Find out overhead recovery rate and total cost of a job
manufactured on this machine with the following additional
information:
Direct material cost : Rs. 180
Direct labour cost: Rs. 250
Direct expenses : Rs. 120
Machine usage time : 6.5 hours
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Example : 3 - solution
1. Total working hours = 313*16=5,008 per year
2. Power cost per year =5,008*4.5=22,536
3. Total overhead for the machine = Tooling cost
35,000+Maintenance 18,000 +Spare parts 23,000 +Depreciation 6,000 + Power cost 22,536 = 98,536
4. Machine hour rate = total overhead / number of working
hours = 98,536 / 5,008 =20.87 Rs. Per hour
5. Total cost = 180 + 250 + 120 + (6.5*20.87) = 685.67
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Techniques of Investment appraisal
1. Payback period :i. It is the time that a project must run in order that the cash
generated will repay the initial investment.
ii. Payback is calculated on the basis of absolute values of
the expected income after tax.iii. This is simple a technique and therefore widely used
iv. The early returns are generally preferred to the longer
ones
v. It does not recognize that that money devalues withtime
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Example : 4
1. Investment = Rs. 1,00,000
2. Annual return = Rs. 20,000
3. Payback =
(1,00,000 / 20,000) = 5 years
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Techniques of Investment appraisal
2. Discounted cash flow:i. Looks at the earning the life of the project and the time
at which returns are received , and it allows for the fall in
value a period of time.
ii. It is a fact that Rs. 100 today is worth more than Rs. 100would be in a few years time. This comes about not
because of inflation, which evens out over a period of
time and also affects both costs and profit equality , but
because Rs. 100 invested today will attract interest at
some rate and therefore investment will increase in
value.
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The present value
�If the interest rate is 10% and we invest Rs. 500 today and infive years of time the investment will be worth Rs. 805,
assuming that the interest is immediately reinvested at the
same rate and that capital is left untouched.
± 500*1.10*1.10*1.10*1.10*1.10 = 805
� In a similar way we can work backward and say that if the
interest rate is 10% then Rs.500 payable in fivers time will be
worth Rs. 310 today.
± 500/ (1.1)5 = 310
± 310*1.10*1.10*1.10*1.10*1.10 = 500
� This called the present value
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The present value
P = S / (1+i)n
Where
P = Present valueS = Sum in future
i = interest rate (also called discount rate)
n = number of years
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Net present value
1. An investor get 8% interest per annum by investing money ina building society . The investor is offered an alternative
investment by another company which will provide Rs.
3,88,000 at the end of each of three following years
2. In order to calculate the value of this second investment we
need to asses what it is worth today
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Net present value
P = ((3,88,000) / 1.081) + ((3,88,000) / 1.082) +((3,88,000) / 1.083)
= 3,59,259.3 + 3,32,647.5 + 3,08,006.9 = 9,99,913.6
The present value of the investment is Rs. 9,99,913.6therefore if the capital cost of the second investment is less
than Rs. 9,99,913.6 then this investment will make more
money
Net Present Value =
present value of the return capital cost
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Example : 5
� An investment of Rs. 13000 yields return of Rs. 4000
per year for first three years and Rs. 2000 per year
the next two years
� By calculating net present values determine whetherthis is a worth investment, if the money could
otherwise be invested at 5 % per annum or at 10 %
per annum
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Example : 5 solution
1. Present value at 5 % interestP = (4000/1.051)+(4000/1.052) +(4000/1.053) +(2000/1.054)+
(2000/1.055)
= Rs. 14105
2. Net Present value at 5 % interest
= 14195 13000 = +1105
3. If the money could only be invested at 5 % then this is
worthwhile investment as it would bring a positivenet present value
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Example : 5 solution
1. Present value at 10 % interestP = (4000/1.101)+(4000/1.102) +(4000/1.103) +(2000/1.104)+
(2000/1.105)
= Rs. 12555
2. Net Present value at 5 % interest
= 12555 13000 = - 445
3. If the money could be invested elsewhere at 10 %
then this is not profitable investment as it wouldbring a negative net present value
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Internal rate of return
1. This is the discount rate, or rate of interest , atwhich net present value is zero
2. it is a point at which you break even.
3. Data of example : 5@ 5 % NPV = + Rs. 12555
@ 10 % NPV = - Rs. 445
IRR = 5 + ((1105/(1105+445)) = 8.56 %
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1105
771
449
140
-158
-445
-600
-400
-200
0
200
400
600
800
1000
1200
0 1 2 3 4 5 6 7 8 9 10 11
N
P
V
i
n
R
s
.
interest rate %
DETERMINATION OF INTERNAL RATE OF RETURN
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Depreciation
1. Investments in terms of cost to buy are considered as assetto the company in successive years with decreasing value
2. The term used to describe this reduction in value is
depreciation . The reduced vale is considered as book value
3.T
here are accounting techniques to calculate depreciation4. The factors for depreciation :
i. Wear and tear
ii. Shelf-life
iii. Damage due to misuse
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Depreciation
5. Depreciation must be incorporated in balance sheetto show the reduction in asset value
6. Book value = cost of asset - depreciation
7. Stock is not to be depreciated because it is valuedannually
8. Methods for calculating depreciation
i. Straight-line method
ii. Reducing-balance methodiii. Production unit method
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Straight-line method
1. Asset is depreciated by equal annual charges spreadover assets estimated life
2. D= (c-s)/n
D= depreciation charge, c= cost, s=scrap value,
n= estimated life
1. Example
i. Cost : Rs. 6,00,000
ii. Scrap value : Rs. 40,000
iii. Estimate life : 10 years
iv. Annual depreciation
= (6,00,000 40000) /10 = 56,000
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Reducing-balance method
1. The depreciation charge is a constant proportion of balanceremaining at the end of each accounting period.
2. Example
i. Cost : Rs. 6,00,000
ii. Scrap value : Rs. 40,000
iii. Estimate life : 10 years
value year
Rs. 600000 0
Rs. 6,00,000 10% =54,0000 1Rs. 54,0000 10%=48,600 2
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Production unit method
1. The depreciation charge is based on numberof units of work produced
2. D= (c-s)/ND= depreciation charge, c= cost, s=scrap value,
N= estimated production units
3. Examplei. Cost : Rs. 13,00,000
ii. Scrap value : Rs. 50,000
iii. Estimate production : 2,50,000 units
iv. Depreciation charge = (13,00,000- 50,000)/ 2,50,000
= Rs. 5 per unit
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Example : 6
� A transport vehicle was purchased at a cost of
Rs.18,50,000 . The useful life in terms of
number of kilometer is 4,50,000 and scrap
value is Rs. 50,000 . Calculate the depreciationrate and find out deprecation for 1st and 2nd
year and also calculate the book value of
vehicle if it has travelled 13,000 km in 1st
yearand 18,500 km in 2nd year
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Example : 6 - Solution
1st
year:� Cost C=18,50,000 Rs.
� Working units N=4,50,000 km
� Scarp value s = 50,000 Rs.
1. Depreciation rate =
(18,50,000 - 50,000)/ 4,50,000 = 4 Rs./km.
2. Depreciation for 13,000 km. = 4* 13,000
= 52,000 Rs.
3. Book value = cost of asset depreciation
=18,50,000 - 52,000 = 17,98,000 Rs.
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Example : 7
The following data is given for a companyDepartment Direct
Material cost
Rs.
No. Of
employees
Floor
area m2
Dept
overhead
Rs.
M/c shop 5,00,000 14 500 90,000
Ass shop 2,50,000 20 1,000 74,000
Moulding
shop
2,00,000 14 1,000 82,000
Personnel 0 5 0 50,000
Purchase 0 6 0 70,000
Maintenance 0 3 0 30,000
Total 9,50,000 62 2,500 3,96,000
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Example : 7
Apportion the overhead to 3 production
shops and calculate the cost of a job which is
manufactured a moulding shop where
material cost is Rs. 74 and labour cost is Rs. 50
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Example : 7 - solution
1. The problem is to be solved by apportion and absorption of overhead costs
2. Eliminate the cost of personnel department by distributing the
overhead of personnel department proportionately to other
departments.
Basis of distribution= number of employees in a particular
department
3. Machine shop
i. Total number of employees from other than personnel = 62-5= 57
ii. Towards m/c shop = (14/57)*50,000 = 12,280.7
iii. Updated overhead of m/c shop =90,000+12,280=
1,02,280.7
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Example : 7 - solution
4. Assembly shop :� personnel apportionment
= (20/57)*50,000 = 17,543
� Updated overhead of assembly shop
=74,000 + 17,543 = 91,5435. Moulding shop :
� personnel apportionment
= (14/57)*50,000 = 12,280
� Updated overhead of moulding shop
=83,000 + 12,280 = 94,280
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Example : 7 - solution
6. Purchase department:� personnel apportionment
= (6/57)*50,000 = 5,263
� Updated overhead of Purchase department
=70,000 + 5,263 = 75,2637. Maintenance department:
� personnel apportionment
= (3/57)*50,000 = 2,631
� Updated overhead of Purchase department
=30,000 + 2,631 = 32,631
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1. Eliminate the cost of purchase department by distributing
the overhead of personnel department proportionately to
other departments.
Basis of distribution= cost of direct material in a particular
department
2. Machine shop
i. Total cost of material= 5,00,000 +2,50,000 +2,00,000 = 9,50,000
ii. Towards m/c shop = (14/57)*50,000 = 12,280.7
iii. Updated overhead of m/c shop =90,000+12,280=
1,02,280