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Analysis: Since NPV is positive, the project can be selected. (vii) Calculation of project's cash flows and NPV assuming that the book salvage value for depreciation purposes is Rs. 20,000 even though the machine is worthless in terms of its resale value: Depreciation p.a. = 2,50,000 - 20.000 5 YEARS = Rs. 46,000 p.a. Cash Inflow p.a. Savings Less : Depreciation Salaries of computer specialists Maintenance cost (Rs.) 1,73,000 46,000 80,000 12,000 1,38,000 35,000 14,000 21,000 46,000 67,000 Profit before tax Less : Tax @ 40% Profit after tax Add : Depreciation Cash Inflow p.a. Year Cash flows Rs. 0 (2,50,000) 1 to 5 67,000 5 (tax credit) 8,000 NPV (3,929) P.V. factor @ 12% 1.000 3.605 0.567 Total P.V. Rs. (2,50,000) 2,41,535 4,536 Analysis : Since NPV is negative, Project can be rejected. Illustration 11: Xpert Engineering Ltd. is considering buying one of the following two mutually exclusive investment projects: Project A: Buy a machine that requires an initial investment outlay of Rs. 1,00,000 and will generate the cash flows after tax (CFAT) of Rs. 30,000 per year for 5 years. 39 Project B: Buy a machine that requires an initial investment outlay of Rs. 1,25,000 and will generate 'cash flows after tax (CFAT) of Rs. 27,000 per year for 8 years. Which project should be undertaken? The company uses 10% cost of capital to evaluate the projects. Note: Present value of Re. 1 for eight years @10% - 0.9091, 0.8264, 0.7513, 0.6830, 0.6209, 0.5645, 0.5132, and 0.4665

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