Problem:

Suppose a firm purchases a new tooling machine for Rs 2000,000, installation costs net of the taxes are Rs 300,000. An existing asset has a book value of the Rs 400,000 and firm is in the 30% tax bracket. Assume the company sells existing asset for Rs 400,000.

Required:

problem 1: Evaluate the net investment of firm.

problem 2:  Suppose the company sells the existing asset for 350,000 in place of Rs 400,000. How is your answer to part (a) affected?

problem 3: Assume the company now sells existing asset for 450,000 instead of Rs 350,000. How is net investment affected?

problem 4: The firm is as well evaluating the purchase of new project with a depreciable base of Rs 200,000, anticipated economic life of 5 years and change in earnings before taxes and depreciation of Rs 70,000 year 1, Rs 50,000 year 2, Rs 40,000 year 3, Rs 20,000 year 4 and Rs 10,000 year 5. Suppose straight-line depreciation and a 20% tax rate, compute the total net cash flows over the five years.