CHPTER 4 & 5

M/s E Traders is a firm of two partners Mr. S & Mr. N dividing profits & losses in the ratio of 3:2. The following are the balances in their ledgers on 31st March, 2005

Capital:- Mr. S 40,000 Mr. N 26,000Drawings: - Mr. S 16,000

Mr. N 14,000Sundry Creditors 32,151Goodwill 15,000Cash in Hand 100Cash at Bank 7,065Sundry Debtors (less provision for B/D for Rs. 2,130) 58,170Bad Debts 1,575Stock (as on 01-04-2004) 14,517Plant & Machinery (as on 01-04-2004) 21,000Building (as on 01-04-2004) 30,000Purchases (less Returns of Rs. 4,038) 153,336Sales (less Returns of Rs.23, 463) 325,275Carriage outward 7,010Wages 46,455Land 6,0006% Loan on Mortgage 28,500Interest on Mortgage Loan 1,185Salaries 18,291Carriage Inward 2,787Rents & Rates 6,000Gas, Water &Electricity 2,160Insurance (For the period 01-01-2005 to 31-12-05) 513Advertisement 9,792Cash discount received 3,300Cash discount paid 1,680Investments 15,000General Expenses 11,780Bills Payable 8,840Bills Receivable 5,400Dividend Received 750

You are required to prepare Trading and Profit & Loss Account for the year ending 31st March, XXXX and the Balance Sheet on that date after making the following adjustments:-

(1) (i) Depreciation is to be provided for on Plant & Machinery at 10% p.a. and on Builing at 6% P.A.

(ii) Provide for rent payable for February and March XXXX at Rs. 500 p.m.(iii) Provision for Bad Debts must be maintained at 5% of Debtors.(iv) Provide interest on capital at 10%. No interest on drawings.

(2) Purchases included Plant & Machinery costing Rs. 3,000 purchased on 01-04-2004.(3) The Manager is entitled to a commission of 10% of Net Profits after charging his

commission but before interest on capital accounts of Partners.(4) The closing Stock was Rs. 16,800.

Trading Account of E Traders Ltd. as on 31st March, .XXXX

Particulars Amount Particulars AmountStock Opening 14,517 SALES:

Less Sales Return3,25,275

PurchasesLess Purchases of Plant & Machinery

1,53,3363,000

1,50,336 Closing stock 16,800

Carries Inwards 2,787Wages :Factory staff 46,455Gross Profit c/d 1,27,980TOTAL 3,42,075 TOTAL 3,42,075

Profit & Loss Accounts of XYZ Ltd. as on 31st March, .XXXXParticulars Amount Particulars Amount

Sundry Expenses 11,780 Gross Profit b/d 1,27,980Carriage & Packing of Sales 7,010 Discount Received 3,300Gas, Water, Electricity, etc. 2.160Salaries :Clerical Staff 18,291Discounts allowed 1,680Rent & Rate+ outstanding

6000 + 600 6,600

Interest Payables on Mortgage+ outstanding

1185+525 1,710

Insurance - paid in advance

523 - 386 127

Provisions for Bad & Doubtful Debts

3,015- 2,130 885

Depreciation on Building Plant & Machinery

1,8002,400 4,200

Net Operating Profits c/d 67,045TOTAL 1,31,280 TOTAL 1,31,280

Profit & Loss (Adjustment) Accounts of XYZ Ltd. as on 31st March, .XXXX

Particulars Amount Particulars Amount

Manager’s A/c 6,705 Net Operating Profits b/d 67,045

Interest on Capital of N 4,000 Dividend Received 750

Interest on Capital of S 2,600 6,600

Capital A/c of N 32,694

Capital A/c of S 21,796 54,490

TOTAL 67,795 TOTAL 67,795

Balance Sheet of XYZ Ltd. as on 31st March, .XXXXLIABILITIES Amount ASSETS Amount

Current Liabilities Cash in Hand 100Trade Creditors 32,151 Cash at Bank 7,045Bills Payable 8,840 Inventories / Stock Closing 16,800*Rents & Rates outstanding 600 *Bills Receivables 5,400LONG TERM LIABILITIES6% Loans on Mortgage. 28,500

*Debtors Less Bad Debts/provisions for Bad Debts

60,3003,015 57,285

Interest on 6% Loans on Mortgage o/s 525 *Investments 15,000Capital A/c – S + interest + P& L A/c

- Drawings

40,0004,000

32,69476,,69416,000 60,694

*Plants & Machinery + Purchases

Less Depreciation

21,0003000

24,0002,400 21,600

Capital A/c – N + interest + P& L A/c

- Drawings

26,0002,600

21,79650,39614,000 36,396

Building (at Cost)Less Depreciation LandPrepaid Insurance

30,0001,800 28,200

6,000 385

Goodwill(*in balancing figure) 10,495TOTAL 1,68,330 TOTAL 1,68,330

From the following balances as on 31st March, 2005, you are required to prepare Trading and Profit & Loss Account for the year ending 31st March, 2005 and the Balance Sheet on that date after making the necessary adjustments:-

Capital:- Mr. Gupta 40,000 Drawings: 15,000 Sales 4,34,400 Purchases 3,64,650 Carriage Inward 27,900 Rents & Rates & Taxes 8,550 Sales Returns 12,900 Purchases Returns 8,700 Salaries 13,950Sundry Creditors 22,200Sundry Debtors 36,0006% Bank Loan (01-04-2004) 30,000Interest paid on Bank Loan 1,350Printing & Advertisements 21,900Interest received from A.N. Sen 400Cash in Hand 570Cash at Bank 12,000Discount received 6,300Discount paid 11,310Investments 7,500Furniture & Fittings 2,700General Expenses 6,000Audit Fee 1,050Insurance 900Postage & Telegrams 4,0709% Deposits with Mr. A. N. Sen 45,000

(a) The closing Stock was Rs. 1,20,800.(b) Sundry Debtors included a sum of Rs. 3,000 & Sundry Creditors included a sum of Rs.

4,000 due to Mr Gupta.(c) Purchases costing Rs. 1,800 had been omitted to be entered in the Purchases A/c..(d) Personal Purchases costing Rs. 1,000 made by Mr. Gupta had been included in the

Purchases.(e) Furniture Purchases costing Rs. 1,000 purchased on 01-04-2004 had been debited to

Purchases A/c.(f) 25% of Printing & Advertisements is to be carried forward to the next year.(g) Provide 5% for Bad Debts & 2% on the balance for discount for prompt payment.(h) Write off Depreciation on Furniture & Fittings at 10%.(i) Insurance paid in advance as on 31-03-2005 was Rs. 120.(j) Provide interest on Bank Loan and 9% Deposits with Mr. A. N. Sen.(k) As on 31-03-2005 Salaries and Carriage Inwards that remained unpaid were Rs. 1,200 &

Rs. 150 respectively.

TRADING ACCOUNTS AS ON 31-12-2004

Particulars Amt. (Rs.) Amt. (Rs.) Particulars Amt. (Rs.) Amt. (Rs.)

Stock Opening 70,200 Sales

- Sales Returns4,34,400

12,500 4,21,500 Purchases- Purchases Returns

- Gupta’s Capital A/c

- Furniture A/c

+Purchases A/c

3,64,6508,700

3,55,950700

3,55,2501,000

3,54,2501,800 3,56,050

Stock closing 1,20,000

Carriage A/c+ Carriage outstanding

27,900150 28,050

Balance c/f to P& L A/c 87,2,00Total 5,41,500 Total 5,41,500

P & L A/CParticulars Amt. (Rs.) Amt. (Rs.) Particulars Amt. (Rs.) Amt. (Rs.)Rates & Taxes 8,550 Gross Profit 87,200Salaries + outstanding

13,9501,200 15,150

Interest received Interest outstanding

4003,650

Bad & Doubtful Debts 1,650 Discount Received 6,300Printing & Stationery- prepaid

21,9005,475 16,425

Prompt Payment Discount 627Insurance - Prepaid

900120 780

Discount Paid 11,310Depreciation on Furniture 370Interest paid on bank loan+ outstanding

1,350450 1,800

General Expenses 6,000Audit Fee 1,050Traveling Expenses 3,500Postage & telegram 4,070Balance c/f 2,6,268Total 97,550 Total 97,550Working Notes

Capital Account of Mr. GuptaDrawings 15,000 Balance b/d 1,65,000S Debtors 3,000 Creditors A/c 4,000Purchases A/c 700 Purchases A/c 1,800Balance b/d 1,52,100TOTAL 1,70,800 TOTAL 1,70,800

BALANCE SHEETLIABILITIES Amt. (Rs.) Amt. (Rs.) Assets Amt. (Rs.) Amt. (Rs.)Sundry CreditorsLess Mr. Gupta’s A/c

22,200 4,000 18,200

Cash in hand Cash at Bank

57012,000

Carriage outstandingSalaries outstanding

1501,200

StockPrepaid Insurance

Prepaid Printing & Advertisement

1,20,000120

5,475Bank Loan 6%

Interest outstanding on Bank Loan 6%30,000

450Sundry Debtors

- Mr. Gupta’s A/c

- Bad & Doubtful Debts

- Prompt payment Discount

36,0003,000

33,0001,650

31,350627 30,723

P&L A/c 26,268 Investment9% Deposits with A.N. Sen

Interest Receivable on 9% Deposits with A.N. Sen

7,50045,000

3,650Capital : (in Balancing figure) 1,52,100 Furniture at cost

+ Purchases

- Depreciation

2,700 1,000 3,700 370 3,330

Total 2,28,368 Total 2,28,368The Trial Balance of XYZ Ltd. for the year ending 31st March, XXXX , as under:-

Trial Balance of XYZ Ltd. as on 31st March, .XXXXPARTICULERS Rs.

Share Capital: 5,000 Equity Shares of Rs. 100 each 5,00,000 4L

6% Debenture secured on the mortgage of fixed assets 1,00,000 4L

Provisions for Taxation for the assessment year 2001-02, 2002-03 1,00,000 4L

Sundry Creditors 52,000 4L

Discount on issue of Debentures 4,000 4L

Profit & Loss A/c (Credit Balance) 10,000 4L

Gross Profit 5,00,000 2C

Dividend Received on Investment ( Gross Rs. 10,000) 7,000 2C

Director’s Fees 1,00,000 2D

Interest on Debentures 5,000 2D

Income Tax deducted on Interest on Debentures 1,500 2D

Audit Fee (including Rs. 1,000 for Tax Representation) 5,000 2D

Miscellaneous Trade Expenses 1,10,000 2D

Advance against Construction of Buildings 50,000 4A

Building (Cost Rs. 4,00,000) 3,00,000 4A

Furniture (Cost Rs.1,00,000) 5,000 4A

Moter Vehicles 30,000 4A

Equity Share of other Companies (Market Value Rs. 2,20,000) 2,00,000 4A

5,000 10% Preference Shares of Rs. 10 each of other companies (Rs. 6 paid up) 30,000 4A

Stock in Trade (at cost) 2,00,000 4A

Sundry Debtors (Consider for Unsecured Goods) 1,40,000 4A

Cash at Bank 57,500 4A

Preliminary Expenses 30,000 4A

You are required to prepare a Profit & Loss Account for the year ending 31st March, XXXX and the Balance Sheet on that date after taken into Account following adjustments: 1. The method of valuation of Closing Stock has been charged & this resulted in

reduction of the value of the closing stock to Rs. 1,90,000. This has not been adjusted. 4A, 2D2. Closing Stock also includes goods worth Rs. 20,000, which cannot be marketed. 4A,

2D3. Provide Depreciation at @10% on the original cost of all fixed assets. 4A, 2D 4. Moter Vehicles account represents two old vehicles standing in the books at Rs.

5,000 each (original cost Rs. 15,000 each) & a new vehicle purchased on 1st January, XXXX for Rs. 20,000. One of the old vehicles was sold for Rs. 4,000 & amount was credited to Sales Account. 4A, 2D

5. The Company has contracted for the construction of a building at Rs. 1,50,000 which is still incomplete. 4A

6. Provide Rs. 1,00,000 towards taxation liability for the current year. 4A, 2D7. Sundry Creditors include Rs. 2,000, which had already been paid. 4L8. Dividend is proposed for the year at 20%.4L, 2C9. Debtors outstanding for more than six months: Rs. 40,000. . 4A, 2D10. Cash Balance includes a Cheque for Rs. 10,000 returned by the banker for want of

balance in the account. . 4A, 2D

P& L A/c for the year ended as on 31-03-2003Particulars Amt. (Rs.) Amt. (Rs.) Particulars Amt. (Rs.) Amt. (Rs.)Salaries & Wages 1,00,000 Gross Profit 5,00,000Directors Fees 4,000 - Loss on value of Vehicle 4,000 4,96,000Interest on Debenture+ Tax Deducted at Source

5,0001,500 6,500

Dividend Received on Investment- Tax Deducted at Source

10,000 3,000

7,000

Audit Fee 4,000 Profit on sale of Vehicle 500Tax Representation Fee 1,000Misc. Expenses 1,10,000DEPRECIATION ON Building 40,000Furniture 1,000Moter Vehicle 1 1,500Moter Vehicle 2 1,500Moter Vehicle 3 1,000Moter Vehicle sold 1,500 47,500Loss on Valuation of stock 20,000Loss on Absolution of stock 10,000Balance c/f to P& L Adj.A/c 2,00,500Total 5,03,500 Total 5,03,500

P& L Adj.A/cParticulars Amt. (Rs.) Particulars Amt. (Rs.)Provisions for Taxation 1,00,000 Balance b/d 10,000

Provisions for 1,00,000 P& L A/c 2,00,500Balance c/d 10,500Total 2,10,500 Total 2,10,500

BALANCE SHEETLIABILITIES Amt. (Rs.) Amt. (Rs.) Assets Amt. (Rs.) Amt. (Rs.)Capital : 5,00,000 Fixed Assets Building at cost

- Depreciation

- Depreciation

4,00,0001,00,0003,00,000 40,000

2,60,000

Bank Loan 30,000 Furniture at cost- Depreciation

- Depreciation

10,000 5,000 5,000 1,000 4,000

Unsecured Loan Sundry CreditorsLess Mr. Gupta’s A/c

22,200 4,000 18,200

Moter vehicle (1& 2) at cost- Depreciation

- - Depreciation(3) at cost

Depreciation

30,00020,00010,000 3,00020,000 2,000

7,000

18,000Reserve & Surplus P& L A/c 10,500 INVESTMENTS

PROVISIONS

Equity Shares (at Cost & Paid up value)Preference Shares (at Cost & Paid up value)

2,00,000

3,00,000

Provisions for 2000-01 & 01-02+ provisions for current year

1,00,0001,00,000 2,00,000

Current AssetsStock in Trade (at Cost )Less Devaluation

Less Obsolance

2,00,00010,000

1,90,00020,000 1,70,000

Provisions for Proposed Dividend 1,00,000 DEBENTURES Within Six Month Over Six Month

1,00,00040,000 1,40,000

Cash & Bank Balance_ Cheque Returns

57,50010,000 47,500

Misc. AssetsBuilding AdvancePreliminary Expenses Discounts on issue of debentures

50,00030,000 4,000

84,000Total 9,60,500 Total 9,60,500

From the following Trial Balances of Mr. Keshav Kant as on 31st March, 2006, you are required to prepare Trading and Profit & Loss Account for the year ending 31st March, 2005 and the Balance Sheet on that date after making the necessary adjustments:-

Capital:- 8,00,000 4LDrawings: 60,000 4L Sales 23,10,400 1CCommission on Sales 45,000 2C cStock opening 75,000 1CPurchases 15,95,000 1CCarriage Inward 25,000 1C bWages (for 11 months upto 28-02-2006) 66,000 1CSalaries 1,40,000 2CSundry Creditors 3,00,000 4LSundry Debtors 2,50,000 4A eBad Debts 15,000 2C eProvisions for Bad Debts 8,000 2CDiscount received 15,000 2DPrinting, Stationary & Advertisements 18,000 2CMisc. Expenses 30,000 2CPostage Telephones & Telegrams 12,000 2CMachinery 5,00,000 4A b & fBuilding 4,00,000 4A fFurniture, Fixture & Fittings 40,000 4A fInsurance 24,000 2CInvestments 1,00,000 4A dInterest received on Investments 12,000 2DCash at Bank 150,000 4A

ADJUSTMENTS:-(a) The closing Stock was Rs. 2,25,000. (1C & 4A)(b) Machinery Purchases costing Rs. 45,000 on 01-10-2005 was shown as Purchases A/c.

Freight paid on the machinery was Rs. 5,000 which is included in the Freight on Purchases. (4A & 2D)

(c) Commission is payable @ 2% on Sales.(2D)(d) Investments were sold at 10% profit but entire sale proceed have been taken as sales. (2C &

4A)(e) Write off Bad Debts Rs. 10,000 & create a provision for Doubtful Debts @ 5% of Debtors.

(2C & 4A)(f) Write off Depreciation on Building @ 2% and on Machinery & Furniture Fixture & Fittings

at 10%. (2C & 4A)

Manufacturing & Trading) Account of XYZ Ltd. as on 31st March, .XXXXParticulars Amount Particulars Amount

Stock Opening 75,000 SALES:Less Sale of Investment

23,10,00060,000 22,50,000

PurchasesLess Machinery A/c

15,95,00045,000 15,50,000 Closing stock 2,25,000

Fright Less Machinery A/c

25,0005,000 20,000

Wages Add o/s

66,0006,000 72,000

Gross Profit c/d 7,58,000TOTAL 24,75,000 TOTAL 980 24,75,000

working Notes:-(1) Net Sales (Based on Commission paid = Commission on Sales X 100 = 45,000 X 100 = 22,50,000

2 2(2) Investment Sold = Total Sales (Given) – Sales (Worked out above) = 23,10,000-22,50,000 = 60,000

Profit & Loss Accounts of XYZ Ltd. as on 31st March, .XXXXParticulars Amount Particulars Amount

Misc. Expenses 30,000 Gross Profit b/d 7,58,000Salaries : 1,40,000 Interest on Investment 12,000Insurance Less Prepaid

24,0008,000 16,000 Discount Received 15,000

Commission on Sales 45,000Postage & Telephone 12,000*Bad Debts provisions Less Written Off

Add Provision

15,00010,000

50007500 12,500

Depreciation on BuildingFixture & Fitting Machinery 65000

6,0004,000

55,000Net Operating Profits c/d 1,64,500TOTAL 7,85,000 TOTAL 7,85,000

Balance Sheet of XYZ Ltd. as on 31st March, .XXXXLIABILITIES Amount ASSETS Amount

Sundry Trade Creditors 3,00,000 Cash at Bank 1,50,000Inventories / Stock Closing 2,25,000

Wages Outstanding 6,000 Debtors Less Provisions for Bad & Doubtful Debts

25000012,500 2,37,500

Prepaid Insurance 8,000*Accounts Receivables*Investments 1,00,000

. CapitalP & L Accounts

Less Drawings

8,00,0001,64,0009,64,000

60,0009,04,000

Machinery + Purchases+ Freight

Less Depreciation

5,00,00045,000

5,0005,50,000

55,000 4,95,000General Reserve(*in Balancing figure0

3,35,000 Furniture & fixtureLess Depreciation

40,0004,000 36,000

*Building Less Depreciation

3,00,0006,000 2,94,000

TOTAL 15,45,000 TOTAL 15,45,000

From the following Trial Balances of Mr. Keshav Kant as on 31st March, 2006, you are required to prepare Trading and Profit & Loss Account for the year ending 31st March, 2005 and the Balance Sheet on that date after making the necessary adjustments:-

Capital:- 8,00,000 4LDrawings: 60,000 4L Sales 23,10,400 1CCommission on Sales 45,000 2CcStock opening 75,000 1CPurchases 15,95,000 1CCarriage Inward 25,000 1CbWages (for 11 months upto 28-02-2006) 66,000 1CSalaries 1,40,000 2CSundry Creditors 3,00,000 4LSundry Debtors 2,50,000 4AeBad Debts 15,000 2CeProvisions for Bad Debts 8,000 2CDiscount received 15,000 2DPrinting, Stationary & Advertisements 18,000 2CMisc. Expenses 30,000 2CPostage Telephones & Telegrams 12,000 2CMachinery 5,00,000 4Ab & fBuilding 4,00,000 4A fFurniture, Fixture & Fittings 40,000 4AfInsurance 24,000 2CInvestments 1,00,000 4A dInterest received on Investments 12,000 2DCash at Bank 150,000 4A

ADJUSTMENTS:-(g) The closing Stock was Rs. 2,25,000. (1C & 4A)(h) Machinery Purchases costing Rs. 45,000 on 01-10-2005 was shown as Purchases A/c.

Freight paid on the machinery was Rs. 5,000 which is included in the Freight on Purchases. (4A & 2D)

(i) Commission is payable @ 2% on Sales.(2D)(j) Investments were sold at 10% profit but entire sale proceed have been taken as sales. (2C &

4A)(k) Write off Bad Debts Rs. 10,000 & create a provision for Doubtful Debts @ 5% of Debtors.

(2C & 4A)(l) Write off Depreciation on Building @ 2% and on Machinery & Furniture Fixture & Fittings

at 10%. (2C & 4A)

Manufacturing & Trading) Account of XYZ Ltd. as on 31st March, .XXXXParticulars Amount Particulars Amount

Stock Opening 75,000SALES:Less Sale of Investment

23,10,000

60,000 22,50,000PurchasesLess Machinery A/c

15,95,00045,000 15,50,000 Closing stock 2,25,000

Fright Less Machinery A/c

25,0005,000 20,000

Wages Add o/s

66,0006,000 72,000

Gross Profit c/d 7,58,000TOTAL 24,75,000 TOTAL 980 24,75,000

working Notes:-(1) Net Sales (Based on Commission paid = Commission on Sales X 100 = 45,000 X 100 = 22,50,000

2 2(2) Investment Sold = Total Sales (Given) – Sales (Worked out above) = 23,10,000-22,50,000 = 60,000

Profit & Loss Accounts of XYZ Ltd. as on 31st March, .XXXXParticulars Amount Particulars Amount

Misc. Expenses 30,000 Gross Profit b/d 7,58,000Salaries : 1,40,000 Interest on Investment 12,000Insurance 24,000 16,000 Discount Received 15,000

Less Prepaid 8,000Commission on Sales 45,000Postage & Telephone 12,000*Bad Debts provisions Less Written Off

Add Provision

15,00010,000

50007500 12,500

Depreciation on BuildingFixture & Fitting Machinery 65000

6,0004,000

55,000Net Operating Profits c/d 1,64,500TOTAL 7,85,000 TOTAL 7,85,000

Balance Sheet of XYZ Ltd. as on 31st March, .XXXXLIABILITIES Amount Amount ASSETS Amount Amount

Sundry Trade Creditors 3,00,000 Cash at Bank 1,50,000Inventories / Stock Closing 2,25,000

Wages Outstanding 6,000 Debtors Less Provisions for Bad & Doubtful

Debts

25000012,500

2,37,500Prepaid Insurance 8,000*Accounts Receivables*Investments 1,00,000

. CapitalP & L Accounts

Less Drawings General Reserve*

8,00,0001,64,0009,64,000

60,0009,04,000

Machinery + Purchases+ Freight

Less Depreciation

5,00,00045,000

5,0005,50,000

55,000 4,95,0003,35,000 Furniture & fixture

Less Depreciation40,000

4,000 36,000*Building Less Depreciation

3,00,0006,000 2,94,000

TOTAL 15,45,000 TOTAL 15,45,000* Difference between Total Assets & Total Liabilities is taken as General Reserve in Balancing Figures.

CHAPTER6Prepare an estimate of Net Working Capital requirement for ABC Ltd. from the following

information:-

Estimated cost of production per unit Rs. 170 which includes;-Raw Material Rs. 80Direct Labour Cost Rs. 30Overheads (exclusive of Depreciation) Rs. 60Selling Price per unit Rs. 200

Level of activity per Annum 1,40,000 unitsRaw Material in Stock: average 4 weeksWork in Progress (assume 50% completion stage)Finished Goods in Stock: average 4 weeksCredit allowed by suppliers: average 4 weeks Credit allowed to Debtors: average 4 weeksLeg period in payment of wages average 1.5 weeksCash at Bank expected as Rs. 25,000.

You may assume the production is carried out evenly throughout the year (52 weeks) and wages and accrue similarly.

All sales are on credit basis only.Add 10% for contingencies.

You may state your assumptions, if any.

ASSUMPTIONS:-(1) All Sales are made on credit.(2) It has been assumed that the material has been introduced at the commencement of the process.(3) All Materials procured on credit basis only. (4) Leg in payment of Wages is 1.5 weeks only, hence it can be ignored(5) Leg in Payment of Overheads is Nil.(6) There is no depreciation charge..(7) No provision is made for Contingency in trade being all Debts are good

Computation of Net Working CapitalNature of Assets and Liabilities Basis of Calculations Amount(A) Current Assets(i) Raw Material Stock Average of 4 Weeks 1,04,000X 80 X 4 = 6,40,000

52(ii) Work in Progress

(a) Raw MaterialAverage of 2 Weeks 1,04,000X 80 X 2 = 3,20,000

52 (b) Direct Labour & Overhead (50% Completion Stage)

Average of 2 Weeks 1,04,000X 45 X 2 = 1,80,00052

(iii) Finished Goods 1,04,000X 170 X 4 =13,60,00052

(iv) Debtors (i.e. credit allowed to Buyers)

Average of 8 Weeks 1,04,000X 200 X 8 = 32,00,00052

(v) Cash at Bank 25,000Total 57,25,000(B) Current LiabilitiesCreditors (i.e. credit allowed by Suppliers / creditors)

Average of 4 Weeks 1,04,000X 80 X 4 = 6,40,00052

NET WORKING CAPITAL (A-B) 50,85,000

From the following particulars relating to ABC Ltd., prepare a statement showing changes in Working Capital alongwith Fund Flow Statement:-

Balance Sheet of ABC Ltd. as on 31st March, 2004 & 2005 is as under:-2004 2005

ASSETS

CURRENT ASSETS (Net) 1,35,000 1,27,000

Land & Building 9,000 9,000Plant & Machinery(Accumulated Depreciation)

81,000 (24,000)

1,05,000 (26,000)

Patents 16,200 12,600TOTAL ASSETS 2,32,200 2,49,200

CURRENT LIABILITIES 24,600 34,80012% Debentures 43,400 014% Debentures 0 39,000Retained Earning 68,200 71,800Equity Share Capital 90,000 1,00,000Reserve for Future Loans on Investments 6,000 3,600TOTAL LIABILITIES 2,32,200 2,49,200

Additional Information:-(a) A Reconciliation of the balances in retained earning is as follow:-

Opening Balance 68,200Net income for the Current Year 3,000Award received from statement of patent infringement case 15,600Dividend paid (15,000)Closing Balance 71,800

(b) Net Income of the year 2005 includes a loss of Rs. 4,800 on the sale of a part of plant. The plant value of Rs. 19,000 at the beginning of the year-accumulated depreciation being Rs. 6,000.

(c) Investments of Rs. 15,000 was sold during the year at a loss. The loss was charged to the Reserve for future losses on investments & did not appear on the Income Statement.

(d) During the current year 12% Debentures were called for redemption. Most of them were refunded through new 14% Debentures & the rest were purchased for cash.

(e) The Equity Shares were issued in exchange of machinery. The rest of Plant & Machinery were purchased for cash

. 31-03-2005 31-03-2004Current Assets Cash & Bank Balance 47,500 49,800S.. Debtors 1,67,800 1,18,300Investments 50,000 1,00,000Stock 90,500 3,55,800 55,600 3,23,700Fixed AssetsLess Deprecation

5,20,0001,40,000 3,80,000

4,80,0001,08,000 3,72,000

Preliminary Expenses 0 0 7,200 7,200TOTAL 7,35,800 7,02,900Current LiabilitiesS Creditors 1,95,300 1,33,650Provisions Proposed Dividend 15,000 28,800Provisions for Taxation 32,000 47,000 50,000 78,800Capital : Equity Shares of Rs. 100 each issued for cash

4,00,000 3,60,000

Reserve 60,000 1,10,000. Surplus 33,450 93,450 20,450 1,30,450

7,35,800 7,02,900

Change in Working Capital Current Assets 3,55,800 3,23,700LESS: Current Liabilities 2,42,350 2,12,450WORKING CAPITAL 1,13,450 1,11,250WORKING CAPITAL as on 31-03-2005 1,13,450WORKING CAPITAL as on 31-03-2004 1,11,250

2,200

Summarized Balance Sheetas on 31-03-2005

as on 31-03-2004

Change in Working Capital

Sources UsageWORKING CAPITAL 1,13,450 1,11,250 0 2,200Fixed Assets (at Cost) 5,20,000 4,80,000 0 40,000Preliminary Expenses 0 7,200 7,200 0

6,33,450 5,98,450Accumulated Depreciation 1,40,000 1,08,000 32,000 0Capital 4,00,000 3,60,000 40,000 0Reserve 60,000 1,10,000 0 50,000. Surplus in P &L A/c 33,450 20,450 13,000 0

6,33,450 5,98,450 92,200 92,000

Fund Flow StatementSources of FundsNet Profit 40,000Preliminary Expenses 7,200Issue of Shares 40,000Sale of Fixed Assets (Machinery) 3,000Depreciation Written Off 8,000Depreciation on Machinery Sold 40,000

1,000 39,000TOTAL 1,37,200Payment of Taxes 56,000Payment of Dividend 10,000profit on sale of MachineryPurchase of Fixed Assets 49,000Decrease in Tax Provisions 18,000Increase in Working Capital 2,200TOTAL 1,37,200

CHAPTER 9Vivek Manufacturing Company manufactures bags that are sold to retailers at Rs. 10 per bag. The Cost particulars are as follow:-Direct Material Cost (one piece @ Rs.1.50 ) 2.50Direct Wages (3 Hours @ Rs.1.00 ) 1.50 Variable Manufacturing Overheads 1.00Variable Selling Overheads 1.50Variable Administrative Overheads 0.50TOTAL 7.00

Fixed Costs are Manufacturing Overheads 4,00,000Selling Overheads 3,00,000Administrative Overheads 2.00.000TOTAL 9,00,000

This year sakes were 3,50,000 units. The company desired to earn a net income of Rs. 6,00,000 before taxes. The firm is evaluating a marketing program designed to achieve the firm’s desired Net Income. The program would increase fixed cost by Rs. 1,45,000 & variable cost by Rs.0.25 per unit.

You are required to:-(1) Calculate the Break Even Point in Units & Rs. Sales.(2) Prepare a detailed Cost-Volume-Profit Chart, carefully labeled, and based on current situation.(3) Compute the Margin of Safety Ratio for the current year.(4) Ignoring the marketing program, compute the sales level that will satisfy Vivek’s net Income

Requirement.(5) Compute the Break Even Point with the new marketing program.(6) If the marketing Program is implemented & sales are precisely enough to achieve the firm’s

minimum net income requirement, what is the margin of safety ratio.

Units Sales 3,50,000 Present Proposed:Per Units (Rs.) Amt. (Rs.) : Amt. (Rs.) Per Units (Rs.)

Sales 10-00 35,00,000 41,82,500 11-95VC 7-00 24,50,000 25,37,500 7.25Contribution 3-00 10,50,000 16,45,,000 4.70FC 2-5714 9,00,000 10,45,000Profit 1,50,000 6,00,000Less Tax 57,750 2,31,000Profit After Tax 92,250 3,69,000

Sales = Selling Price per Unit x Units SoldSales = Variable Cost + Fixed Cost + ProfitVariable Cost (or VC) = Marginal Cost Contribution = Sales – VCContribution = Fixed Cost + ProfitProfit = Contribution – Fixed Cost (FC)Fixed Cost = Contribution - Profit Profit / Volume Ratio (or P / V Ratio) = CONTRIBUTION per unit or Total Contribution Selling Price Per Unit Total Sales In case P / V Ratio is to be expressed as % of Sales the figure can be derived from the formulae as given above should be multiplied by 100. thus

BEP (of output) = Fixed Cost = Rs. 9,00,000 = 3,00,000 Units CONTRIBUTION per unit Rs. 3

BEP (of output) = Fixed Cost X Selling Price per Unit = Rs. 9,00,000 x Rs. 3 = Rs. 30,00,000 CONTRIBUTION per unit Rs. 3

or = Fixed Cost x Total Sales Rs. 9,00,000 x Rs. 35,00,000 = Rs. 30,00,000 Total Contribution Rs. 10,50,000

or Fixed Cost = Rs. 9,00,000= Rs. 9,00,000 = Rs. 30,00,000 (Here P / V Ratio = Contribution / Sales = 3/10)

1 – Variable cost per Unit =1 – 7 (or 0.3)Selling Price per Unit 10-00At BEP, the desired profit is zero, in case of volume of output of sales is to be computed for a desired

profit, the amount of desired profit should be added to the fixed cost in the formula given above, hence Unit sales for desired profit = Fixed Cost + desired profit = Rs. 16,45,000 = 2,13,637 Units

Contribution per unit Rs. 7.7

or Fixed Cost + desired profit = or Fixed Cost + desired profit =Rs. 16,45,000 = Rs. 25,52,960

1 – Variable cost per Unit P / V Ratio (0.6443) (Here P / V Ratio = Contribution / Sales = 7.70/11.95=0.6443)

Selling Price per Unit======================================================================

A MNC soft drink company is planning to establish a subsidiary in India to produce mineral water. Based on the estimated annual sales of 40,000 bottles mineral water, cost studies shows the following estimates for the Indian Subsidiary:-

Heads of Expenditure Total Annual Cost %age of Total Annual Cost which is

variable Material 2,10,000 100%Labour 1,50,000 80%Factory Overheads 92,000 60%Administrative Expenses 40,000 35%

The Indian production will be sold by the manufacturer’s representatives who will receive a commission of 8% of the sale price.

You are required to:-a. Compute the sale price per bottle to enable the management to realize an estimated

10% profit of the sale proceeds in India.b. Calculate the Break Even Point in Rs. Sales as also in numbers of bottles for the Indian subsidiary on the assumption that the sale price is Rs. 14 per Bottles.

FROM THE GIVEN DATA estimated cost sheet is as underTotal cost for 40,0000 units (Rs,) Per Unit cost (Rs,)

VARIABLE COSTMaterialLabour Factory OverheadsAdministrative ExpensesTOTAL VARIABLE COST

2,10,0003,21,000

50,60014,000

3,94,600

5.253.00

1.2650.35

9.865FIXED COSTLabour Factory OverheadsAdministrative ExpensesTOTAL FIXED COST

30,00041,40026,00097,400

0.751.0350.65

2.435TOTAL COST 4,92,000 12.300Sales Rs. 6,00,000 Rs 15/- per BottleContribution Rs. 6,00,000 - Rs. 4,92,000 =

Rs. 1,08,000Rs 15/- Rs 12.30 =

Rs 2.70

Or Sales = Rs.100 = I f 82% of Sales = Rs. 4,92,000Less Commission = Rs. 8 = Profit = Rs. 10= therefore, Total COST = Rs. 82= therefore, Sales for 40000 bottles = Rs. 4,92,000 X 100 = Rs. 6,00,000

82= therefore, Selling price per bottle = Rs. 6,00,000 = Rs 15/- per Bottle.

40000 bottles Sales - VC - FC = Net IncomeUnit Contribution Margin to Cover FC = FC Contribution per Unit

Unit Contribution Margin to Cover FC + Desired Income = Sale Price – VCContribution per UnitBEP Sales (Units) = FC = Rs. 4,92,000 = = 18222.22 or 18223 units

Contribution per Unit Rs. 2.70

BEP Sales with Desired Income (Units) = FC + Desired Income = Rs. 4,92,000 + Rs.1,08,000 = Rs. 6,00,000 = 22222.22 or 22223

Contribution per Unit Rs. 2.70 Rs. 2.70 units

Units Sales 40,000Present

Proposed

Amt. (Rs.) Per Units (Rs.) %age Per Units (Rs.)

Sales 5,40,000 13-50 6,00,000 15-00 14-00VCMaterial LabourFactory OverheadAdministrative ExpensesTotal Variable Cost

2,10,0001,20,000

50,60014,000

3,94,600

5.253.001.2650.35

9.865

2,10,0001,20,000

50,60014,000

3,94,600

5.253.001.2650.35

9.865 9.865Contribution 1,45,400 3.635 2,05,400 5.135 4.135FCLabourFactory OverheadAdministrative ExpensesTotal Fixed Cost

30,00041,40026,00097,400

0.751.0350.65

2.435

30,00041,40026,00097,400

0.751.0350.65

2.435 2.435Profit 48,400 1.20 2.70 1.70

Sales = Selling Price per Unit x Units SoldSales = Variable Cost + Fixed Cost + ProfitVariable Cost (or VC) = Marginal Cost Contribution = Sales – VCContribution = Fixed Cost + ProfitProfit = Contribution – Fixed Cost (FC)Fixed Cost = Contribution - ProfitSales – (Variable Cost + Fixed Cost) = Profit or Sales = Variable Cost + Fixed Cost + ProfitTherefore unit Contribution Margin to cover FC + Desired Income = unit sale price – unit VC, Thus

From the cost worked out in Column No. 1 & 2 of the above table, if Sales = 100%- Profit 10%

Commission = 8% 18%Total Cost = 82%

If 82% of sales = Rs. 4,92,000 then Total Sales for 40,000 units = Rs. 4,92,000 X 100 / 82 = Rs. 6,00,000 then Selling Price per unit = Rs. 6,00,000 / 40,000 units = Rs. 15.00 (as worked out in Column No. 3 & 4) & proposed Selling Price per unit = Rs. 15.00 – 1-00 = Rs. 14.00 (as worked out in Column No. 5)

-Profit / Volume Ratio (or P / V Ratio) = CONTRIBUTION per unit or Total Contribution Selling Price Per Unit Total Sales In case P / V Ratio is to be expressed as % of Sales the figure can be derived from the formulae as given above should be multiplied by 100. thus

BEP (of output) (as worked out in Column No. 3 & 4) = Fixed Cost + Desired Profit = Rs. 4,92,000 + 1,08,000 = Rs 6,00,000 = 22,223 Units

CONTRIBUTION per unit Rs. 2.70 Rs. 2.70

BEP (of output) (as worked out in Column No. 5)= Fixed Cost + Desired Profit = Rs. 4,92,000 + 1,08,000 = Rs 6,00,000 = 35,295 Units

CONTRIBUTION per unit Rs. 1.70 Rs. 1.70

At BEP, the desired profit is zero, in case of volume of output of sales is to be computed for a desired profit, the amount of desired profit should be added to the fixed cost in the formula given above, hence

Unit sales for desired profit = Fixed Cost + desired profit = Rs. 16,45,000 = 2,13,637 Units

The following data are obtained from the records of a factory:-

Sales 4,000 units @ Rs. 25 each Rs. 1,00,000Material consumed Rs. 40,000Variable Overheads Rs. 10,000 Labour Charges Rs. 20,000 Fixed Overhead Rs. 18,000 Rs. 88,000 Net Profit Rs. 12,000

You are required to calculate:-(a) The number of units the company should sell so that there is neither any loss nor any profit.(b) The sales needed to earn a profit of 20% on sales.(c) The extra units which should be sold to obtained the present profit if it is proposed to reduced

the selling price by 20% to 25%.(d) The Selling Price to be fixed to bring down its break even point to 500 units under the

present conditions.(e) Fixed Assets costing Rs. 400000, accumulated depreciation Rs. 300000 were sole for Rs.

150000.(f) Actual Tax liability for the PY year was Rs. 500000.(g) Loans represent Long Term Loans given to Group Companies. (h) Interest on Loan Funds for the PY year was 14,21`,000 & dividend income were Rs. 402,000.

From the given data For 4,000 Unit Total Per Unit Proposed Decrease20% of present SP 25% of present SP

Sales 1,00,000 25.00 80,000 75,000Variable Cost Material 40,000 10.00 Labour 10,000 2.50 Variable OH 20,000 70,000 5.00 17.50 70,000 70,000Contribution 30,000 7.50 10,000 5,000Fixed Cost 18,000 4.50 18,000 18,000Profit 12,000 3.00 -28,000 -23,000

(a) BEP (i) In terms of Sales (Revenue)BEP = Fixed Cost X Sales = Rs.18,000 X 1,00,000 = Rs. 60,00,000 Contribution 30,000

(ii) In terms of UnitsBEP = Fixed Cost = Rs. 18,000 X 1,00,000 = 2,400 units Contribution per Unit Rs. 7.50

(b) if selling price per unit = Rs.25/- therefore 20% of this SP = Rs.5/-. But from given data it is Rs. 3/- BEP = Fixed Cost = Rs. 18,000 = 7,200 units Contribution per Unit Rs. 2.50

Given Total Per Unit Per UnitAs per above calculations Units Sold 4000 7,200Profit 12,000 3.00 36,000 5.00Variable Cost 70,000 17.50 1,26,000 17.50

82,000 20.50 1,62,000 22.50Fixed Cost 18,000 4.50 18,000 2.50Sales 1,00,000 25.00 1,80,000 25.00

(c ) (i) No. of Units sold = Fixed Cost + Desired Profit = Rs. 18,000 + 12,000 = 12,000 units Contribution per Unit Rs. 2.50

(ii) No. of Units sold = Fixed Cost + Desired Profit = Rs. 18,000 + 12,000 = 24,000 units Contribution per Unit Rs. 1.25

(d) Proposed Selling = Contribution = Fixed Cost + Desired Profit = Rs. 18,000 + 12,000 = Rs. 60.00 Proposed No. of Units Proposed No. of Units 500

CHAPTER 10You are required to calculate overheads variances when:- (a) Standard Overhead rate Per Hour is used(b) Standard Overhead rate Per Unit is usedBUDGETED ACTUALProduction in units 12,500 11,000Man Hours 6,250 5,750OVERHEAD COST:Fixed 12,500 13,000Variables 50,000 45,000

Overhead Cost Variance!

VOH Cost Variance FOH Cost Variance! ! !!VOH VOH FOHFOH

Expenditure Variance Efficiency Variance Expenditure Variance Expenditure Variance

! !

FOH Exp FOH Capacity Variance

Variance

Variable Total OHCV (When Standard Overhead Rate per Hour is used):-Standard Fixed OH Rate per hour = Budgeted FOH = Rs. 12,500 = Rs. 2 per HourBudgeted Hours 6,250 hours

Standard Variable OH Rate per hour = Budgeted VOH = Rs. 50,000 = Rs. 8 per HourBudgeted Hours 6,250 hours Total Standard OH Rate per hour = Budgeted FOH = Rs. 62,500 = Rs. 10 per HourBudgeted Hours 6,250 hours

Variable Total OHCV (When Standard Overhead Rate per Unit is used):-= VOHCV + FOHCV

Standard Fixed OH Rate per hour = Budgeted FOH = Rs. 12,500 = Rs. 2 per HourBudgeted units 12,500 Units

Standard Variable OH Rate per hour = Budgeted VOH = Rs. 50,000 = Rs. 4 per UnitsBudgeted units 12,500 Units

Total Standard OH Rate per hour = Budgeted FOH = Rs 62,500 = Rs. 5 per Units HourBudgeted units 12,500 Units

Total OHCV (When Standard Overhead Rate per Hour is used):-= Recovered OH - Actual OH = (Actual Units X Actual Rate) – Actual OH= ( 11,000 X 5) - 58,000 = 55,000 - 58,000 = (- 3,000)

Variable OHCV = Recovered VOH - Actual VOH = (Actual Units X Actual Rate) – Actual OH= ( 11,000 X 4) - 45,000 = 44,000 - 45,000 = (- 1,000)

Fixed OHCV = Recovered FOH - Actual FOH= (Actual Units X Actual Rate) – Actual OH= ( 11,000 X 1) - 13,000 = 11,000 - 13,000 = (- 2,000)

Verification:- Total OHCV = Variable OHCV - Fixed OHCV = (- 3,000) = (- 1,000) + (- 2,000)

Total OHCV (When Standard Overhead Rate per Unit is used):-= Recovered OH - Actual OH = (Actual Units X Actual Rate) – Actual OH= (5,750 X 10) - 58,000 = 57,500 - 58,000 = (- 500)

Variable OHCV = Recovered VOH - Actual VOH = (Actual Units X Actual Rate) – Actual OH= ( 5,750 X 8) - 45,000 = 46,000 - 45,000 = ( 1,000)

Fixed OHCV = Recovered FOH - Actual FOH= (Actual Units X Actual Rate) – Actual OH= (5,750 X 2) - 13,000 - = 11,500 - 13,000 = (-1,500)

Verification:- Total OHCV = Variable OHCV - Fixed OHCV = (- 500) = ( 1,000) + (- 1,500)

CHAPTER 13

XYZ Ltd. has a debt of Rs. 45,00,000 @9% & Equity of Rs. 55,00,000. This firm has sales of Rs. 75,00,000. Variable Cost of Rs. 42,00,000 and Fixed Cost of Rs. 6,00.000.

(i) What is the firm Return on Investment (ROI)?(ii) Does it have favourable Financial Leverage?(iii) If the firm belongs to an industry whose assets turnover ratio is 3, does it have a high ore low

assts leverage?(iv) What are the Operating Financial & Combined Leverage of the firm?(v) If the sales drop to Rs. 50,00,000what will be the new EBIT?

LIABILITIES ASSETSEquity Share Capital 55,00,000

Debt Capital (@ 9% Interest) 45,00,000

TOTAL 1,00,00,000 TOTAL 1,00,00,000

As per given data Statement of Cost & Profits and their distribution is as under:-Sales Given

RS. 50,00,000If sales dropped to

RS. 50,00,000Sales S 75,00,000 50,00,000Less VC VC 42,00,000 28,00,000Contribution Con. 33,00,000 22,00,000Fixed Costs FC 6,00,000 6,00,000Profit PBIT 27,00,000 16,00,000Less Interest @ 9% I 2,43,000 2,43,000Profit Before Tax PBT 24,57,00,000 13,57,00,000Less Tax say @ 38.5% T 9,45,950 5,22,450Profit after Tax PAT 15,11,650 8,34,450

Return on Equity = PAT/ Equity Capital   61.50% 15.17%

FINANCIAL LEVERAGE & EQUITY RETURNS

CAPITAL STRUCTURE

DEBT ZeroEquity Rs. 1 crore

DEBT 45 LakhEquity Rs. 55 Lakh

DEBT 75Lakh Equity Rs.25 Lakh

Profit PBIT 27,00,000 27,00,000 27,00,000Less Interest @ 9% I 0 2,43,000 6,75,000Profit Before Tax PBT 27,00,000 24,57,000 21,25,,000Less Tax say @ 38.5% T 10,39,500 9,45,950 8,18,125Profit after Tax PAT 16,50,500 15,11,050

Return on Equity = PAT/ Equity Capital  

21.607% 24.47% 23.761%

Since under Debt Equity in 45:55 Ratio, Return on Equity is highest, we may continue with existing system being favourable because in changed scenario to existing Debt Equity Ratio leads to reduction in Return on Equity. Based on Assets Turnover Ratio 3, the required sales should be Rs. 1 crore x 3 = Rs. 3 crore. Whereas it is on Rs. 75 Lakh which will be only 25% of the industry’s average, hence is not acceptable being unsatisfactory

FINANCIAL LEVERAGE = Operating Profit = EBIT = 27,00,000 = 1.0989 Profit before Tax EBT 24,57,000

OPERATING LEVERAGE= Contribution = C = 33 ,00,000 = 1.2222 Operating Profit = EBIT 27,00,000

COMBINED LEVERAGE= Operating Profit x Contribution = EBIT x C Profit before Tax X Operating Profit EBT EBIT = 27,00,000 X 33 ,00,000 = 33 ,00,000 = 1.34307 or1.3431

24,57,000 X 27,00,000 24,57,000

CHAPTER 15

You are a Financial Analyst for Susan Electronics Company. The Director of Capital Budgeting has asked you to analyze two proposed capital investments Projects P & Q. Each project has a cost of Rs. 10,000 & cost of the capital for each project is 12%. The projects expected net cash flow are as under:-Expected Net Cash Flow (Rs.)

Year Project P Project Q0 10,000 10,0001 6,500 3,5002 3,000 3,5003 3,000 3,5004 1,000 3,500(i) Calculate each project’s Pay Back Period, Net Present Value (NPV) Internal Rate of Return (IRR).(ii) Which project or projects should be accepted if they are independent?(iii) Which project or projects should be accepted if they are mutually exclusive?(i) How might a change in cost of capitals produce a conflict between the NPV &

IRR rankings of these two projects? Would this conflict exist if k were 5% (HINT:- plot the NPV Profits ).

PAY BACK PERIOD  Project P Project QYear Cash Flow Cumulative Cash Flow Cash Flow Cumulative Cash Flow

0 10,000 (-10,000) 10,000 (-10,000)

1 6,500 -3,500 3,500 -3,5002 3,000 -500 3,500 -3,0003 3,000* 2,500 3,500* 5004 1,000 3,500 3,500 4,000

For balanced Recovery period in third year, for both the project worked out as under:-*Project P = 500/ 3000 = 1/6 year & *Project Q = 3000 / 3500 = 6/7 yearHence, from the above calculations, the Pay Back Period for Project P is = 2 years + 1/6 year or 2 + 0.167 year = 2.167 year whereas for Project Q it is = 2 years + 6/7 year or 2 + 0.86 year = 2.86 yearNET PRESENT VALUE (@ 10% Rate of Interest):-

 Year

Project P Project QCash Flow

Present Value of Cash Flow

Present Value

Cash Flow

Present Value of Cash Flow

Present Value

0 -10,000 0 0 -10,000 0 0.01 6,500 0.909 5,908.5 3,500 0.909 3,181.52 3,000 0.826 2478.0 3,500 0.826 2,891.03 3,000 0.751 2,253.0 3,500 0.751 2,685.54 1,000 0.683 683.0 3,500 0.683 2,390.5

Total of Present Value 11322.5     11091.5Initial Outlays 10000     10000

Net present Vlue 1322.5     1091.5Hence, from the above calculations, the Net Present Value for Project P is higher hence Project P is proffered.

  Project P Project Q

Year

discount Factor @15%

discount Factor @16%

Cash Flow

Present Value @15%

Present Value @16%

Cash Flow

Present Value @15%

Present Value @16%

0 -1 -1 -10,000 -10000 -10000 -10,000 -10000 -10000

1 0.870 0.909 6,500  5655  5908.5 3,500 3045  5655

2 0.756 0.826 3,000  2268  2478.0 3,500 2646  2268

3 0.658 0.751 3,000  1974  2253.0 3,500 2303  1974

4 0.572 0.683 1,000  572 683.0 3,500 2002  572 Total of Present Value= 10,469  11322.5    9996  11,092 Initial Outlays= -10000  -10000    -10000  -10000 Net present Value = 469   1322.5    -4   1,092

Hence, from the above calculations, the Net Present Value for Project P is higher hence Project P is proffered.

NPV (@ 5% Rate of Interest) Year

Project P Project QCash Flow

Present Value factor of Cash Flow @ 5% interest

Present Value

Cash Flow

Present Value factor of Cash Flow@ 5% interest

Present Value

0 -10,000 1.0000 -10000 -10,000 1.0000 -100001 6,500 0.952 6188 3,500 0.952 3332.02 3,000 0.907 2721 3,500 0.907 3174.53 3,000 0.864 2592 3,500 0.864 3024.04 1,000 0.823 823 3,500 0.823 2880.5

Total of Present Value  12324   12,4 11 Initial Outlays  -10000    -10000 Net present Value   2324      2,411

Hence, from the above calculations, the Net Present Value for Project Q is higher hence Project Q is proffered.