Question 1 OR (b)
Yearly cash flow of a plant after tax
7 marks
- Time to write
- About 14 minutes
From an older CBCS paper
Question
Question 1 OR (b) · 7 marksThe plant's cost is ₹12 Lacs. Its estimated life is 5 Years, and it would then be disposed off (Scrap Value – Nil). The estimated Profit before Depreciation, Interest, and Taxes (PBIT) is ₹4.20 Lacs p.a. With the tax rate @ 30%, find out the plant's yearly cash flow.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- estimatedFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
The abbreviation "PBIT" is printed against the words "Profit before Depreciation, Interest, and Taxes"; the answer follows the words (profit before depreciation, interest and tax), with straight-line depreciation over 5 years and no interest given. "Disposed off" is kept as printed.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Reading and depreciation 2 marks 4 min
- 2 Profit after tax 2½ marks 4 min
- 3 Cash flow, with check 2½ marks 4 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 14 minutes for 7 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Reading (paper note): the ₹4.20 lakh is profit before depreciation, interest and tax, as the words say; no interest is given. Depreciation is straight line: 12,00,000 ÷ 5 = ₹2,40,000 a year (scrap nil). Depreciation is a non-cash charge: it reduces taxable profit, and is added back to profit after tax to give the cash flow.
| Particulars | ₹ |
|---|---|
| Profit before depreciation, interest and tax | 4,20,000 |
| Less: depreciation | 2,40,000 |
| Profit before tax | 1,80,000 |
| Less: tax @ 30% | 54,000 |
| Profit after tax | 1,26,000 |
| Add: depreciation | 2,40,000 |
| Yearly cash flow after tax | 3,66,000 |
Check: cash flow = profit before depreciation and tax − tax = 4,20,000 − 54,000 = ₹3,66,000. Cash flows, not accounting profit, are what capital budgeting uses.
Where the 7 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Reading and depreciation | 2 |
| 2 | Profit after tax | 2.5 |
| 3 | Cash flow, with check | 2.5 |
| Total | 7 |
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