Financial ManagementQuestion 5548 of 217
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1. What is the Profit before Taxes for the Year 2, Year 3 and Year 4 of the investment proposal ?

Options

A` 2,35,000, ` 4,40,000, ` 4,01,000
B` 1,45,000, ` 3,50,000, ` 3,11,000
C` 2,05,000, ` 4,10,000, ` 3,66,000
D` 1,40,000, ` 3,60,000, ` 3,31,000
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Correct Answer

✅ Option B — ` 1,45,000, ` 3,50,000, ` 3,11,000

All Options:

  • A` 2,35,000, ` 4,40,000, ` 4,01,000
  • B` 1,45,000, ` 3,50,000, ` 3,11,000 ✓
  • C` 2,05,000, ` 4,10,000, ` 3,66,000
  • D` 1,40,000, ` 3,60,000, ` 3,31,000

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Detailed Solution & Explanation

Correct Answer: Option **B** Explanation: To find the Profit before Taxes (PBT) for Year 2, Year 3, and Year 4, we must calculate the additional sales, variable costs, additional fixed costs, depreciation, and savings for each year from the case scenario details.
**1. Annual Depreciation:**
The cost of acquisition of the automated machine is ‘5,00,000\displaystyle ` 5,00,000, and its residual value at the end of Year 5 is ‘50,000\displaystyle ` 50,000. Under the Straight-Line Method (SLM), the annual depreciation is calculated as:
textAnnualDepreciation=fractextCostofAcquisition−textResidualValuetextUsefulLife\\text{Annual Depreciation} = \\frac{\\text{Cost of Acquisition} - \\text{Residual Value}}{\\text{Useful Life}}
textAnnualDepreciation=frac5,00,000−50,0005=90,000textperannum\\text{Annual Depreciation} = \\frac{5,00,000 - 50,000}{5} = 90,000\\text{ per annum}
**2. Calculation of Profit Before Taxes (PBT) for Year 2, Year 3, and Year 4:**
We use the formula:
textPBT=textSales−textVariableCost−textAdditionalFixedCost+textCostSavingsfromBreakages−textDepreciation\\text{PBT} = \\text{Sales} - \\text{Variable Cost} - \\text{Additional Fixed Cost} + \\text{Cost Savings from Breakages} - \\text{Depreciation}
* **For Year 2:**
* Additional Sales Units = 25,000\displaystyle 25,000 units
* Selling Price = ‘30\displaystyle ` 30 per unit
* Sales Revenue = 25,000times30=‘7,50,000\displaystyle 25,000 \\times 30 = ` 7,50,000
* Variable Cost = 25,000times20=‘5,00,000\displaystyle 25,000 \\times 20 = ` 5,00,000
* Additional Fixed Cost = ‘30,000\displaystyle ` 30,000
* Savings in breakages = ‘15,000\displaystyle ` 15,000
* Depreciation = ‘90,000\displaystyle ` 90,000
* textPBTtextYear2=(7,50,000−5,00,000)−30,000+15,000−90,000\\text{PBT}_{\\text{Year 2}} = (7,50,000 - 5,00,000) - 30,000 + 15,000 - 90,000
* textPBTtextYear2=2,50,000−30,000+15,000−90,000=1,45,000\\text{PBT}_{\\text{Year 2}} = 2,50,000 - 30,000 + 15,000 - 90,000 = 1,45,000
* **For Year 3:**
* Additional Sales Units = 30,000\displaystyle 30,000 units
* Selling Price = ‘35\displaystyle ` 35 per unit
* Sales Revenue = 30,000times35=‘10,50,000\displaystyle 30,000 \\times 35 = ` 10,50,000
* Variable Cost = 30,000times20=‘6,00,000\displaystyle 30,000 \\times 20 = ` 6,00,000
* Additional Fixed Cost = ‘30,000\displaystyle ` 30,000
* Savings in breakages = ‘20,000\displaystyle ` 20,000
* Depreciation = ‘90,000\displaystyle ` 90,000
* textPBTtextYear3=(10,50,000−6,00,000)−30,000+20,000−90,000\\text{PBT}_{\\text{Year 3}} = (10,50,000 - 6,00,000) - 30,000 + 20,000 - 90,000
* textPBTtextYear3=4,50,000−30,000+20,000−90,000=3,50,000\\text{PBT}_{\\text{Year 3}} = 4,50,000 - 30,000 + 20,000 - 90,000 = 3,50,000
* **For Year 4:**
* Additional Sales Units = 32,000\displaystyle 32,000 units
* Selling Price = ‘35\displaystyle ` 35 per unit
* Sales Revenue = 32,000times35=‘11,20,000\displaystyle 32,000 \\times 35 = ` 11,20,000
* Variable Cost = 32,000times22=‘7,04,000\displaystyle 32,000 \\times 22 = ` 7,04,000
* Additional Fixed Cost = ‘35,000\displaystyle ` 35,000
* Savings in breakages = ‘20,000\displaystyle ` 20,000
* Depreciation = ‘90,000\displaystyle ` 90,000
* textPBTtextYear4=(11,20,000−7,04,000)−35,000+20,000−90,000\\text{PBT}_{\\text{Year 4}} = (11,20,000 - 7,04,000) - 35,000 + 20,000 - 90,000
* textPBTtextYear4=4,16,000−35,000+20,000−90,000=3,11,000\\text{PBT}_{\\text{Year 4}} = 4,16,000 - 35,000 + 20,000 - 90,000 = 3,11,000
Therefore, the Profit before Taxes (PBT) for Year 2, Year 3, and Year 4 are ‘1,45,000\displaystyle ` 1,45,000, ‘3,50,000\displaystyle ` 3,50,000, and ‘3,11,000\displaystyle ` 3,11,000 respectively.
Hence, **Option B** is the correct answer.

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