Project Financial Appraisal - Numericals

8/12/2019 Project Financial Appraisal - Numericals

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Project Financial Appraisal

1. M/s National Electronics Ltd; an electronic goods manufacturing co manufactures, large range of electronic goods. Ithas under consideration two projects X and Y, each costing Rs. 120 lakhs. The projects are mutually exclusive andthe company is considering selecting one of the two projects.

Cash flows have been worked out for both the projects and the details are given in table. Project X has life of 8 yearsand Project Y has life of 6 years. Both have zero salvage value at the end of their operational lives. The company isalready making profits and its tax rate is 50%. The cost of capital of the company is 15%

Year Net Cash inflow at the end of YearProject X Project Y

1 25 402 35 603 45 804 65 505 65 306 55 207 35 --8 15 --The company follows straight line method for depreciating its assets. Advise the company regarding the selection ofthe project.

2. Calculate the NPV of the following investment proposals and decide on the acceptance and rejection of theseproposals . Discount rate is 10%

Proposal Investment (Rs)Cash Inflows (Rs.)Year 1 Year 2 Year 3 Year 4

A 20,000 8,000 8,000 8,000 8,000B 20,000 6,000 8,000 10,000 10,000C 20,000 4,000 8,000 10,000 10,000D 20,000 10,000 10,000 10,000 5,000Also calculate the Internal Rate of return of these proposals.

3. A company has to select between two investment opportunities A and B, both of which require an initial investmentof Rs. 25,000/-. The expected net returns and cash flows for each of the investment options is given below:

Year Investment A Investment B1 Rs. 8,000 Rs. 6,5002 Rs. 6,000 Rs. 8,5003 Rs. 5,000 Rs. 6,0004 Rs. 6,000 Rs. 5,0005 Rs. 5,000 Rs. 4,000The cost of capital is 10%. Calculate the NPV for each investment option. If NPV is the basis for selecting theinvestment options, which option is preferable?


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4. A company is planning to buy a new machine and has received two competitive offers. Both the machines have thesame manufacturing capacity but differ in their initial price and operating costs. The details of both the offers aregiven in table. marginal cost of capital for company is 12%, recommend which machine the company can purchase.

Life InitialCost

Estimated operating and maintenance costsYr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10

M/c A 6 yrs 500 80 100 120 150 150 150 -- -- -- --M/c B 10 yrs 700 90 120 150 150 150 150 175 175 175 175

5. A company with 10% cost of funds and limited investment of Rs. 160 lakhs is evaluating the desirability of severalinvestment proposals:Project Initial investment

(Rs. Lakhs)Life e(Years) Annual Cash Flow

(Rs. Lakhs)P 120 5 30Q 80 3 32R 80 4 25S 40 7 8T 120 9 15

a. Rank the projects according to Profitability index and NPV methodsb. Determine optimal invest package

6. Compute the IRR from the following dataYear 0 1 2 3 4 5Cash inflow (Rs.) -- 5,000 4,000 3,000 2,000 1,000Cash Outflow Rs Rs. 10,000

7. A company is considering investing surplus funds in a project. Four projects are being considered. The projected cashflow for the projects are given below. Based on NPV and PI criteria rank the projects. Based on profitability indexcriteria which project will you recommend for execution? Assume discount rate of 8%.

Year Year 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6Project A (400) 100 100 100 100 100 100Project B (600) 120 120 100 180 180 160Project C (400) 160 140 100 180 60 40Project D (640) 400 100 120 0 0 200

8. ABC Ltd; is contemplating three projects. The expected cash flows (in Rs.) are as follows:

Year Project A Project B Project C0 (100,000) (100,000) (100,000)1 50,000 10,000 10,0002 50,000 10,000 50,0003 10,000 50,000 40,0004 10,000 30,000 70,0005 10,000 100,000 10,000

a. Determine for each projecti. Payback


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ii. IRR (approx)iii. NPV assuming the Cost of capital is 10%

b. Rank the projects by payback, NPV and IRR methods of capital budgeting

9. Your company is considering two mutually exclusive projects A and B. Project A involves an outlay of Rs. 100 millionand will generate an expected cash inflow of Rs. 25 million per year for 6 years. Project B calls for an outlay of Rs. 50million which will produce an expected cash inflow of Rs. 13 million per year for 6 years. The companys cost of

capital is 12%. Suggest with appropriate reasons your choice of the project.

10. A company with a cost of capital of 12% is considering two projects X and Y. The details pertaining to them are givenbelow:Particulars Project X Project YInitial Investment 1,500,000 1,500,000Cash Inflows Year 1 200,000 1,000,000Cash Inflows Year 2 400,000 800,000Cash Inflows Year 3 600,000 400,000Cash Inflows Year 4 1,100,000 200,000Cash Inflows Year 5 1,100,000 200,000Select the most appropriate project based on Payback period, ARR, Discounted payback period, NPV, IRR and PImethods

Cash Flow ProblemsExample 1:

A company is considering a capital project about which the following information is available:a. Investment outlay on project is Rs. 600 lakhs. This consists of Rs. 400 lakhs on Plant & machinery and Rs. 200

lakhs on net working capital. Enitre outlay will be incurred beginning of the project.

b. Expected life of project is 5 years, salvage value of fixed assets is Rs. 196 lakhs as net working capital will beliquidated at book value.

c. The project expected to increase revenue of firm by Rs 540 lakhs per year. (includes all cost items apart fromdepreciation, interest and tax). Tax rate is 25%. The expense per annum is estimated @ Rs 350 lakhs pa.

d. Plant and machinery will be depreciated @ 20% per year as per WDV.e. Cost of capital is 10%

Using NPV method, determine whether the company should undertake the above proposal or not.

Example2:A company is considering a capital project about which the following information is available:

a. Investment outlay on project is Rs. 200 million. That consists of Rs. 150 million on Plant & machinery and Rs. 50million on net working capital. Entire outlay will be incurred beginning of the project.

b. Expected life of project is 5 years, salvage value of fixed assets is Rs. 48 million whereas the net working capitalwill be liquidated at book value.


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c. The project expected to increase revenue of firm by Rs 250 million per year. The increase in costs on account ofthe project is expected to be Rs. 100 million per year. (includes all cost items apart from depreciation, interestand tax). Tax rate is 30%.

d. Plant and machinery will be depreciated @ 25% per year as per WDV method.e. Estimate the post tax cash flows of the project, assuming cost of capital is 12% and determine whether the

company should undertake the above proposal or not.

Example 3:XYZ Enterprises is contemplating a new investment project for which they are considering the following information:Total Cash outflow for the project will be 10 crores, which consists of Rs. 6 crores on plant and machinery and Rs. 4crores on gross working capital. The entire outflow will be incurred at the beginning of the project.Project has a life of 5 years at the end of 5 years, plant and equipment would fetch a salvage value of Rs. 2 crores.Working capital will be liquidated at end of 5 years which will be equal to its book value (4 crores).The project will entail increment revenues for the firm to the tune of Rs. 8 crores per annum, the incrementalexpenses on account of the project will be 4 crores per annum, which includes all items of expenses excludingdepreciation and taxes.The effective tax rate is 50%

Cost of Capital is 14%Depreciation is charged at 33.33 % on the basis of Written Down methodHelp the enterprise, whether it should undertake the project or not on the basis of NPV criterion.

Example 4:

A company is considering a proposal to install new equipment. The equipment would involve a cash outlay of Rs. 40lakhs and an additional working capital of Rs. 2.4 lakhs. The expected life of the project is 5 years with a salvagevalue of Rs. 2.8 lakhs. The company charges depreciation on a written down value method at the rate of 25% perannum. The cost of capital is 12%. The income tax rate is 40%.

The project is expected to generate revenue of Rs. 32 lakhs in the first year and it will increase by 15% every year onits previous years value. The aggregate cost for the first year is Rs. 18 lakhs excluding depreciation and tax. It willincrease by Rs. 3 lakhs every year. The working capital will be liquidated by the end of the life of the project.Using the above information, develop the cash flow statement, develop the cash flow for the proposal and using theNPV method, determine whether the proposal should be undertaken or not.

Example 5:

A company is considering a capital project for which the following information is available.The initial outlay of the project would be Rs. 50 Lakhs with salvage value of Rs. 5 lakhs

The cost of capital is 12%The working capital required would be Rs. 4 lakhs which will be liquidated at the book value when the project isterminated.The life of the project is 6 yearsThe yearly cost is Rs. 12 lakhs which excludes depreciation and taxThe revenue generated in the first year is Rs. 24 lakhs which will increase by Rs. 4 lakhs every yearThe depreciation will be charged on the written down value method and the rate is 25%The income tax rate is 40%


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Using the above information, develop the cash flow for the project and using the NPV method, determine whetherthe project should be considered or not.

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Project Financial Appraisal - Numericals