Question

Calculate (i)Cost of Production and Profitability Statement .(ii) Cash flow Statement.(iii)Calculate the cost of Capital; (iv) NPV of the Project;(v)DSCR.

Zinc Unit Installed Capacity    First Year Second Year    Third Year…
   Tonnes    1000000 750000 800000    1000000

SRevenue Projection : Zinc is expected to be sold at Rs per ton Rs2.1 lakh.

Cost of the Project: The cost of the project works out as below:
a) Fixed Assets or Long Term Loan: Rs 3145 crores
b) Working Capital : The working capital requirements were Rs 431 crores at 75% capacity; Rs 459.73 crores at 80% capacity and Rs 574.67 crores at full capacity utilization. Interest rate for working capital were @12.5 %.
Means of Financing: The project would be financed by equity of Rs 942 crores and rest by term loan financing amounting to Rs 2203 crores . Interest on term loan was @11.50 %. The company’s share is listed in NSE . The risk-free rate of return is 8.00% assumed by the company and the market rate of return is 18%. The Beta of the company, as reported in the pink press was 1.17. Marginal tax rate of the company is @ 27 %. The project does not enjoy any tax exemption. It is expected the project will be implemented in an years time.

Life of the Project : For all estimation purposes life of the project would be 8 (eight) years. The project enjoys 2 (two)years moratorium in terms of repayment of instalment payment .

In rest of the six years, instalments of the principal will be paid uniformly. However interest payment will be from the first year of operation.

Salvage Value of the Project : Rs 310.

Manpower of the Project: Since company is already running a plant of similar type and of bigger capacity , the company is confident to draw competent human resources required for the project.

Availability of Raw Material : The company is in possession of mine rights of Zinc Mine , there will be no difficulty to obtain needed raw material .

Technology and Process Knowhow :The company will be using Bayer–Hall-Herout commercial technology, for the production of Zinc.

Fuel Usage: To ensure reliable low-cost power for the units operations and to achieve self-sufficiency of energy needs, the company proposes to set up captive power plants (CPPs) to cater to the power requirements of its smelters and mines. Besides a large part of coal for the CPPs is high GCV imported coal. The price of coal since remains to be volatile the company is examining critically ,setting up installed thermal captive power plants (CPPs). As of now it would buy power from outside.

Risk Analysis- an indicative list only :(a)Changes in the market prices of Zinc, could adversely affect the results of operations;(b)Operating results are affected by movements in exchange rates; (c) The company’s energy requirements are met by power supply of electricity boards , any changes in the state government’s policy could increase production costs. (d) The company has to obtain a steady supply of Zinc ore at reasonable costs otherwise results of operations may be affected.

Domestic Industry Outlook: Domestic Zinc consumption has been witnessing strong growth spurred by investments and industrial growth. The outlook for future demand remains upbeat as economic activity in key Zinc consuming sectors continued to be fast paced. The company estimates with this capacity expansion its share in global market will be around 7%.

Project Implementation :A combination of cutting-edge technology-driven equipment and know-how of global mining experts will help us develop the mines. These initiatives will ensure high productivity levels at low costs, enabling us to maintain our position as one of the lowest-cost producers globally.

Revenues and Cost Structure (%)
Cost Components as % of Revenue
Raw Material    0.049
Salaries    0.034
Finance Cost 0.14
Depreciation    0.18
Power Fuel Water    0.050
Other Expenses 0.250
Sub Total .703

Answer 1

1) COST OF PRODUCTION & PROFITABILITY

Based on the details provided, the Cost of Production and Profitability can be derived taking into consideration Capacity Utilization thereby arriving at inflows for the year. % Outflow on account of various heads like Raw material, Salaries, Finance Cost, Depreciation, Power Fuel etc can then be derieved on the basis on % on Inflows. Taxes and other details are required to be apportioned accordingly to arrive at Profitability,

Cost of Production only includes direct cost that are related to production i.e. Raw Material, Power Fuel, etc. Since there is no clarity on the other expenses and Salaries (whether labour salary or office staff) , it is assumed and taken as direct cost.

B: Cash Flow Statement

On the basis on profitability statement, cashflow statement can be derieved. Other Non Cash items like Depreciation are to be added back, since there is no actual outflow in case of Depreciation. Cash outflow on capital accounts like repayment of Terms Loan installments are to be taken into consideration based on which free cash flow from the investment can be derived at. Attached Cashflow for the above example C: COST OF CAPITAL.

Cost of Capital includes, Cost of Debt and Cost of Equity in there respective proportion. Attached, in reference to the above example D