Question

1. The details of estimated project cost, sales and selling price of the product, depreciation and salvage value of a new project are given in the table below. All revenues and costs occur at the end of the period. The income tax rate is 20%. a) Find NPV of the project if the discount rate is 10%. b) The promoters has invested Rs 55 million in Year 1 and Rs 35 million in Year 2. Prepare the cash flow statement (Sources of funds and Disposition of funds). Show all calculations.                                         [5]  

	Year-1	Year-2	Year-3	Year-4	Year-5	Year-6
Project Cost (Rs million)	50	30
Sales (million units)			3	4	5	5
Selling price (Rs/Unit)			10	15	20	20
Cost of production (Rs million)			20	50	80	70
Depreciation (Rs million)			2	2	2	2
Salvage value (Rs million)						20

Answer 1

Notes:-

Particulars	Year 3	Year 4	Year 5	Year 6
Sales (Million Unit) (a)	3	4	5	5
Cost of Production (Millions) (b)	20	50	80	70
Cost of Production per Unit (b/a)	6.66	12.5	16	14
selling price per unit (c)	10	15	20	20
Total Salling Price (Millions) (a*c)	30	60	100	100

Computation of after tax cash flows (Rs. in Millions)

Particulars	Year 3	Year 4	Year 5	Year 6
Sales	30	60	100	100
Less:- Cost of Production	(20)	(50)	(80)	(70)
Contribution / PBDT	10	10	20	30
Less:- Depriciation	(2)	(2)	(2)	(2)
PBT	8	8	18	28
Less:- Tax @20%	(1.6)	(1.6)	(3.6)	(5.6)
PAT	6.4	6.4	14.4	22.4
Add:- Depreciation	2	2	2	2
Cash Flow	8.4	8.4	16.4	24.4

(a) Computation of NPV of the project

Year	Cash Flow	PVF @10%	Persent Value
1	(50)	0.909	(45.45)
2	(30)	0.826	(24.78)
3	8.4	0.751	6.31
4	8.4	0.683	5.74
5	16.4	0.620	10.17
6	24.4	0.564	13.76
6	20	0.564	11.28
		NPV	(22.97)

Decision: NPV is Negative, hence project should not be consider.