The details of estimated project cost, sales and selling price of the product, depreciation and salvage...

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

Expert Solution

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.

jeff jeffy answered 2 years ago

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