Case 2.1: Divya Handtools Pvt. Ltd.

Capacity expansion
Year
NCF
PVF
PV, 14%
0
-250
1.000
-250.0
1
45
0.877
39.5
2
45
0.769
34.6
3
45
0.675
30.4
4
68
0.592
40.3
5
68
0.519
35.3
6
68
0.456
31.0
7
68
0.400
27.2
8
68
0.351
23.8
9
30
0.308
9.2
10
85
0.270
22.9
NPV
44.2
Year 10 cash flows include salvage value.
Minimum savings each year from replacement
Cash outlay (Rs million)
50
Life (years)
10
PVFA 14%, 10
5.2161
9.6 capital recovery
Annuity (annual savings, Rs mn)
Annual instalment of SBI loan
Amount (Rs million)
Interest rate
Period (years)
PVFA 14%, 10
Annual instalment (Rs mn)

200
14%
10
5.2161
38.3

Payment at maturity - SBI loan

Amount (Rs million)
Interest rate
Period (years)
Future value factor
Single payment (future value)

200
14%
10
3.7072
741.4

Quarterly instalment - FI loan

Amount (Rs million)
Annual interest rate
Quarterly rate
Quarterly periods
PVFA 3.375%, 40
Quarterly instalment (Rs mn)

200
13.50%
3.375%
40
21.7754
9.2

The company should borrow from FI since the the annual interest rate is lower.
Lease
Amount (Rs million)
Period (years)
Lease rental (beginning of the year)
PVFA of annuity due (13.5%)
Value of lease rentals

300
10
52
6.038
314.0

The value of lease rentals is higher than the amount of borrowing (Rs 300 million).
Hence, borrowing is cheaper than leasing

1
2
3
4
5
6
7
8
Int. rate -half-yearly
Period
20
20

120
120
120
120
120
120
120
1120

9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502

110.09
101.00
92.66
85.01
77.99
71.55
65.64
562.09
1166.04

12%
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404

107.14
95.66
85.41
76.26
68.09
60.80
54.28
452.35
1000.00

6%
0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627

113.21
106.80
100.75
95.05
89.67
84.60
79.81
702.70
1372.59

Int. rate -half-yearly

3%
3%
4%
Cash flow PVF
PV
PVF
PV
PVF
PV
60 15.589 935.35 14.877 892.65 13.590 815.42
1,000
0.610 610.27 0.567 567.43 0.476 476.11
1545.62
1460.08
1291.53