Smooth Drive Tyres

Calculation of Incremental Cash Outflows

Cost of new production equipment
Additional working capital (15% of expected 1st year sales)
Less: Sales proceeds of existing machines (7 macines*Rs. 8 lakh)
Add: Removal cost of existing machines (7 machines* Rs. 50,000
Tax on profi t from sale of machines (Working note 1)
Cost of laying off workers and personnels (working note 2)

720,000,000
211,680,000
-5,600,000
350,000
287,109
643,500
927,360,609

Calculation of Cash Inflows

Particulars
Production Equipment
(+) Working capital
(-) Sales of machine
(+)Tax on sale of existing machines
(+) Removal cost
(+) Cost of layoff
Sales Revenue
Add:
Cost Savings
Maintenance cost (WN 3)
Cost of utilities
Labour cost (WN 4)

Year 0
Year 1
720,000,000
211,680,000
225,255,060
5,600,000
287,109
350,000
643,500
1,411,200,000

1,700,000
250,000
1,848,000
3,798,000

Less:
Incremental Cost
Incremental depreciation (WN 6 )(a)
Bad debt loss (b)
Insurance (WN 5)

178,600,000
Nil
14,246,910
192,846,910

Less: Total costs

610,600,000

Earning before tax

Tax @ 35%
Earning after tax
CFAT (a+b+c)
Add: Net salvage value of equipment (d)
Add: Tax benefit on short-term capital loss
Release of working capital (f)
Initial Investment
Changes in working capital
Terminal cash inflow (d+e+f)
Net cash flow
PV Factor @ 15%
PV of cash flows

611,551,090
214042882
397,508,209
576,108,209

NPV

927,360,609
13,575,060
-927,360,609
1
-927,360,609

562,533,149
0.869565217
489,159,259.57

Year 2

Year 3

Year 4

239,701,422

255,075,059

1,501,700,400

1,598,009,479

1,700,500,393

1,700,000
250,000
2,032,800
3,982,800

3,500,000
250,000
2,236,080
5,986,080

3,500,000
250,000
2,459,688
6,209,688

133,950,000
Nil
12,822,219
146,772,219

100,462,500
Nil
11,539,997
112,002,497

Nil
15,000,000
10,385,997
25,385,997

649,060,700

689,970,559

733,486,505

709,850,281
248447598
461402683
595,352,683

802,022,503
280707876
521314627.2
621,777,127

947,837,579
331743153
616094426
631,094,426
100,000,000
70,485,625
240,075,059

14,446,362

15,373,637

580,906,321
0.756143667
439,248,635.72

606,403,490
0.657516232
398,720,138.23

410,560,684
1,041,655,110
0.571753246
595569690.2
995,337,115

Cash Flows and Net Working Capital Requirement for Year 1

Total cash revenues:
OEM Market (4,00,000 cars*4 tyres*Rs. 1200 *0.11)
Replacement Market( 1,00,00,000 tyres*Rs. 1500*0.08)
Total Costs
Cost of tyres in OEM Market (4,00,000 cars*4 tyres*Rs. 600*0.11)
Cost of tyres in Replacement Market(1,00,00,000 tyres*Rs. 600*0.08)
Selling and administrative costs

Net working capital (15 % of sales)

Cash Flows and Net Working Capital Requirement for Year 2

Total cash revenues:
OEM Market (4,10,000 cars*4 tyres*Rs. 1251 *0.11)
Replacement Market( 1,02,00,000 tyres*Rs. 1563.75*0.08)
Total Costs
Cost of tyres in OEM Market (4,10,000 cars*4 tyres*Rs. 625.50*0.11)
Cost of tyres in Replacement Market(1,02,00,000 tyres*Rs. 625.50*0.08)
Selling and administrative costs

Net working capital (15 % of sales)

Cash Flows and Net Working Capital Requirement for Year 3

Total cash revenues:
OEM Market (4,20,250 cars*4 tyres*Rs. 1304.17 *0.11)
Replacement Market( 1,04,04,000 tyres*Rs. 1630.21*0.08)
Total Costs
Cost of tyres in OEM Market (4,20,250 cars*4 tyres*Rs. 652.08*0.11)
Cost of tyres in Replacement Market(1,04,04,000 tyres*Rs. 652.08*0.08)
Selling and administrative costs

Net working capital (15 % of sales)

211200000
1200000000
1411200000
105600000
480000000
25,000,000
610,600,000
211680000

225680400
1276020000
1501700400
112840200
510408000
25,812,500
649060700
225255060

241153612.4
1356855867
1598009479
120576806.2
542742346.8
26,651,406
689970559
239,701,422

Cash Flows and Net Working Capital Requirement for Year 4

Total cash revenues:
OEM Market (4,30,756 cars*4 tyres*Rs. 1359.59 *0.11)
Replacement Market( 1,06,12,080 tyres*Rs. 1699.49*0.08)

257687707
1442812686

1700500393
Total Costs
Cost of tyres in OEM Market ( 4,30,756 cars*4 tyres*Rs. 679.80*0.11)
Cost of tyres in Replacement Market( 1,06,12,080 tyres*Rs. 679.80*0.08)
Selling and administrative costs

Net working capital (15 % of sales)

128843853
577125074.5
27517577
733486505
255075059

No. of cars in OEM Market (4,00,000*1.025)

Selling price per tyre (1200* 1.0425)
No. of cars in Replacement market (1,00,00,000*1.02)
Selling price per tyre (1500* 1.0425)
Variable cost per tyre (600*1.0425)
Selling and administrative cost (Rs. 2,50,00,000*1.0325)

410000
1251
10200000
1563.75
625.5
25812500

No. of cars in OEM Market (4,10,000*1.025)

Selling price per tyre (1251* 1.0425)
No. of cars in Replacement market (1,02,00,000*1.02)
Selling price per tyre (1563.75* 1.0425)
Variable cost per tyre (625.5*1.0425)
Selling and administrative cost (Rs. 2,58,12,500*1.0325)

420250
1304.17
10404000
1630.21
652.08
26651406

No. of cars in OEM Market (4,20,250*1.025)

Selling price per tyre (1304.17* 1.0425)

430756
1359.5946

No. of cars in Replacement market (1,04,04,000*1.02)

Selling price per tyre (1630.21* 1.0425)
Variable cost per tyre (652.08*1.0425)
Selling and administrative cost (Rs. 2,66,51,406*1.0325)

15,373,637

10612080
1699.4933
679.79731
27517577

Working Notes:
1. Tax on Profi ts From Sale of Existing Machine
Sales proceeds from existing machines
Less: Book value of existing machine (Working note 6)
Gross Profit
Less: Removal cost (7 machines *Rs. 50,000)
Net profit
Tax payable on profits

5,600,000
4,429,687
1,170,313
350,000
820,313
287,109

2. Cost of Laying off 34 Personnel

Salary paid as compensation
Tax benefits
Cost of layoff

990,000
346500
643,500

3. Savings in Maintenance Costs

Year
1
2
3
4

4. Savings in Labour and Employee Costs

Existing Costs:
Unskilled labour(20*Rs. 4,000* 12 months)
Skilled personnel (20*Rs. 6,000*12 months)
Supervising executives (2* Rs. 7,000*12 months)
Maintenance personnel (2* Rs. 5,000*12 months)

Existing Machine
New equipment
2,500,000
800,000
2,500,000
800,000
6,500,000
3,000,000
6,500,000
3,000,000

(A)

960,000
1,440,000
168,000
120,000
2,688,000

(B)

756,000
84,000
840,000

Proposed Costs
Skilled personnel (9* Rs.7,000*12 months)
Maintenece personnel (1* Rs. 7,000*12 months)

Savings in labour cost (A-B)

1,848,000 This cost will increase by 10 % in subseq

5. Insurance
Year
1
2
3
4

Existing machine
New equipment
153090
14400000
137781
12960000
124003
11664000
111603
10497600

Cost Savings
1,700,000
1,700,000
3,500,000
3,500,000

ill increase by 10 % in subsequent years.

Incremental Insurance
14246910
12822219
11539997
10385997

6. Incremental Depreciation
WDV of the existing machine in the beginning of year 4:
Initial cost of machines (7 machines * Rs. 15 lakh)
Less: Depreciation charges
Year 1 (Rs. 10500000*0.25)
Year 2 (Rs. 7875000*0.25)
Year 3 (Rs. 5906250*0.25)
WDV of Existing machines
Depreciation base of new equipment
WDV of Existing machines
Add: Cost of new machines
Less: Sale value of existing machien

Base for incremental depreciation (Rs. 71,88,29,687-Rs. 44,29,687)

10500000
2625000
1968750
1,476,563
6070313
4429687

4,429,687
720,000,000
-5,600,000
718,829,687
714,400,000

7875000
5906250

Calculation of Incremental Depreciation

Year
WDV
Depreciation
1
714,400,000
178600000
2
535,800,000
133950000
3
401,850,000
100462500
4
301,387,500
Nil

Short-term capital loss (Rs. 30,13,87,500- Rs. 10,00,00,000)

Tax benefit on shor-term capital loss (Rs. 20,13,87,500*0.35)

201,387,500
70485625