TUTORIAL - CASH FLOW FOR INVESTMENT ANALYSIS

1. A company is faced with the problem of choosing between two mutually exclusive
projects. Project A requires a cash outlay of Rs 1,00,000 and cash running expenses of
Rs 35,000 per year. On the other hand, project B will cost Rs 1,50,000 and require cash
running expenses of Rs 20,000 per year. Both the machines have an eight year life.
Project A has a Rs 4000 salvage value and project B has Rs 14,000 salvage value. The
company tax rate is 50% and has a 10% required rate of return. Assume depreciation
on straight line basis and no tax on salvage value of assets. Compute the NPV using
incremental cash flows.
2. Television Ltd. Is a highly profitable firm, it has a proposal for manufacturing car
televisions. The project would involve cost of plant of Rs 500 lakh, installation cost of Rs
100 lakh and working capital of Rs 125 lakh. The annual capacity of the plant is to
manufacture 22000 sets. The price per set in the first year would be Rs 12,000. The
variable cost to sales ratio is expected to be 65%. The fixed cost per annum would be
Rs 300 lakh excluding depreciation. The company would have to incur promotion
expenditure of Rs 120 lakh in the first year. Written down depreciation rate is 25%.
Working capital requirement is estimated to be 25% of the sales .The company expects
that the plants capacity utilization over its economic life of 7 years will be as follows
YEAR
1
2
3
4
5
6
7
Capacity utilization 40 40
50
75 100 100 10
%
0
The terminal value of the project is expected to be 20% of its original cost. Calculate
the project NPV assuming a target rate of 14%. The corporate tax rate is 35%.
TUTORIAL - CASH FLOW FOR INVESTMENT ANALYSIS
1. A company is faced with the problem of choosing between two mutually exclusive
projects. Project A requires a cash outlay of Rs 1,00,000 and cash running expenses of
Rs 35,000 per year. On the other hand, project B will cost Rs 1,50,000 and require cash
running expenses of Rs 20,000 per year. Both the machines have an eight year life.
Project A has a Rs 4000 salvage value and project B has Rs 14,000 salvage value. The
company tax rate is 50% and has a 10% required rate of return. Assume depreciation
on straight line basis and no tax on salvage value of assets. Compute the NPV using
incremental cash flows.
2. Television Ltd. Is a highly profitable firm, it has a proposal for manufacturing car
televisions. The project would involve cost of plant of Rs 500 lakh, installation cost of Rs
100 lakh and working capital of Rs 125 lakh. The annual capacity of the plant is to
manufacture 22000 sets. The price per set in the first year would be Rs 12,000. The
variable cost to sales ratio is expected to be 65%. The fixed cost per annum would be
Rs 300 lakh excluding depreciation. The company would have to incur promotion
expenditure of Rs 120 lakh in the first year. Written down depreciation rate is 25%.
Working capital requirement is estimated to be 25% of the sales .The company expects
that the plants capacity utilization over its economic life of 7 years will be as follows
YEAR
1
2
3
4
5
6
7
Capacity utilization 40 40
50
75 100 100 10
%
0
The terminal value of the project is expected to be 20% of its original cost. Calculate
the project NPV assuming a target rate of 14%. The corporate tax rate is 35%.
Both the question are solved in book
Question 1 - Sol 10.2
Question 2 Sol 10.4