CUPPAMANIA Project

On April 1, 2016, Mr. Piyush, Chief Financial Officer of ABC Foods Limited is considering a project to
produce Cup Noodles, CUPPAMANIA which requires Rs 10,00,000 capital investment for new
Equipment for packaging.
The company has already spent Rs 1,00,000 on R&D for the new product and it was included as R&D
expense in the first year P&L account, because a new product had to pay for its R&D expenses.
The existing product of the company is packaged noodles YUM YUM. Since the same production
machinery is used to produce the new Cup Noodles, CUPPAMANIA, no cost for production machinery
has been included in the new project cost.
The book value of the production machinery is now Rs 15,00,000 and it is expected to last for five years
more. 1/3rd of the existing production machinery will be used for the production of new Cup Noodles,
CUPPAMANIA.
The sales volume of packaged noodles YUM YUM has increased by 50% over the last year. The excess
capacity of production machinery is available only for the next one year and it could be leased out for Rs
75,000 for job work.
Fresh production capacity for Cup Noodles, CUPPAMANIA has to be created by the end of year 1 at a
cost of Rs 500,000. The life of this production facility will be five years and salvage value at the end of its
fourth year of operation will be equal to its book value. Straight line method will be used for depreciation
of production and packaging machinery.
It is expected that 75% of the sales volume of new Cup Noodles, CUPPAMANIA will come from growth
in the market size of the population using the noodles and 25% would come from erosion of market share
of packaged noodles YUM YUM.
The adjustment item in the following table represents erosion of YUM YUM market and was calculated
by multiplying the volume of erosion times a variable profit contribution.
The financial year ends of March 31. The corporate tax rate is 30%.
The after-tax weighted average cost of capital for CUPPAMANIA project is 15%. The life of the new
project is five years.
The following is the forecast P&L Account for the
31,
Year 0 Year 1
Gross
Profits
(before
500,000
subtracting the depreciation
of packaging machinery)
Depreciation of packaging
200,000
machinery
Depreciation on production
100,000
machinery (CUPPAMANIAs
share)
R&D Expense
100,000

new CUPPAMANIA for the five years ending March

Year 2
500,000

Year 3
500,000

Year 4
500,000

Year 5
500,000

200,000

200,000

200,000

200,000

100,000

100,000

100,000

100,000

Adjustment for erosion of

profits of YUM YUM
Profits before tax (PBT)
Tax @ 40%
PAT
Net
Working
Capital
Requirement (CA NIBCL)

30,000

25,000

25,000

25,000

25,000

25,000

75,000
30,000
45,000
40,000

175,000
70000
105000
55,000

175,000
70000
105000
45,000

175,000
70000
105000
35,000

175,000
70000
105000

Required:
i)
Estimate the Free Cash Flows to the Firm of CUPPAMANIA project. Comment on the same
also.
ii)
Estimate the discounted payback period and NPV of CUPPAMANIA project.
iii)
Should ABC Ltd launch CUPPAMANIA?