Computation of Adjusted NPV of

Foxconn Technology Group for Maharashtra plant

Ajit Sahu
M.Com.(Business Finance)
Pondicherry University

Company Profile-
Hon Hai Precision Industry Ltd., trading as Foxconn Technology Group, is a multinational
electronics manufacturing company which is headquartered in Republic of China (Taiwan). It
manufactures electronics products for major Chinese, American, Canadian, Finnish and
Japanese companies. Products like, Black Berry, iPad, iPhone, iPod, Kindle, Nintendo 3DS,
Nokia, PlayStation 3, PlayStation 4, Wii U and Xbox one are being manufactured by Foxconn.
As of 2012, 40% of consumer electronics available worldwide were being manufactured by
Foxconn. It has started its operation since 2006 in the SEZ of Chennai, Tamil Nadu. The closing
of the unit in Dec 24, 2014 affected 25,000 employees. In 2015, the company also planned to
manufacture apple iPhone in India.
Operational Proportion-
All the products are related to 3C electronics (Computer, Communication, and Consumer
Electronics). Its product covers the spare parts, modules and the system assemblies.
Currently, the company is making nearly 15 million phones in India. After setting up its plant
in Mumbai-Pune expressway, the company can export its products to West Asia and Africa
from India.
Investment of $5 billion in Maharashtra-
The company is planning to invest $5 billion($500 crore) in the state of Maharashtra, as per
the MoU signed in the year 2015.The state has come out with a detailed electronics policy and
continues to attract investments from other companies. Foxconn is going to set up a large
mobile phone and phone parts manufacturing factory over 1500 acres near Mumbai-Pune
expressway. The company is going to create 50,000 jobs by 2020 in the state of Maharashtra.
This project is going to be one of the biggest FDI in India. The company is a lab
Cost of Capital for Foxconn-
Foxconn had tie up with the Japanese telecom and internet giant Soft Bank. In June 2015, Soft
Bank had announced a joint venture with Foxconn and Bharti Enterprise in Renewable energy
that will invest $20 billion over 10 years. The company is also planning to use its internal
resources for financing of the project.
Subsidized Finance from Government-
Currently, Foxconn is getting tax incentives including reimbursement of net VAT, a 10 year
central sales tax waiver among other things to Foxconn in the state of Andhra Pradesh. The
govt. of Andhra Pradesh is also giving Rs.10,000 towards training cost of each employees
working in Foxconn. Although, for setting its plant at Maharashtra, the company has not
received any special grants announcement from the state government; the company is going to
get govt. subsidies as per the Make in India initiative undertaken by the company
Following are the products manufactured by Foxconn:
 Routers
 Broadband modems
 Set-top boxes for gaining access to internet
 Set-top boxes for TV
 Digital Video Recorder (DVR) / Network Video Recorder (NVR)
 CCTV Camera / IP Camera
 Lithium-ion batteries (other than those for mobile handsets including cellular phones

Calculation of Free cash flow of the company-

Let todays exchange rate-

$1=INR 65.30
CF0= $500 Crore = 500*65.3
= INR 32,650 crore

T
CFt TVT
NPV     C0
t 1 (1  K ) t
(1  K )T

Where-
CFt = expected incremental after-tax cash flow in year t,
TVT = expected after tax terminal value including return of net working capital,
C0 = initial investment at inception,
K = weighted average cost of capital.
T= Economic life of the project in Years.
In this case the amount of invested capital is INR 32,650 crore.
As per the Finance bill 2018, the corporate tax rate is 25% for companies having turnover of
up to Rs.250 crore and 30% for companies having turnover more than Rs.250 crore.
If we take the average return on capital of the parent firm, then it is 11.17%.
ROCE= EBIT/Capital Employed
11.17%= EBIT/ Rs. 32,650 crore
So, EBIT= 3647.005 crore
Operating Income= Gross Income-(Operating Expenses + Depreciation and Amortization)
Operating income (EBIT) is the income that is left in the income statement after all the
operating cost and overhead. In this case Operating Income is calculated as per the ratios of
parent company.

Computation of Net Present Value-

Particulars Amount(INR Million)

Sales Revenue ₹ 389,172.08

Less : Cost of Goods Sold
Gross Profit
Less : Operating Expenses
(Depreciation)
EBIT
Less : Interest Expenses
₹ 334,818.91
₹ 54,353.17
₹ 17,883.12
₹ 36,470.05
₹ 22,038.75

Earnings Before Tax ₹ 14,431.30

Less: Taxes @30% ₹ 4,329.39

Net Income ₹ 10,101.91

Add: Depreciation ₹ 17,883.12

Gross Cash Flow ₹ 27,985.03

Less : Changes in Net Working

Capital ₹ 7,109.20

Free Cash Flow ₹ 20,875.82

NPV ₹ 29,057.79
For computation of NPV, all the data and financial ratios are collected from Bloomberg (all the
workings are shown in excel file).

NPV = (𝑭𝒓𝒆𝒆 𝒄𝒂𝒔𝒉 𝑭𝒍𝒐𝒘 ∗ (𝟏 + 𝑮𝒓𝒐𝒘𝒕𝒉 𝑹𝒂𝒕𝒆))/(𝑹𝒂𝒕𝒆 − 𝑮𝒓𝒐𝒘𝒕𝒉 𝑹𝒂𝒕𝒆)

The APV Model is a value-additivity approach to capital budgeting. It is useful for a domestic
firm for analyzing domestic capital expenditure.
If APV ≥ 0 → The project should be accepted.
If APV > 0 → The Project should be rejected

Calculation of Adjusted Net Present Value:

Adjusted NPV = NPV + NPV of Financial Side effects + Real Options.

Steps involved in calculating Adjusted NPV are as follows:

1. Calculation of discounted cash flow
2. Taking financial problems into consideration
3. Valuation of any real and growth options.

In the case of Foxconn there is no real options available.

Adjusted NPV = INR 29,057.79 Million + INR 48,975 Million + 0

= INR 78,032.79 Million
Conclusion-
The main objective of financial management is shareholders wealth maximization. The
shareholder will get benefitted when the firm makes an investment that will return more in a
present value sense than the investment costs. In the case of Foxconn the investment of $5
Billion is worthwhile as the project is giving positive NPV. The plant at Maharashtra is going
to be one of the biggest and successful FDI investment in India for Foxconn.