An existing profitable company, RMC World Ltd. is considering a new project for manufacture of home automation gadget involving a capital…

CA Intermediate · Financial Management and Strategic Management · MTP · May 2024
An existing profitable company, RMC World Ltd. is considering a new project for manufacture of home automation gadget involving a capital expenditure of 1000 Lakhs and working capital of 150 Lakhs. The capacity of the plants for an annual production of 3 lakh units and capacity utilization during 5 year life of the project is expected to be as indicated below: Year 1 2 3 4 5 Capacity Utilization (%) 50 65 80 100 100 The average price per unit of product is expected to be 600netting a contribution of 60 percent. The annual fixed costs, excluding depreciation, are estimated to be 500 Lakhs per annum from the third year onwards. For the first and second year, it would be 200 lakhs and 350 lakhs respectively. Scrap value of the capital asset at the end of 5th year is 200 Lakhs. Depreciation on capital asset is provided on written down value basis @ 40% p.a. for income tax purpose. The rate of income tax may be taken at 30%. The cost of capital is 12%. At end of the third year an additional investment of 200 lakhs would be required for working capital. There is no capital gain tax applicable. COMPUTE the NPV of the project. RMC World Ltd. is about to make a presentation to Secure Venture Capital Firm. Secure Venture Capital Firms will invest in any project if the net addition to shareholder wealth from the project is above 100 lakhs.

Suggested Answer and Working Notes:

Calculation of Cash Flow after Tax Year 1 Year 2 Year 3 Year 4 Year 5 Capacity 50% 65% 80% 100% 100% Units 1,50,000 1,95,000 2,40,000 3,00,000 3,00,000 Contribution p.u. 360 360 360 360 360 (600 x 60%) Total Contribution 5,40,00,000 7,02,00,000 8,64,00,000 10,80,00,000 10,80,00,000 Less: Fixed Asset 2,00,00,000 3,50,00,000 5,00,00,000 5,00,00,000 5,00,00,000 Less: Depreciation (W.N.) 4,00,00,000 2,40,00,000 1,44,00,000 86,40,000 51,84,000 PBT (60,00,000) 1,12,00,000 2,20,00,000 4,93,60,000 5,28,16,000 Less: Tax (18,00,000) 33,60,000 66,00,000 1,48,08,000 1,58,44,800 PAT (42,00,000) 78,40,000 1,54,00,000 3,45,52,000 3,69,71,200 Add: Depreciation 4,00,00,000 2,40,00,000 1,44,00,000 86,40,000 51,84,000 CFAT 3,58,00,000 3,18,40,000 2,98,00,000 4,31,92,000 4,21,55,200 Calculation of NPV Year Description Cash Flow PVF @12% PV 0 Initial Investment (10,00,00,000) 1 (10,00,00,000) 0 WC introduced (1,50,00,000) 1 (1,50,00,000) 3 WC introduced (2,00,00,000) 0.7118 (1,42,36,000) 1 CFAT 3,58,00,000 0.8929 3,19,65,820 2 CFAT 3,18,40,000 0.7972 2,53,82,848 3 CFAT 2,98,00,000 0.7118 2,12,11,640 4 CFAT 4,31,92,000 0.6355 2,74,48,516 5 CFAT 4,21,55,200 0.5674 2,39,18,860 5 WC released 3,50,00,000 0.5674 1,98,59,000 5 Scrap Sale 2,00,00,000 0.5674 1,13,48,000 Net Present Value 3,18,98,684 Working Notes (W.N.) Calculation of Depreciation Year Opening WDV Depreciation Closing WDV 1 10,00,00,000 4,00,00,000 6,00,00,000 2 6,00,00,000 2,40,00,000 3,60,00,000 3 3,60,00,000 1,44,00,000 2,16,00,000 4 2,16,00,000 86,40,000 1,29,60,000 5 1,29,60,000 51,84,000 77,76,000

Topics: Part-A: Financial Management

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic