Millenial Limited, a Quick commerce (Q-Comm) startup company engaged into the business of deliveries is in a need of a delivery vehicles. The…

CA Intermediate · Financial Management and Strategic Management · MTP · May 2025
Millenial Limited, a Quick commerce (Q-Comm) startup company engaged into the business of deliveries is in a need of a delivery vehicles. The company is considering two different options – Option A - Buying a brand new 4 electric delivery vehicles that would cost - 1,50,000 each with a GST of 5% not eligible for set off. Electric vehicles would be eligible for a government subsidy of 20,000 each but only to be received at the end of the year. The life of the delivery vehicle would be 10 years. Scrap value is to be considered at 10% on Gross cost. Option B - The other alternative is to buy the vehicles needed on a secondhand basis for 1,00,000 each which will remain in service for a period of 5 years and after 5 years company done capital work on the vehicles for 70,000 each after which they can be used for another 5 years. The scrap value of the spare parts replaced at the end of 5 years would be - 32,000 whereas at the end of the 10th year scrap value of vehicle would be - 4,000 each. Millenial Limited's applicable both corporate tax rate and capital gain tax rate is at 15% whereas the vehicles would be depreciated at 20% on WDV basis. The Q-Comm delivery industry's average required rate of return is 15%. You are required to evaluate both the options and advise on the best one. The revenue and cash expenses for the Q-comm company is expected at 15,00,000 p.a. and - 10,00,000 p.a. respectively.

Suggested Answer and Working Notes:

Evaluation of option A – buying brand new vehicles The cash inflows would be in the form of 'cash flows from operations', government subsidy, scrap value and tax savings on capital loss if any. A] Calculation of PV Cash Inflows from Operations Year 1 2 3 4 5 6 7 8 9 10 Revenue 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 Less: Cash Exp 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 NPBDT 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 Less: Depre 1,26,000 1,00,800 80,640 64,512 51,610 41,288 33,030 26,424 21,139 16,911 NPBT 3,74,000 3,99,200 4,19,360 4,35,488 4,48,390 4,58,712 4,66,970 4,73,576 4,78,861 4,83,089 Less: Tax @ 15% 56,100 59,880 62,904 65,323 67,259 68,807 70,046 71,036 71,829 72,463 NPAT 3,17,900 3,39,320 3,56,456 3,70,165 3,81,132 3,89,905 3,96,925 4,02,540 4,07,032 4,10,626 Add: Depre 1,26,000 1,00,800 80,640 64,512 51,610 41,288 33,030 26,424 21,139 16,911 Cash flow after tax from operation 4,43,900 4,40,120 4,37,096 4,34,677 4,32,742 4,31,193 4,29,955 4,28,964 4,28,171 4,27,537 PVAF @ 15% 0.870 0.757 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 PV of Cash flows 3,86,193 3,33,171 2,87,609 2,48,635 2,15,073 1,86,275 1,61,663 1,40,271 1,21,601 1,05,602 PV = 21,86,092 Since GST on purchase of electric vehicle is not eligible for set off, it would be added to the cost of vehicle Initial Outflow = 1,50,000 x 4 = 6,00,000 (+) 5% GST = 30,000 Purchase price / Gross Cost = 6,30,000 B] Calculation of PV on Government subsidy Government subsidy received at the end of Year 1 = 20,000 x 4 = 80,000 PVIF at 15%, Year 1 = 0.870 Therefore, PV on Government subsidy = 69,600 C] Calculation of PV of Scrap value Scrap value received at the end of Year 10 = 10% on Gross Cost = 6,30,000 x 0.1 = 63,000 Therefore, PV of scrap = 63,000 x 0.247 = 15,561 D] Calculation of PV on Tax savings due to Capital Loss at the end of 10th year WDV of assets at the end of 10th year = 6,30,000 - 5,62,354 = 67,646 Less: Sale Value = 63,000 Capital Loss = 4,646 Tax savings at 15% on above loss = 697 PV on Tax savings due to Capital Loss = 697 x 0.247 = 172 NPV of Net Outflow = PV on Cash Inflows from Operations + PV on govt subsidy + PV on Scrap + PV on Tax Savings due to Capital Loss - Initial Outflow = 21,86,092 + 69,600 + 15,561 + 172 - 6,30,000 NPV = 16,41,425 Evaluation of option B – buying second hand vehicles A] Calculation of PV of Cash Outflow Purchase of 4 vehicles at the beginning = 1,00,000 x 4 = 4,00,000 Rework of 4 vehicles at the end of 5th year = (70,000 x 4) x 0.497 = 1,39,160 Total Gross Cash Outflow = 4,00,000 + 1,39,160 = 5,39,160 B] Calculation of PV of Cash Inflows from Operations Year 1 2 3 4 5 6 7 8 9 10 Revenue 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 15,00,000 Less: Cash Exp 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 NPBDT 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 5,00,000 Less: Depre 80,000 64,000 51,200 40,960 32,769 75,814 60,652 48,521 38,817 31,054 NPBT 4,20,000 4,36,000 4,48,800 4,59,040 4,67,231 4,24,186 4,39,348 4,51,479 4,61,183 4,68,946 Less: Tax @ 15% 63,000 65,400 67,320 68,856 70,085 63,628 65,902 67,722 69,177 70,342 NPAT 3,57,000 3,70,600 3,81,480 3,90,184 3,97,146 3,60,558 3,73,446 3,83,757 3,92,006 3,98,604 Add: Depre 80,000 64,000 51,200 40,960 32,769 75,814 60,652 48,521 38,817 31,054 Cash flow after tax from operation 4,37,000 4,34,600 4,32,680 4,31,144 4,29,915 4,36,372 4,34,098 4,32,278 4,30,823 4,29,658 PVAF @ 15% 0.870 0.757 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 PV of Cash flows 3,80,190 3,28,992 2,84,703 2,46,614 2,13,668 1,88,513 1,63,221 1,41,355 1,22,354 1,06,126 PV = 21,75,736 C] Calculation of WDV at the end 5th year (for depreciation purpose) WDV at the end of 5th Year = 1,31,072 (4,00,000 – 2,68,928) Add: Rework = 2,80,000 (70,000 x 4) Less: Sale Value = (32, 000) WDV on which Depreciation will be calculated = 3,79,072 D] Calculation of PV of Scrap PV of Scrap sale at the end of 5th Year = ₹ (8,000 x 4) x 0.497 = 15,904 PV of Scrap sale at the end of 10th year = ₹ (4,000 x 4) x 0.247 = 3,952 Total PV on Scrap Sale = 15,904 + 3,952 = 19,856 E] Calculation of PV on Tax savings due to Capital Loss (At Year 10) WDV as per Income tax at the end of 10th Year = 1,24,214 (3,79,072 – 2,54,858) Less: Sale Value (4,000 x 4) = (16, 000) Capital Loss = 1,08,214 Tax @ 15% on Capital Loss = 16,232 PV on Tax Savings (16,232 x 0.247) = 4,009 NPV = PV on Cash Inflows from operations + PV on Scrap + PV on Tax Savings due to Capital Loss - Initial Outflow = 21,75,736 + 19,856 + 4,009 - 5,39,160 NPV = 16,60,441 Comment - Since NPV for Option B is more, Millenial Limited should go for buying second hand e-delivery vehicles instead every 5 years instead of owning brand new vehicles.

Topics: Part-A: Financial Management

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