Bharat Infrastructure Ltd (BIL), a premier Indian Engineering firm, has been invited to establish and operate a high-speed data center…

CA Final · Advanced Financial Management · PYQS · May 2026
Bharat Infrastructure Ltd (BIL), a premier Indian Engineering firm, has been invited to establish and operate a high-speed data center infrastructure in the Republic of Valoria. The initial investment required for the project is 4,000 million Valors (VL). Under the agreement, BIL will sell the project back to the Valorian government after 4 years for a guaranteed sale price of 8,000 million VL. During the four-year operational period, BIL will provide technical maintenance and security protocols at an annual fee of 80 million VL, payable at the end of each year. To hedge the foreign exchange risk associated with the initial capital investment, BIL's investment bankers have proposed a Currency Swap arrangement with the following terms: BIL will swap the principal amount of 4,000 million VL for Indian Rupees immediately (Year 0) at today's spot rate.The swap will be reversed at Year 4, with both parties re-exchanging the same principal amounts at the same spot rate locked in at inception.The bank will charge an annual facilitation fee of 0.30% (calculated on the principal amount), payable at the end of each year. The currency swap covers only the initial investment and terminal principal. BIL's policy is to hedge all other foreign currency cash flows using forward contracts at the respective forward rates prevailing in the market today. Financial Data: The current market data and exchange rates (VL/₹) are as follows: Period Spot 1 Year Forward 2 Year Forward 3 Year Forward 4 Year Forward Exchange Rate (VL/₹) 50.00 53.00 56.18 59.55 63.12 PV Factor @ 14% 1.000 0.877 0.769 0.675 0.592 Cumulative PVFA for 4 years at 14%. = 2.913 Assume a risk-adjusted discount rate of 14% per annum. Ignore taxation. You are required to evaluate the project's financial viability using the Net Present Value (NPV) method, with all cash flows expressed in Indian Rupees (₹ million).

Suggested Answer and Working Notes:

Working Notes: (1) Swap Calculations Initial Investment (Year 0): 4,000 m VL/ 50.00 = 80.00 MillionAnnual Bank Charges:80.00 m x 0.30% = 0.24 Million p.a. for years 1 to 4.Swap Terminal Receipt (Year 4): Since the swap is at the spot rate, BIL receives back 80 million in exchange for 4000 million VL. (2) Project Cash Flows (in Million) The annual technical fees and the excess buy-back amount (portion not covered by the swap) are converted using the representative forward rates. Year 1 Fee: 80 m VL/ 53.00 = 1.51 mYear 2 Fee: 80 m VL/ 56.18 = 1.42 mYear 3 Fee: 80 m VL/ 59.55 = 1.34 mYear 4 Fee: 80 m VL/ 63.12 = 1.27 mYear 4 Excess Sale Receipt: Total Sale Price 8000 m VL Less: Amount covered by swap reversal (4000 m VL) Excess to be converted at Forward Rate 4000 m VL Forward Rate (4-year) VL 63.12/₹ ₹ Equivalent: 4000 / 63.12 63.37 m DCF Analysis of the Project (₹ in Million) Year Particulars VL Million Spot/ Forward Rate Cash Flow (₹ in Million) PVF @ 14% PV (₹ in Million) 0 Initial Investment (Swap) (4000) 50.00 (80) 1.00 (80.0000) 1 Technical Fee 80 53.00 1.5094 0.877 1.3237 2 Technical Fee 80 56.18 1.4240 0.769 1.0951 3 Technical Fee 80 59.55 1.3434 0.675 0.9068 4 Technical Fee 80 63.12 1.2674 0.592 0.7503 4 Swap Principal Receipt 4000 50.00 80 0.592 47.3600 (28.5641) Less: PV of Facilitation Fee (0.30% x 4000 x 2.913) (0.6991) 63.12 (29.2632) Add: PV of Excess Receipt ( 4000 x 0.592) 37.5158 63.12 Net Present Value 8.2526 OR Net Present Value - if cash flows discounted to only two decimals 8.25 * Note: 2.913 is the cumulative PVFA for 4 years at 14%. Conclusion: Since the NPV is positive 8.2526 Million or 8.25 Million, BIL should accept the invitation to operate the project in the Valoria.

Topics: International Financial Management

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