HCL has proposed a new foreign investment which involves creation of a plant with an annual output of 1 million units. Taking into consideration the…

(i) Calculation of Annual CFAT Scenario 1 Scenario 2 Scenario 3 Annual Sales (in units) (A) 10,00,000 10,00,000 10,00,000 US $ US $ US $ Selling price p.u. 10.00 10.00 10.00 Cost p.u. 6.00 5.70 5.55 Profit p.u. (B) 4.00 4.30 4.45 Total Profit (A x B) 40,00,000 43,00,000 44,50,000 Less: Depreciation 10,00,000 9,00,000 8,50,000 PBT 30,00,000 34,00,000 36,00,000 Less: Tax @30% 9,00,000 10,20,000 10,80,000 PAT 21,00,000 23,80,000 25,20,000 Add: Depreciation 10,00,000 9,00,000 8,50,000 Expected CFAT (US$) 31,00,000 32,80,000 33,70,000 (ii) Expected Value of CFAT = US$ 31,00,000 x 0.4 + US$ 32,80,000 x 0.4 + US$ 33,70,000 x 0.2 = US$ 32,26,000 (iii) Viability of proposal: Expected CFAT = US $ 32,26,000 Expected Growth Rate = 3% Expected Value of inflow in perpetuity = (US$ 32,26,000 (1.03)) / (0.11 - 0.03) = 33,22,780 / 0.08 = US$ 4,15,34,750 US $ Value of Inflows 4,15,34,750 Less: Initial Outlay 2,50,00,000 NPV of project 1,65,34,750 Since NPV is positive, project is viable.