Assignment No.1 Marks: 10
Due Date: November 23, 2015
ABC Limited is a company that deals in manufacturing chemical. There is an opportunity to
manufacture a new chemical for a Textile Industry. For this, the company must install a plant with
estimated life of 5 years, costing Rs.2.5 million.
For technical aspect of the project, a consultant would be hired at a cost of Rs.60,000. However, if
the project does not turn out financially feasible, his contract would be cancelled by paying him
Rs.20,000. At the end of first year, other acquisition cost would be Rs.40,000.
Working capital requirement in the beginning would be Rs.350,000 and Rs.100,000 in the next year.
All the working capital would be recovered at the end of fifth year. Due to technological
obsolescence the plant will not be useable after fifth year and the salvage value is estimated around
Cash flow emerging from the additional sales would be Rs.650,000 in first year, Rs.600,000 in
second year, Rs.550,000 in third year, Rs.750,000 in fourth and last year.
The company shall depreciate the asset on straight line over its useful life. Tax rate is 20%. Company
requires 10% rate of return on such projects.
Following are some assumptions:
1. Taxes are paid in the same year of benefit occurring.
2. Consultant and Other costs are supposed to occur at the end of first year.
3. Inflation is assumed at 0%
You are required to evaluate the project on the basis of Net Present Value (NPV) whether it would
undertake or not.
Note: Provide all calculations, they carry marks.
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jo values di hui hy ...
(2.5 million - 150000) / 5
Can somebody give me time for making the assigment .Or share the formula for use it
Jani, the above discussion is about "making of assignment" .. go through the discussion and the lecture slides as mentioned in the discussion you will solve it by yourself inshAllah.
My NPV IS 152924 ... IS THIS CORRECT?
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Dear Students Don’t wait for solution post your problems here and discuss ... after discussion a perfect solution will come in a result. So, Start it now, replies here give your comments according to your knowledge and understandings....
my first year pv is correct = 467277.4
year 2 = 474353.6
year 3 = 401194.2
year 4 = 474002
year 5 = 803444.6
agr ye value thek hen tu me ghlti year 0 me kri hungi cz i didnt include consultant fee. sulaiman can u plz chk k year 0 me sir ki PV = (2300,000) (lec 9 slide # 16) hai q k sir ne cost and working capital include kia bs. he didnt include consultant there. aur year one ki calculation me b kahen consultant fee ki amount include ni hui. apki ppt me b yehi value hai na?
mene bi phir isi trah year 0 me cost + work cap lia hai sirf = (2850,000) - sirf ye value apki different hgi hai na?
Benefit after tax = (benefit - dep) x (1-tax rate) + dep
eg: year 1 = (650,000 - 470,000) x (1-20%) + 470,000 = 614,000 - 100,000 (work cap) = 514,000 then apply df 10%
CF1 bilkul same ai hy .. 514000 ...
me ny abhi written bnai hy .. me type ker k solution share kerta hu abhi ..
i hv the same working according to my method
Yes, jab cashflows calculate kerni hy tab consultant fee or acquistion cost dono ni use kerni kyu k Capital Budgeting Decision me ye dono irrelevant hy ..
CF1 = (650,000-470,000)* (0.80) + 470,000 = 614,000
For the requirement of Working Capital in year 1, working capital will be deducted from after tax cash flow
CF1 = 614,000 -100,000 = Rs. 514,000
CF2 = (600,000 - 470,000)* (0.80) + 470,000 = Rs. 574,000
CF3 = (650,000 - 470,000)* (0.80) + 470,000 = Rs. 614,000
CF4 = (750,000 - 470,000)* (0.80) + 470,000 = Rs. 694,000
CF5 = (1,350,000 - 470,000)* (0.80) + 470,000 = Rs. 1,174,000
PV0 = (2,850,000)
PV1 = 467,277.4
PV2 = 474,353.6
PV3 = 461,298.2
PV4 = 474,002.0
PV5 = 728,936.6
NPV = (244132)
my Npv is 229469.4