CASELET 1

Naveen Enterprises is considering a capital project about which the following information is
available:

 The investment outlay on the project will be Rs 100 million. This consists of Rs 80 million
on plant & machinery and Rs 20 million on net working capital. The entire outlay will be
incurred at the beginning of the project.
 The project will be financed with Rs 45 million of equity capital, Rs 5 million of preference
capital, and Rs 50 million of debt capital. Preference Capital will carry a dividend rate of
15 percent; debt capital will carry an interest rate of 15 percent.
 The life of the project is expected to be 5 years. At the end of 5 years, fixed assets will
fetch a net salvage value of Rs 30 million whereas net working capital will be liquidated
at its book value.
 The project is expected to increase the revenues of the firm by Rs 120 million per year.
The increase in costs on account of the project is expected to be Rs 80 million per year.
(This includes all items of cost other than depreciation, interest, and tax). The effective
tax rate will be 30 percent.
 Plant and machinery will be depreciated at the rate of 15 percent per year as per the
written down value method. Hence, the depreciation charges will be:
1. First Year : Rs 12.00 million
2. Second Year : Rs 10.20 million
3. Third Year : Rs 8.67 million
4. Fourth Year : Rs 7.37 million
5. Fifth Year : Rs 6.26 million

From the above information prepare the Financial Model of Projected Discounted Cash Flow
discounted at 10%p.a.
 CASELET 2

A firm is considering purchasing equipment for Rs 3,000 lakh. The life of an asset is 4 years after
which its salvage value will be Rs 700 lakh. The firm considers depreciation on straight line basis.
The use of new machine will increase the firm’s expected revenue by Rs 1,500 lakh per year and
operating expense (excluding depreciation) will increase by Rs 600 lakh per year. The other
option for the firm is to lease the asset by paying yearly rental of Rs 700 lakh. In this case also the
firm’s expected revenue will increase by Rs 1,500 lakh per year. However, the operating expense
will increase by Rs 500 lakh. Applicable corporate tax is 40 percent and the cost of capital is 12
percent. Should the firm purchase the equipment?