Cost of Project Amity Business School

New Investment Basis: Cost of Project =

Capital Cost + Increased Working Capital
Requirements Other Benefits
Replacement Investment Basis: Cost of
Project = Capital Cost Salvage Value Tax
Benefit (or + Tax Paid) + Net Increase in
Working Capital Requirements (or Net
Decrease) Other Benefits
 Steps in Preparing Amity Business School

Financials
Estimation of the Cost of Project

Financing Mix Details

Estimation of Revenues and Operating

Costs

Preparation of Pro forma Financial

Statements
 Cash Flow Calculation
Amity Business School

CFAT = (Cash Sales Revenue Cash Operating

Cost Depreciation and Other Deductible Non-
cash charges)*(1-t) + Depreciation and Other
Deductible Non-cash charges
Terminal Value (to be added in CFAT of last
year) = Net Proceeds or Benefits of Sale of
Fixed Assets + Net Recovery of Working Capital
 Terminal Value Amity Business School

Book Value of Fixed Assets at the end of 5th year

Salvage Value of Fixed Assets

Net Profit or Loss on Sale of Fixed Assets

Net Proceeds from Sale of Fixed Assets after tax

adjustments
 Numerical 4 Amity Business School

Initial Investment = Rs. 1.25 crore in CapEx and

Rs. 30 lakh in WC
Expected Life = 10 year
Salvage Value = Rs. 55 lakh for CapEx and
100% for WC
Fixed Annual Production = 1 lakh units
Expected Sales Revenue = Rs. 300 per unit
Growth rate in Sales Revenue = 5%
Pre-tax Operating Margin = 10%
Annual WC requirement = 12% of revenue
Depreciation rate = 5% on WDV; Tax rate = 36%
 Numerical 5 Amity Business School

CapEx = Rs. 3 crore in 1st year, 1 crore in 3rd

year and 0.5 crore in 7th year
Initial WC requirement = 30 lakh
Annual WC requirement = 15% of revenue
Expected Life = 10 year
Salvage Value = 15% for CapEx and 100% for
WC
Annual Capacity Production = 1 lakh units
Capacity Utilization: 1-3 year: 60%; 4-7 year:
80% and 8-10 year: 100
 Numerical 5 Amity Business School

Expected Sales Revenue = Rs. 400 per unit

Growth rate in Sales Revenue = 5%

Variable Cost = 30% of Sales

Fixed Cost: 1-3 year: 50 lakh; 4-7 year: 85 lakh

and 8-10 year: 110 lakh
Depreciation rate = 5% on WDV; Tax rate = 30%
 CFAT vs. FCF Amity Business School

CFAT = PAT + Depreciation and Other

Deductible Non-cash charges
Free Cash Flow (FCF) = PAT + Depreciation
and Other Deductible Non-cash charges
Additional Investment Requirements in
CapEx or NWC (or + Decrease)