9.1 A company i considering an investment proposal to. | > instal new milling controls at a cost of Rs.50,000. The facility hhas a life expectancy of 5 years and no stlvage value, The tax 7 As 10,000 rate is 35 per cent. Assume the firm uses straight line depre- 2 10,692 ciation and the same is allowed for tax purposes, The esti- 3 12,769 ‘mated cash flows before depreciation and tax (CFBT) from the 4 13,462 investment proposal are as follows: 5 20,385 ‘Compute the following: @ Pay back period, (i Average rate of retum, (ii) Intemal rate of return, (iv) Net present value at 10 per cent discount rate, (¥) Profitability index at 10 per cent discount rate. P.9.2 A project costing Rs 5,60,000 is expected to produce annual net cash benefits (CFAT) of Rs 80,000 over a period of 15 years. Estimate the intemal rate of return (IRR). Also, find the pay back period and obtain the IRR from it. How do you compare this IRR with the one directly estimated?P.9.3 Modem Enterprises Ltd is considering the purchase of a new computer system for its research and development division, which would cost Rs 35 lakh. The operation and maintenance costs (excluding depreciation) are expected to be Rs 7 lakh per annum. It is estimated that the useful life of the system would be 6 years, at the end of which the disposal value is expected to be Rs 1 lakh. ‘The tangible benefits expected from the system in the form of reduction in design and draftmanship costs would be Rs 12 lakh per annum, The disposal of used drawing office equipment and furniture initially is Anticipated to net Rs 9 lakh. ‘As capital expenditure in research and development, the proposal would attract 4 100 per cent write-off for tax purposes. The gains arising from disposal of used assets may be considered tax free. The effective tax rate is 35 per cent. The average cost of capital of the company is 12 per cent. After appropriate analysis of cash flows, advise the company of the financial viability of the proposal. Ignore tax on salvage value. 94 SCL Limited is engaged in the manufacture of power intensive products. As part of its diversification plans, the company proposes to put up a windmill 10 generate electricity. The details of the scheme are as follows: 1. Cost of the windmill, Rs 300 lakhs 2. Cost of land, Rs 15 lakhs 3. Subsidy from state government to be received at the end of first year of installation, Rs 15 lakh. 4. Cost of electricity will be Rs 225 per unit in year 1. This will increase by Re 0.25 per unit every year till ‘year 7. After that, it will increase every year by Re 0.50 per year till year 10. ‘Maintenance cost will be Rs 4 lakh in year 1 and the same will increase by Rs 2 lakh every year. Estimated life, 10 years. Cost of capital, 15 per cent. Residual value, nil. However, land value will go up to Rs 60 lakh, at the end of year 10. 9. Depreciation will be 100 per cent of the cost of the windmill in year 1 and the same will be allowed for tax purposes. 10. As windmills are expected to work based on wind velocity, the efficiency is expected to be on an average 30 per cent. Gross electricity generated at this level will be 25 lakh units per annum; 4 per cent ‘of which will be committed to the state electricity board as per the agreement. 11. Tax mate, 35 per cent From the above information, you are required to calculate the net present value. Ignore tax on capital profits. Use present value up 10 two digits exe P.9.5 Techtonics Lid is considering a new project for = > piece oringehs Ne e penance Year Capacity utilisation (per cent) ‘expenditure of Rs 600 lakh and working capital of Rs 150 i 33.33 lakh. The capacity of the plant is for an annual produc- 2 66.67 ton of 12 lakh units and capacity utilisation during the 6 3 90 year working life of the project is expected to be as 46 100 indicated below: ‘The average price per unit of the product is expected fo be Rs 200 netting a contribution of 40 per cent. The annual fixed costs, excluding depreciation, are estimated to be Rs 480 lakh per annum from the third year ‘onwards; for the first and second year, it would be Rs 240 lakh and Rs 360 lakh respectively. The average rate ‘of depreciation for tax purposes is 33.33 per cent on the capital assets. The rate of income tax may be taken at 35 per cent. Cost of capital is 15 per cent. At the end of the third year, an additional investment of Rs 100 lakh would be required for working capital Terminal value for the fixed assets may be taken at 10 per cent and for the current assets at 100 per cent. For the purpose of your calculations, the recent amendments to tax laws with regard to balancing charge may be ignored.P.9.7 The Domanhill Colliery, an underground mine, owned by the public sector Coal India Lid has been producing coal through manual operations for the last eight years. The past and projected revenues and cost data are summarised below. Past and projected revenue and cost data (Rs crore) Year ‘Sales Direct ‘Administrative Fixed expenses Variable revenue labour cost and selling (excluding expenses expenses depreciation) Past Oata: 1 70 “4 2 1s 2 2 a 16 1“ 7 25 3 101 2 7 22 30 4 123 30 2 25 29 5 162 a 25 3 “3 6 201 “a 33 0 e 7 245 48 40 51 7 8 302 6 6 94 (Conta) (Conte) Projected Data 9 309 62 82 os 89 10 342 69 58 75 97 ” 375 76 3 106 2 408 82 2 s 15 13 441 8 7. 98 328 With the liberalisation and opening up the coal sector to private firms, the Board of Directors of Coal India lad have decided to undertake a. feasibility study for semi-mechanisation of Domanhull Colliery by introducing side dump and load (SDL) machine. With the introduction of the SDL machine, the following, changes in the opening parm are forecast ‘© Increase in. projected sales revenue by 25 per cent due to faster speed of work; = Decrease in direct labour cost by 5 per cent resulting from bun on new recruitments; © Fifteen per cent increase in administrative and selling expenses to support increased semi-mechanised production and sale; = 10 per cent increase in fixed cost on account of setting up of additional maintenance facility; Increase in variable expenses, 50 per cent, as a result of additional electricity consumption; © Loss in terms of disturbance charge due to opposition, strike and lockout: year 9, Rs 2 crore, year 10 RS 0.80 crore and year 11, Rs 0.30 crore: @ The semi-mechanisation would require acquisition of 20 machines at a cost of Rs 1 crore each. An additional Rs 2 crore would have to be spent on creation of additional facility like transformer, special cables and installation of the machines. The machines including the additional facility created would be depreciated over a five year period on the basis of written down value method @ 25 per cent. At the end of 5 years, they are expected to be sold at Rs 2 crore. The colliery does not have other machines in the block of 25 per cent. Assuming effective cost of capital of 8 per cent on World Bank loan to finance the project and 35 per cent tax, present a financial analysis of the feasibility of semi-automation of the Domanhill Colliery. As a financial consultant,what recommendation would you make to the Board of Directors of Coal India Lid?