Evaluation of the project to produce steel tubes for Prakash Steel Ltd

Data given in the question

1) Project Cost
Years (of construction) 1 2
Equipment cost 1.2 1.2
Erection cost 0.2
Other costs 0.3

Total Costs 1.2 1.7

2) Sales Volume
Years (of operations) 1 2 3
100 % Capacity 20000 20000 20000
Actual Capacity (%) 60% 80% 100%
Actual Capacity 12000 16000 20000
Selling Price per tonne 10000

3) Raw material per tonne of output 1.1

4) Raw material cost 5300

5) Cost of utilities and consumables 700

6) Employee Expenses (in cr)

Years (of operations) 1 2 3
Expenses 1 1.25 1.5

7) Rate of Depreciation (SLM) 10%

8) Selling & distribution (% of sales) 5%

9) Adminand other expenses (per year in cr) 1

10) Working capital details

Raw material stock (in months) 1
Finished goods stock (in months) 0.5
Debtors 1
Creditors 0.5

11) Interest on net working capital 13%

12) Tax Rate 35%

13) Cost of Capital 12%

Scenario 3
Years (of construction) 1 2
Equipment cost 1.32 1.32
Erection cost 0.22
Other costs 0.33

Total Costs 1.32 1.87

Scenario 1
9000

Scenario 2
5830

Scenario 4
6.5%
Prakash Steel Ltd - Base Case

Projected Statement of Cash Flows

Year CO CI NCF
1 1.20 0.00 -1.20
2 1.70 0.00 -1.70
3 1.62 0.98 -0.64
4 0.54 1.55 1.01
5 0.54 2.11 1.57
6 0.00 2.11 2.11
7 0.00 2.11 2.11
8 0.00 2.11 2.11
9 0.00 2.11 2.11
10 0.00 2.11 2.11
11 0.00 2.11 2.11
12 0.00 4.81 4.81

NPV 4.81
IRR 32.77%

Projected P/L Statement

Particulars 1 2 3
Tonnes 12000 16000 20000
Sales Value 120000000 160000000 200000000
Sales Value (in crores) 12 16 20
Less:
Raw Material Cost 7.00 9.33 11.66
Utilities 0.84 1.12 1.40
Employee cost 1.00 1.25 1.50
Depreciation 0.29 0.29 0.29
S&D 0.60 0.80 1.00
Admin 1.00 1.00 1.00
Interest on NWC 0.21 0.28 0.35
PBT 1.06 1.93 2.80
Less: Tax 0.37 0.68 0.98
PAT 0.69 1.26 1.82
Operating Cash Inflow 0.98 1.55 2.11

Calculation of Working capital

Particulars 1 2 3
Raw Material Stock 0.58 0.78 0.97
Fininshed Goods 0.33 0.44 0.54
Receivables 1.00 1.33 1.67
Gross Working Capital 1.91 2.55 3.18
Less: Creditors 0.29 0.39 0.49
Net Working Capital 1.62 2.16 2.70

Decision: Since the NPV of the project is positive, we accept the project

Notes
1) Terminal cash inflow = PAT + depreciation + Salvage + Recovery of net working capital
Terminal cash inflow = 2.11 + 0 + 2.70
Terminal cash inflow = 4.81
2) In cash flow statement, the year is for project which is different from the year of operations. The operations will begin only
3) Interest during construction period will not be considered
4) Allocated rent - from the existing expense, a part of it is charged to the project
5) Additional Working capital is a cash outflow (WC is a balance sheet item hence only additional should be considered)
6) FG stock has been valued based on Marginal costing
7) Creditors have been assumed to be only for raw materials
tions. The operations will begin only when the project is complete

additional should be considered)

Prakash Steel Ltd - Scenario 1

Projected Statement of Cash Flows

Year CO CI NCF
1 1.20 0.00 -1.20
2 1.70 0.00 -1.70
3 1.52 0.23 -1.29
4 0.51 0.59 0.08
5 0.51 0.89 0.38
6 0.00 0.89 0.89
7 0.00 0.89 0.89
8 0.00 0.89 0.89
9 0.00 0.89 0.89
10 0.00 0.89 0.89
11 0.00 0.89 0.89
12 0.00 3.42 3.42

NPV -0.12
IRR 11.40%

Projected P/L Statement

Particulars 1 2 3
Tonnes 12000 16000 20000
Sales Value 108000000 144000000 180000000
Sales Value (in crores) 10.8 14.4 18
Less:
Raw Material Cost 7.00 9.33 11.66
Utilities 0.84 1.12 1.40
Employee cost 1.00 1.25 1.50
Depreciation 0.29 0.29 0.29
S&D 0.54 0.72 0.90
Admin 1.00 1.00 1.00
Interest on NWC 0.20 0.26 0.33
PBT (0.06) 0.43 0.92
Less: Tax - 0.13 0.32
PAT (0.06) 0.30 0.60
Operating Cash Inflow 0.23 0.59 0.89

Calculation of Working capital

Particulars 1 2 3
Raw Material Stock 0.58 0.78 0.97
Fininshed Goods 0.33 0.44 0.54
Receivables 0.90 1.20 1.50
Gross Working Capital 1.81 2.41 3.02
Less: Creditors 0.29 0.39 0.49
Net Working Capital 1.52 2.02 2.53

Decision: Since the NPV of the project is negative, we will reject the project

Notes
1) Terminal cash inflow = PAT + depreciation + Salvage + Recovery of net working capital
Terminal cash inflow = 0.89 + 0 + 2.53
Terminal cash inflow = 3.42
2) In cash flow statement, the year is for project which is different from the year of operations. The operations will begin only
3) Interest during construction period will not be considered
4) Allocated rent - from the existing expense, a part of it is charged to the project
5) Additional Working capital is a cash outflow (WC is a balance sheet item hence only additional should be considered)
6) FG stock has been valued based on Marginal costing
7) Creditors have been assumed to be only for raw materials
tions. The operations will begin only when the project is complete

additional should be considered)

Prakash Steel Ltd - Scenario 2

Projected Statement of Cash Flows

Year CO CI NCF
1 1.20 0.00 -1.20
2 1.70 0.00 -1.70
3 1.68 0.52 -1.15
4 0.56 0.93 0.37
5 0.56 1.34 0.78
6 0.00 1.34 1.34
7 0.00 1.34 1.34
8 0.00 1.34 1.34
9 0.00 1.34 1.34
10 0.00 1.34 1.34
11 0.00 1.34 1.34
12 0.00 4.14 4.14

NPV 1.63
IRR 19.35%

Projected P/L Statement

Particulars 1 2 3
Tonnes 12000 16000 20000
Sales Value 120000000 160000000 200000000
Sales Value (in crores) 12 16 20
Less:
Raw Material Cost 7.70 10.26 12.83
Utilities 0.84 1.12 1.40
Employee cost 1.00 1.25 1.50
Depreciation 0.29 0.29 0.29
S&D 0.60 0.80 1.00
Admin 1.00 1.00 1.00
Interest on NWC 0.22 0.29 0.36
PBT 0.36 0.99 1.62
Less: Tax 0.12 0.35 0.57
PAT 0.23 0.64 1.05
Operating Cash Inflow 0.52 0.93 1.34

Calculation of Working capital

Particulars 1 2 3
Raw Material Stock 0.64 0.86 1.07
Fininshed Goods 0.36 0.47 0.59
Receivables 1.00 1.33 1.67
Gross Working Capital 2.00 2.66 3.33
Less: Creditors 0.32 0.43 0.53
Net Working Capital 1.68 2.24 2.79

Decision: Since the NPV of the project is positive, we accept the project

Notes
1) Terminal cash inflow = PAT + depreciation + Salvage + Recovery of net working capital
Terminal cash inflow = 1.34 + 0 + 2.79
Terminal cash inflow = 4.14
2) In cash flow statement, the year is for project which is different from the year of operations. The operations will begin only
3) Interest during construction period will not be considered
4) Allocated rent - from the existing expense, a part of it is charged to the project
5) Additional Working capital is a cash outflow (WC is a balance sheet item hence only additional should be considered)
6) FG stock has been valued based on Marginal costing
7) Creditors have been assumed to be only for raw materials
tions. The operations will begin only when the project is complete

additional should be considered)

Prakash Steel Ltd - Scenario 3

Projected Statement of Cash Flows

Year CO CI NCF
1 1.32 0.00 -1.32
2 1.87 0.00 -1.87
3 1.62 0.99 -0.63
4 0.54 1.56 1.02
5 0.54 2.12 1.58
6 0.00 2.12 2.12
7 0.00 2.12 2.12
8 0.00 2.12 2.12
9 0.00 2.12 2.12
10 0.00 2.12 2.12
11 0.00 2.12 2.12
12 0.00 4.82 4.82

NPV 4.61
IRR 30.89%

Projected P/L Statement

Particulars 1 2 3
Tonnes 12000 16000 20000
Sales Value 120000000 160000000 200000000
Sales Value (in crores) 12 16 20
Less:
Raw Material Cost 7.00 9.33 11.66
Utilities 0.84 1.12 1.40
Employee cost 1.00 1.25 1.50
Depreciation 0.32 0.32 0.32
S&D 0.60 0.80 1.00
Admin 1.00 1.00 1.00
Interest on NWC 0.21 0.28 0.35
PBT 1.03 1.90 2.77
Less: Tax 0.36 0.67 0.97
PAT 0.67 1.24 1.80
Operating Cash Inflow 0.99 1.56 2.12

Calculation of Working capital

Particulars 1 2 3
Raw Material Stock 0.58 0.78 0.97
Fininshed Goods 0.33 0.44 0.54
Receivables 1.00 1.33 1.67
Gross Working Capital 1.91 2.55 3.18
Less: Creditors 0.29 0.39 0.49
Net Working Capital 1.62 2.16 2.70

Decision: Since the NPV of the project is positive, we accept the project

Notes
1) Terminal cash inflow = PAT + depreciation + Salvage + Recovery of net working capital
Terminal cash inflow = 2.12 + 0 + 2.70
Terminal cash inflow = 4.82
2) In cash flow statement, the year is for project which is different from the year of operations. The operations will begin only
3) Interest during construction period will not be considered
4) Allocated rent - from the existing expense, a part of it is charged to the project
5) Additional Working capital is a cash outflow (WC is a balance sheet item hence only additional should be considered)
6) FG stock has been valued based on Marginal costing
7) Creditors have been assumed to be only for raw materials
tions. The operations will begin only when the project is complete

additional should be considered)

Prakash Steel Ltd - Scenario 4

Projected Statement of Cash Flows

Year CO CI NCF
1 1.20 0.00 -1.20
2 1.70 0.00 -1.70
3 1.62 0.86 -0.75
4 0.54 1.39 0.85
5 0.54 1.91 1.38
6 0.00 1.91 1.91
7 0.00 1.91 1.91
8 0.00 1.91 1.91
9 0.00 1.91 1.91
10 0.00 1.91 1.91
11 0.00 1.91 1.91
12 0.00 4.61 4.61

NPV 4.01
IRR 29.54%

Projected P/L Statement

Particulars 1 2 3
Tonnes 12000 16000 20000
Sales Value 120000000 160000000 200000000
Sales Value (in crores) 12 16 20
Less:
Raw Material Cost 7.00 9.33 11.66
Utilities 0.84 1.12 1.40
Employee cost 1.00 1.25 1.50
Depreciation 0.29 0.29 0.29
S&D 0.78 1.04 1.30
Admin 1.00 1.00 1.00
Interest on NWC 0.21 0.28 0.35
PBT 0.88 1.69 2.50
Less: Tax 0.31 0.59 0.87
PAT 0.57 1.10 1.62
Operating Cash Inflow 0.86 1.39 1.91

Calculation of Working capital

Particulars 1 2 3
Raw Material Stock 0.58 0.78 0.97
Fininshed Goods 0.33 0.44 0.54
Receivables 1.00 1.33 1.67
Gross Working Capital 1.91 2.55 3.18
Less: Creditors 0.29 0.39 0.49
Net Working Capital 1.62 2.16 2.70

Decision: Since the NPV of the project is positive, we accept the project

Notes
1) Terminal cash inflow = PAT + depreciation + Salvage + Recovery of net working capital
Terminal cash inflow = 1.91 + 0 + 2.70
Terminal cash inflow = 4.61
2) In cash flow statement, the year is for project which is different from the year of operations. The operations will begin only
3) Interest during construction period will not be considered
4) Allocated rent - from the existing expense, a part of it is charged to the project
5) Additional Working capital is a cash outflow (WC is a balance sheet item hence only additional should be considered)
6) FG stock has been valued based on Marginal costing
7) Creditors have been assumed to be only for raw materials
tions. The operations will begin only when the project is complete

additional should be considered)

Prakash Steel Ltd - Final Summary

Calculation of NPV and IRR under different scenarios

Particulars Base Case Scenario 1 Scenario 2

NPV 4.81 -0.12 1.63
IRR 32.77% 11.40% 19.35%

Projected P/L Statement (for Scenario 1)

Particulars 1 2 3
Tonnes 12,000 16,000 20,000
Sales Value 108,000,000 144,000,000 180,000,000
Sales Value (in crores) 11 14 18
Less:
Raw Material Cost 7.00 9.33 11.66
Utilities 0.84 1.12 1.40
Employee cost 1.00 1.25 1.50
Depreciation 0.29 0.29 0.29
S&D 0.54 0.72 0.90
Admin 1.00 1.00 1.00
Interest on NWC 0.20 0.26 0.33
PBT (0.06) 0.43 0.92
Less: Tax - 0.13 0.32
PAT (0.06) 0.30 0.60
Operating Cash Inflow 0.23 0.59 0.89
Scenario 3 Scenario 4
4.61 4.01
30.89% 29.54%