Part - B

Note: All the figures we have used are in millions.

Rs. in
Sr.No. Year 0 1
1 Revenue - 10.00
2 COGS = 60% of Revenue - 6.00
3 Gross Profit = 1-2 - 4.00
4 Selling, general adminitrative @ 23.5% of Revenue - 2.35
5 R&D 0.2 -
6 Depreciation 0.10
7 EBIT = 3-4-5-6 (0.20) 1.55
8 Income tax, (T = 40%) (0.08) 0.62
9 Unlevered net income = 7-8 (0.12) 0.93
10 Plus: depreciation - 6 (0.12) 1.03
11 Less: Investment in PP&E 0.50 -
12 Less: Change in NWC - 2.70
13 Free Cash Flow = 9+10-11-12 (0.74) (0.74)
PV Factor @20% 1.0000 0.8333
PRESENT VALUE (0.7400) (0.6167)
NET PRESENT VALUE 2.2990 Positive so investmen

Note-1 0 1
Change in NWC
Cash = Revenue * 0.27 - 2.70
Inventory - -
Receivable - -
Payable - -
- 2.70
a=25%
b=15%
Formula: IRR interpolation = a% + {(NPVa / (NPVa-NPVb)
0 1
Free Cash Flow (0.74) (0.74)
a-discount factor@25% 1.00 0.80
NPVa (0.74) (0.59)

0 1
Free Cash Flow (0.74) (0.74)
b-discount factor@15% 1.00 0.87
NPVb (0.74) (0.64)
 = 25% + {(1.53 / (1.53-3.31)} *
= 25% + (-.86 * -10%)
IRR 34%
The investment in the project is feasible as NPV of the project is positive. So there will be a good decision
greater than the cost of capital, IRR analysis also shows that it is feasible to invest in the project.

In our working of this question we have taken the projected revenues. By deducting the costs we have reached
have ignored the already spent development cost as we have analysed just the incremental cash flows.

Net working capital is calculated separately. There us no other item than cash. Cash is invested as 27cents again
Negative income tax means the tax shield for the company.
 Part - B

Rs. in million
2 3 4 5
13.00 13.00 8.67 4.33
7.80 7.80 5.20 2.60
5.20 5.20 3.47 1.73
3.06 3.06 2.04 1.02
- - - -
0.10 0.10 0.10 0.10
2.05 2.05 1.33 0.62
0.82 0.82 0.53 0.25
1.23 1.23 0.80 0.37
1.33 1.33 0.90 0.47
- - - -
3.51 3.51 2.34 (12.06) Note-1
(0.96) (0.96) (0.64) 12.90
0.6944 0.5787 0.4823 0.4019
(0.6639) (0.5532) (0.3106) 5.1834
Positive so investment shouls be made

2 3 4 5

3.51 3.51 2.34 (12.06)

- - - -
- - - -
- - - -
3.51 3.51 2.34 (12.06)

= a% + {(NPVa / (NPVa-NPVb)} * (b-a)%

2 3 4 5
(0.96) (0.96) (0.64) 12.90
0.64 0.51 0.41 0.33
(0.61) (0.49) (0.26) 4.23 1.53

2 3 4 5
(0.96) (0.96) (0.64) 12.90
0.76 0.66 0.57 0.50
(0.72) (0.63) (0.37) 6.41 3.31
= 25% + {(1.53 / (1.53-3.31)} * (15-25)%
= 25% + (-.86 * -10%)

So there will be a good decision to iunvest in the project. IRR of the project is 34% which is far
to invest in the project.

ucting the costs we have reached at the EBIT. In R&D cost we have taken the tax deductible cost and we
incremental cash flows.

Cash is invested as 27cents against dollar sale, so we can say that 27% of revenue for the year.