ESTIMATED CASH FLOW STATEMENT

SOURCES OF FUNDS (CASH INFLOW)

Term loan procured 20
Unsec loan procured 10
PBIT/EBIT 80
Depreciation (as it is non cash expense) 20

TOTAL (A) 130

APPLICATION OF FUNDS (CASH OUTFLOW)

Term loan repaid 5
Fixed assets 30
Increase in inventory 10
Increase in receivables 15
20 Interest 20
Tax 30
Dividend 10

TOTAL (B) 120

NET CASH INFLOW AMOUNT (A)-(B) 10

Add:- Opening cash balance 20
Estimated Closing cash balance 30

PROJECTED BALANCE SHEET

LIABILITIES RS ASSETS Rs
Add profit(retained
earnings) of 20 from Share capital 100 Fixed assets 190 reducing depreciation
income statement Reserves and surplus 40 Investments
Secured loans 95 Current Assets
 Unsecured loans 60 Cash 30
Current liabilities 90 Receivables 95
Provisions 20 Inventories 90
405 405

Q1) Cash inflow

Term loan 1
Curr liab 0.3
Prov 0.05
PBIT 4.5
Depn 1.5

7.35
Cash outflow
FA 1.5
Inv 0.5
Rec 0.2
int 1.2
tax 1.8
div 1 0.5
term loan 0.5

6.7
Net inflow 0.65
Add:-op bal 1
Cl bal 1.65

6.9 tb MULTI YEAR PROJECTIONS

Correction IN QS. eXHIBIT 6.10 Sales is 30 Mn for Yr 1 and 60 Mn for Yr 2

PROJECTED PROFIT & LOSS STATEMENT

YR 1 YR 2
Sales 30 60
Less:- Cost of Sales 30 40
 EBITDA 0 20
LEss:- depre 2 2.8
EBIT -2 17.2
Less:- interest 4.8 6.4
EBT -6.8 10.8
Less:- adj of loss Yr 1 -6.8 8.4 Yr 2 prf
Adj EBT -6.8 4 -6.8 Yr 1 loss
Less:- tax 60% 2.4
Loss/EAT -6.8 1.6 1.6

Note:- As per IT loss of Yr 1 can be carried forward and adjusted against profit of Yr2. In Yr 2 tax is paid after adjusting loss of Yr 1

PROJECTED CASHFLOW STATEMENT

CASH INFLOW CONSTRUCTION PER YR 1 YR 2
SHARE CAPITAL 10 15
TERM LOAN 15 15 7.5
BANK BORR 12 6
EBIT -2 17.2
DEPR 2 2.8

TOTAL 25 42 33.5

TOTAL 50
CASH OUTFLOW
PRIL EXP 2
FA 20 20 10
CA 20 10
INTEREST 4.8 6.4
TAX 2.4

TOTAL 22 44.8 28.8

NET FLOW 3 -2.8 4.7
ADD:-OP BAL 3 0.2
CL BAL 3 0.200000000000003 4.9
PROJECTED BALANCE SHEET
CONSTRUCTION PERIOD
LIABILITIES ASSETS
SC 10 FA 20
TERM LOAN 15 PRILIM EXP 2
CASH 3
TOTAL 25 TOTAL 25

YR 1
LIABILITIES ASSETS
SC 25 FA 38
TERM LOAN 30 CA (OTHER THAN CASH) 20
BORR 12 CASH 0.2
PRILIM EXP 2
PROFIT AND LOSS 6.8

TOTAL 67 TOTAL 67

YR 2
LIABILITIES ASSETS
SC 25 FA 45.2
TERM LOAN 37.5 CA (OTHER THAN CASH) 30
BORR 18 CASH 4.9
PROFIT AND LOSS 1.6 PRILIM EXP 2

TOTAL 82.1 TOTAL 82.1

 Yr 1 Yr2
CA = Debtors 10000 8000 2000 inflow
CL = Creditors 15000 10000 5000 outflow

Decrease in Current Assets result in Cash inflow

Increase in current assets results in cash outflow
Decrease in Current liability results in cash outflow
Increase in current liability results in cash inflow

g depreciation
 ESTIMATION OF PROJECT CASH FLOWS

Operating activies
Financing activities Interest/dividend expense
Investing activities Interest/dividend income

Ills 1 Navin Entr

Yr 1 2 3 4
Investment 100 Mn Sales 120 120 120 120
FA 80 Mn Less: - cost 80 80 80 80
WC 20 Mn EBITDA 40 40 40 40
Funding Less:- Depn 12 10.2 8.67 7.37
ESC 45 Mn EBIT 28 29.8 31.33 32.63
15% PSC 5 Mn Less:- tax 30% 8.4 8.94 9.399 9.789
15% Debt 50 Mn EBIT (1-tax rate) 19.60 20.86 21.93 22.84
Add:- depn 12 10.2 8.67 7.37
Operating cash inflow 31.60 31.06 30.60 30.21
TV on account of FA
TV on account of WC
Cash inflow 31.60 31.06 30.60 30.21

Illus 2 India Pharma Yr1 2 3 4

Sales 100 150 200 150
Less:-RM 30% of sales 30 45 60 45
Less:- Labour 20 30 40 30
Less:- fixed op& maint cost 5 5 5 5
Less:- Opportunity cost 15 15 15 15
Less:- depre 15%wdv 15.00 12.75 10.84 9.21
Less:- bad debt
 EBIT 15.0 42.3 69.2 45.8
Less tax 30% 4.50 12.68 20.75 13.74
EBIT (1-tax rate) 10.5 29.6 48.4 32.1
Add:- depn 15.00 12.75 10.84 9.21
Add:- bad debt
Cash inflow from operation 25.5 42.3 59.3 41.3
Change in WC - is outflow &
+inflow -10 -10 10 10
Cash inflow from operation 15.5 32.3 69.3 51.3
Add:- TV - FA
ADd:- TV WC
Net cash flow from Project 15.5 32.3 69.3 51.3

WN1 Depn WDV 15%

Cost 100.00 85.00 72.25 61.41
Dep 15.00 12.75 10.84 9.21
WDV 85.00 72.25 61.41 52.20

WN2 Yr 0 1 2 3 4
WC is 20% of
sales of next
year 20 30 40 30 20

Change in WC 10 10 -10 -10

+ indicates
additional
required
(outflow), -
indicates
saving on
account of WC
(inflow)
 REPLACEMENT PROJECT - CASH FLOW ESTIMATION

OJUS ENTR

Initial investmenCost of new asset - Salvage value of old asset today

1,100,000 Net outflow

Initial investmenWC reqd for new- WC reqt of old

100,000 Net outflow

Terminal Value (iTV of new asset - TV of old asset had it not been sold
640,000 Net inflow

Operating inflowsEBIT*(1-tax rate)

Yr 1 2 3 4 5

EBIT (savings in
cost which will
bring about the
incremental
EBIT) 257,143 257,143 257,143 257,143 257,143
Less:- tax 30% 77142.9 77142.9 77142.9 77142.9 77142.9
EBIT*(1-tax rate) 180,000 180,000 180,000 180,000 180,000
Add:- depre (difference)
Depn on new ass 240,000 204,000 173,400 147,390 125,282
Depn on old asse 60,000 51,000 43,350 36,848 31,320
Difference 180,000 153,000 130,050 110,543 93,961
Tax savings on ex 54,000 45,900 39,015 33,163 28,188
Cashinflow (incl d 414,000 378,900 349,065 323,705 302,150
Cashinflow (as pe 234,000 225,900 219,015 213,163 208,188

Add: TV on new
asset -TV on old 640,000
Add:- TV on
account of
additional WC
input in the
beginning 100,000
Cash inflow 414,000 378,900 349,065 323,705 1,042,150

Assume that WC is recovered at the end of 5 years

 5
120
80
40
6.26
33.74
10.122
23.62
6.26
29.88
30
20
79.88

5
100
30
20
5
15
7.83
5
 17.2
5.15
12.0
7.83
5
24.8

0
24.8
20
15
59.8

52.20
7.83
44.37

20

0
 CAPITAL BUDGETING

Qs9) Pg 292 PROJECT M PROJECT N

INVESTMENT 50 MnCumulative INVESTMENT 50 MnCumulati
cash ve cash
Year Cash infl inflows Year Cash infl inflows
1 11 11 1 38 38
2 19 30 2 22 60
3 32 62 3 18 78
4 37 99 4 10 88

a) Pay back period Pay back period

2 yrs + (50-30)/32*12 1 yr + (50-38)/22*12
2 yrs + 7.5 months 1 yr + 6.55 months
PBP = 2 yrs& 7.5months PBP = 1 yr& 6.55 months
PV of CI at
b) Discounted payback
Cash period
12% = Cumulati Cash
Year inflow CI/(1+r)^n ve PV CI Year inflow
1 11 9.82 9.82 1 38
2 19 15.15 24.97 2 22
3 32 22.78 47.75 3 18
4 37 23.51 71.26 4 10
PV factors
1 11 0.893 9.82
2 19 0.797 15.15 DPBP = 1 yr +
3 32 0.712 22.78
4 37 0.636 23.51

Discounted payback period

3yrs+ 1.15 months
DPBP = 3 yrs & 1.15m

Based on above 2 methods, the company will prefer to invest in Project N as payback is earlier

c) Net present value

If NPV is positive we accept theatproject, and reject if NPV is negative
PV of CI
Project M Cash 12% = Project N Cash
Year inflow CI/(1+r)^n Year inflow
1 11 9.82 1 38
2 19 15.15 2 22
3 32 22.78 3 18
4 37 23.51 4 10
Sum of cashinflows 71.26 Sum of cashinflows
Initial investment 50 Initial investment
NPV 21.26 NPV
NPV = Sum of PV of cash inflows - PV of Cash outflows

Since both projects are independent and both have positve NPV, the company can invest on bo
d) If projects are mutually exclusive (replacable), then company will invest only in one of the proje
The company will invest in project with higher NPV

Project M Cash Project N Cash

Year inflow PV at 10% Year inflow
1 11 10.00 1 38
2 19 15.70 2 22
3 32 24.04 3 18
4 37 25.27 4 10
Sum of cashinflows 75.02 Sum of cashinflows
Less:- outflow 50 Less:- outflow
NPV 25.02 NPV

Since proejcts are mutually exclusive, co invests in Project M as NPV is higher

e) Project M Cash Project N Cash

Year inflow PV at 15% Year inflow
1 11 9.57 1 38
2 19 14.37 2 22
3 32 21.04 3 18
4 37 21.15 4 10
Sum of cashinflows 66.13 Sum of cashinflows
Less:- outflow 50 Less:- outflow
NPV 16.13 NPV

Since proejcts are mutually exclusive, co invests in Project M as NPV is higher

NPV
Ko Proj M Proj N
10% 25.02 23.08
12% 21.26 20.63
15% 16.13 17.23
IRR 27.30% 35.88%

f) Internal rate of return IRR is greater than Cost of capital then company can
Rate at which NPV is zero
Project M Cash Project N
Year inflow PV at 15% PV at 18%PV at 24%PV at 28% Year
1 11 9.57 9.32 8.87 8.59375 1
2 19 14.37 13.65 12.36 11.59668 2
3 32 21.04 19.48 16.78 15.25879 3
4 37 21.15 19.08 15.65 13.78357 4
Sum of cashinflows 66.13 61.53 53.66 49.23 Sum of cashinflows
Less:- outflow 50.00 50.00 50.00 50.00 Less:- outflow
NPV 16.13 11.53 3.66 -0.77 NPV

24%+ 3.3070604 35%

IRR 24%+3.3% = 27.3% 38%
 0 -50 35%+
1 11 IRR 35%+0.88% = 35.88%
2 19
3 32 0
4 37 1
27.3% 2
3
4

IRR
PROFITABILITY INDEX/BENEFIT-COST RATIO
If PI is greater than 1, company can accept the project, if PI is less than 1 company should not i
PI = PV of cashinflows/PV of cash outflows
PI on basis of NPV determined at 12%
PV of CI at
Project M Cash 12% = Project N Cash
Year inflow CI/(1+r)^n Year inflow
1 11 9.82 1 38
2 19 15.15 2 22
3 32 22.78 3 18
4 37 23.51 4 10
Sum of cashinflows 71.26 Sum of cashinflows
Initial investment 50.00 Initial investment

PI = 1.43 PI =

MIRR = Modified internal rate of return (non conventional cashflows)

MIRR is the rate at which PV of outflows = PV of the (future value of inflows)
Cost of capital is 15%
Year PV at 15%
0 -120 -120.00
1 -80 -69.57
FV at 15%
2 20 34.98
3 60 91.25
4 80 105.80
5 100 115.00
6 120 120.00

PV of cash outflow 189.57

FV of inflows 467.03

Rate at which 189.57 = PV of 467.03, which is cumulative FV of inflows in Yr 6

189.57 = 467.03/(1+r)^6

Try at 15% Try 17%

201.91 182.07
 15%+ 1.24

MIRR = 15%+1.24% = 16.24%

Qs 9) f) Modified IRR calculation

Investment 50 Mn
Cost of capital 14% FV of FV of
PROJECT M Cash inflows at PROJECT N Cash inflows
Year inflow 14% Year inflow at 14%
0 -50 0 -50
1 11 16.30 1 38 56.30
2 19 24.69 2 22 28.59
3 32 36.48 3 18 20.52
4 37 37.00 4 10 10.00

PV of outflow = 50 PV of outflow = 50

FV of inflow 114.47 FV of inflow 115.41

50= 114.47/(1+r)^4 50= 115.41/(1+r)^4

at 14% at 24% at 14% at 24%
67.78 48.42 68.33 48.82

14%+ 9.18 14%+ 9.40

MIRR 14%+9.18% =23.18% MIRR 14%+9.4% =23.4%

 PV of CI at
12% = Cumulative
CI/(1+r)^n PV CI
33.93 33.93
17.54 51.47
12.81 64.28
6.36 70.63

11.0 months

payback is earlier

PV of CI at
12% =
CI/(1+r)^n
33.93
17.54
12.81
6.36
70.63
50
20.63

mpany can invest on both projects

only in one of the projects even though both have positive NPV

PV at 10%
34.55
18.18
13.52
6.83
73.08
50
23.08

PV at 15%
33.04
16.64
11.84
5.72
67.23
50
17.23

pital then company can accept the project

Cash inflow PV at 15% PV at 25%PV at 35%PV at 38%

38 33.04 30.40 28.15 27.54
22 16.64 14.08 12.07 11.55
18 11.84 9.22 7.32 6.85
10 5.72 4.10 3.01 2.76
Sum of cashinflows 67.23 57.79 50.55 48.69
Less:- outflow 50.00 50.00 50.00 50.00
17.23 7.79 0.55 -1.31

50.55
48.69
 0.88
35%+0.88% = 35.88%

-50
38
22
18
10

35.86%

1 company should not invest in project

PV of CI at
12% =
CI/(1+r)^n
33.93
17.54
12.81
6.36
70.63
50.00

1.41
 PROJECTS WHICH ARE MUTUALLY EXCLUSIVE QITH UNEQUAL LIFE
UAE = UNIFORM ANNUAL EQUIVALENT

MACHINE A MACHINE B
0 -75000 0
OP COST FOR 5 YRS P.A -12000 OP COST FOR 5 YRS P.
LIFE 5 YRS LIFE
PV OF COSTS AT 12% 118,260.00 PV OF COSTS AT 12%

sINCE LIFE OF BOTH PROJECTS ARE DIFFERENT THEIR NPV CANNOT BE DIRECTLY COMPARED TO TAKE A DECI

UAE = PV OF COSTS/PVAF (12%,5)

PVAF(12%,5) 3.6048 PVAF(12%,3)

UAE = 118260/3.6048 32,806.26 UAE = 86030/2.4018

Since UAE (PV of outflows, in this qs there is no inflow) is lower for Machina A, we select investment in Ma

INTERRELATIONSHIP BETWEEN INVESTMENT IN PROJECTS AND FINANCING THE PROJECT

It is essential to adjust the NPV with the cost associated with the financing, whether Equity or Debt

Adjusted NPV need to be determined

Steps
1) Final the NPV in regular manner
2) Cost of equity and its impact on NPV
3) Cost of debt (interest and principal repayments) and its impact on NPV

INvestment 5 Mn
Cashflow of Mn 1 for 8 years
Cost of capital 15%
Debt Mn 2.4, hence equity will be 2.6 Mn (5-2.4)
Debt 14%
Cost of equity 5%

1) Calculate NPV
PV of cashinflows = 1000000*4.4873
4,487,300.0
NPV = -0.52 Mn
NPV = -512,700

2) Funding thru equity required 2.6Mn, at a cost of 5% 2.6

??
Issue of Equity = 2.6 Mn/95% 2.74 Mn
Cost of issue = 2.74-2.6 = 0.14 0.14
 NPV now = -0.66 Mn

3) Impact of Cost of debt on NPV

repayment of loan 300000 p.a over 8 years starting from end of Yr 1

Tax savings on
interest = tax% on
Year Loan bal Interest interest
1 2,400,000 336,000 134,400.00
2 2,100,000 294000 117,600.00
3 1,800,000 252000 100,800.00
4 1,500,000 210000 84,000.00
5 1,200,000 168000 67,200.00
6 900,000 126000 50,400.00
7 600,000 84000 33,600.00
8 300,000 42000 16,800.00

Sum of PV of tax savings on account of interest on debt

This savings enhances NPV

NPV now= -246,206

Adjusted NPV= -246,206

Since NPV and APV are negative, this investment is not worthwhile

INTERNATIONAL CAPITAL BUDGETING

Risk free rate rate in home currency
India 8% 15%
USA 3% ?? (will be used for discounting the $ cashflows)

1.06481481481
1.09675925926
 -50000
-20000
3 YRS
86,030.00

E DIRECTLY COMPARED TO TAKE A DECISION

2.4018
35,818.97

Machina A, we select investment in Machine A

Equity or Debt

95%
100%
2736842.10526 4.55 0.55
136,842.11 -4
 0.55
-649,542

m end of Yr 1

PV of Tax
savings at Kd
14%
117,894.74
90,489.38
68,037.13
49,734.74
34,901.57
22,961.56
13,427.81
5,889.39

403,336.33

d for discounting the $ cashflows)

 MULTIPLE PROJECTS AND CONSTRAINTS - CAPITAL RATIONING

Eg Investment 1000000

PI 1.25 PI = PV of inflow/PV of outflow

PV of cashinflows 1250000 1.25 = PV of inflow/10,00,000
NPV 250000 PV of inflow = 1.25*10,00,000

Example - Project indivisibilFunds available 7 Mn

Invt required NPV
A 5 2
B 4 1.5
C 3 1
B&C maximises the NPV, so co. should invest in these 2 projects

Example - Project Divisibility

Based on assumption that part investment in project does not impact the given NPC, co will chose
They either invest 5 in A and balance 2 Mn in B or vice versa
given NPC, co will chose to invest in A & B as it maximises total NPV