3RD SUM OF PROJECT FINANCE

Q) Reliance Ltd. is planning to take up a mining project worth Rs. 50 lakhs. For
that purpose, the company approaches SBI. SBI asked for a project proposal
from the company. The following figures were recorded in the proposal itself:
EARNINGS BEFORE
YEAR INTEREST, TAXES & DEPRECIATION INTEREST
DEPRECIATION
1 50000 5000 2000
2 40000 5000 2500
3 60000 5000 3000
4 65000 5000 3500
5 70000 5000 4000
Tax rate is 40%.
The total amount to be repaid to the bank Rs. 7000000 (including the interest
amount).Determine whether it is feasible for SBI to extend the loan or not.
Solution: Computation of Net operating cash flows
YE EBDI DEPRECIATI INTERE TAX PAT NET
AR T ON ST OPERATING
CASH
FLOWS(PAT+
INT+DEPRECIAT
ON)
1 5000 5000 2000
40%*(5000 2580 25800+2000+500
0 0-5000-200 0 0= 32800
0)= 17200
2 4000 5000 2500 13000 1950 27000
0 0
3 6000 5000 3000 20800 3120 39200
0 0
4 6500 5000 3500 22600 3390 42400
0 0
5 7000 5000 4000 24400 3660 45600
0 0
NOTE: TAX RATE OF 40% IS LEVIED ON PROFIT BEFORE TAX WHICH
IS EBDIT-DEPRECIATION-INTEREST
TOTAL NET OPERATING CASH FLOWS=
32800+27000+39200+42400+45600= Rs. 187000
DEBT SERVICE COVERAGE RATIO = NET OPERATING CASH FLOWS/
TOTAL DEBT SERVICE
= 187000/7000000 = 0.026:1
COMMENT: AS DSCR IS LESS THAN 1, SBI SHOULD NOT GRANT THE
LOAN TO RELIANCE.