Name Hassan Khan

Roll No. 25040066

Section 1
EMBA25

Discount rate 15%

Year
0 1 2 3 4 5 6

Sales - status quo 5 000 000 5 000 000 5 000 000 5 000 000 5 000 000
Sales - new facility 6 000 000 7 500 000 10 000 000 10 000 000 10 000 000
Incremental Sales 1 000 000 2 500 000 5 000 000 5 000 000 5 000 000

Variable Costs - new facility 59.50 58.50 58.00 58.00 58.00

Variable costs - status quo 60 60 60 60 60

Units sold - status quo 50 000 50 000 50 000 50 000 50 000

Units sold - new facility 60 000 75 000 100 000 100 000 100 000

Marketing - status quo 87 500 87 500 87 500 87 500 87 500

Marketing - new facility 287 500 287 000 253 000 253 000 253 000
ACRS rate 20% 32% 19% 12% 11% 6%

Year
0 1 2 3 4 5 6

Sales 1 000 000 2 500 000 5 000 000 5 000 000 5 000 000
CGS 595 000 1 462 500 2 900 000 2 900 000 2 900 000
Savings of existing production 25 000 75 000 100 000 100 000 100 000
Marketing 200 000 199 500 165 500 165 500 165 500
Leasing costs 225 000 225 000 225 000 225 000 225 000
Others 250 000 250 000 250 000 250 000 250 000
Depreciation 260 000 416 000 247 000 156 000 143 000 78 000
Operating Income 0 505 000 22 000 1 312 500 1 403 500 1 416 500 78 000
Less: tax at 40% 202 000 8 800 525 000 561 400 566 600 31 200
Add: depreciation 260 000 416 000 247 000 156 000 143 000 78 000
Operating Cashflow after tax 0 43 000 429 200 1 034 500 998 100 992 900 31 200

Outlay 1 300 000

Salvage proceeds 500 000
Tax on sale 200 000
Working Capital 305 000 315 000 301 000 921 000
Cashflows 1 300 000 348 000 114 200 733 500 998 100 2 213 900 31 200

NPV 650 886

IRR 25.25%

Questions 1
Leasing costs of $325,000 p.a. must be allocated in part to the existing production as well, so not all for the new syrup production.
Alternatively, the leasing costs saved from the move should be a positive flow in the NPV calculation.

Questions 2
Cashflows are relevant rather than accounting flows as investment appraisal requires discounting the after-tax cashflows.
Accounting flows are relevant for profit, not for NPV calculations. Financial appraisal relies on the timing and amount of cashflows.

Questions 3
It is better to focus on incremental cashflows rather than the straight comparison between the one with the alternative and without.
This would provide a snapshot of how the proposal impacts on the value creation,
which would not be the case when side by side the @with” and “without” figures are given.

Questions 4
No, the payback criterion is not suitable as it does not relate to the totality of the relevant cashflows and merely seeks to find out when the initial investment will be recouped.
NPV is the best criterion which should be used for capital budgeting decisions as it shows the value creation in absolute terms due to the project proposal.

Questions 5
Generally, projects have to be supported in the initial years from other finance sources and that sets up as the discount rate.

Here, WACC is used if the project has the same business risk as the existing projects.