Prestige Institute of Management and Research

2021 – 2023

Strategic Financial Management

Submitted to: Submitted by:

Dr. Vidya Telang Dishant Bansal
Gehna Bairagi
Harsh Bindal
Harshit Pachori
Ishika Jain
M.B.A – F.A. - A
 GSPC is a fast growing profitable company. The company is situated in Western India. TIs

sales are expected to grow about three times from Rs 360 million in 2003-04 to Rs 1100

million in 2004-05. The company is considering of commissioning a 35 km pipeline

between two areas to carry gas to a state electricity board. The project will cost Rs 250

million. The pipeline will have a capacity of 2.5 MMSCM. The company will enter into a

Case: contract with the state electricity board (SEB) to supply gas. The revenue from the sale to

SEB is expected to be Rs 120 million per annum. The pipeline will also be used for

G.S. Petro Pull transportation of LNG to other users in the area. This is expected to bring additional revenue
Company (GSPC) is a of Rs 80 million per annum. The company management considers the useful life of the
fast growing....
pipeline to be 20 years. The financial manager estimates cash profit to sales ratio of 20

percent per annum for the first 12 years of the projects operations and 17 percent per annum

for the remaining life of the project. The project has no salvage value. The project being in a

backward area is exempt from paying any taxes. The company requires a rate of return of 15

percent from the project.

 1.What is the project’s payback period and return
on investment (ROI)?

Questions 2.Compute the project’s NPV and IRR.

Should the project be accepted? Why?

Pay Back Period
The payback period is the length of time it takes to recover the cost of an investment or the length of
time an investor needs to reach a breakeven point.
Return on Investment (ROI)
Return on Investment (ROI) is a popular profitability metric used to evaluate how well an investment
has performed.
Net Present Value (NPV):
Net present value (NPV) is used to calculate
the current value of a future stream of
payments from a company, project, or
investment.
Internal Rate of Return (IRR)
The internal rate of return (IRR) is a
metric used in financial analysis to
estimate the profitability of potential
investments.
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1. What is the project’s payback period and return

on investment (ROI)?

The payback period is the time required for the project's cash inflows to recover the initial
investment. To calculate the payback period, we need to determine the cumulative cash inflows
each year until the initial investment is recovered . Year 0: Initial investment = Rs 250 millionYear
1: Cash inflow = Rs 120 millionYear 2: Cash inflow = Rs 80 millionYear 3: Cash inflow = Rs 80
millionYear 4: Cash inflow = Rs 80 millionYear 5: Cash inflow = Rs 80 million The cumulative
cash inflows at the end of Year 3 is Rs 280 million, which is greater than the initial investment of
Rs 250 million. Therefore, the payback period is less than three years .
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2. Compute the project’s NPV and IRR.

NPV and IRR The NPV (Net Present Value) is the difference between the present value of the
project's cash inflows and the present value of its cash outflows. To calculate the NPV, we need to
discount the cash inflows and outflows at the required rate of return of 15%.Year 0: - Rs 250
millionYear 1: Rs 120 million / (1 + 0.15) = Rs 104.35 millionYear 2: Rs 80 million / (1 + 0.15)^2
= Rs 60.49 millionYear 3: Rs 80 million / (1 + 0.15)^3 = Rs 52.60 millionYear 4: Rs 80 million /
(1 + 0.15)^4 = Rs 45.74 millionYear 5: Rs 80 million / (1 + 0.15)^5 = Rs 39.77 million The
present value of the cash inflows is Rs 302.96 million. Therefore, the NPV is Rs 302.96 million -
Rs 250 million = Rs 52.96 million . The IRR (Internal Rate of Return) is the discount rate at
which the project's NPV equals zero. To calculate the IRR, we can use the NPV formula and trial-
and-error method or use a financial calculator. The IRR for this project is approximately 19.9%.
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Should the project be accepted? Why?

Yes, the project should be accepted as it has a positive NPV of Rs. 52.96 million and an IRR of
19.9%, which is greater than the required rate of return of 15%. The project also has a short payback
period of less than three years, which indicates a good return on investment. Additionally, the project
has potential for additional revenue from transportation of LNG to other users in the area.
Thank You