Case Appraisal

By
K.A.Vimalenthirarajah
(SLAS / Attorney –at-Law)
 Project Appraisal: Case 1
• Assistant Director of Agriculture of South District submitted a proposal to construct an
Agriculture Road at the cost of Rs.400,000 and benefiting for next 10 years.

• Annual Maintenance Cost of the Road will be Rs.5,000 per year.

• If the road is constructed, there would be a saving of Transport Cost of Rs.20,000 per
year.

• New crop harvest worth of Rs. 200,000 per year.

• The cost of cultivation, transport and marketing of harvest would be Rs.160,000 per
year

• Cost of Capital is 01% per month

• Calculate the NPV and IRR of the Agriculture Road Project and state whether you
would recommend the project or Not?
Case: Methodology
In Rs. Mn
Year Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10
Investment (400) - - - - - - - - - -
Maintenance Cost - 5 5 5 5 5 5 5 5 5 5
Cost of Crops - 160 160 160 160 160 160 160 160 160 160
Total Cost (400) 165 165 165 165 165 165 165 165 165 165
Saving in Transport - 20 20 20 20 20 20 20 20 20 20
Benefits of Crops - 200 200 200 200 200 200 200 200 200 200
Total Benefits - 220 220 220 220 220 220 220 220 220 220
Net Benefits (400) 55 55 55 55 55 55 55 55 55 55

NPV = Rs.62.05 Mn, IRR = 6% : Project will not be recommended

Check and validate the above answer?

 Case 2
• Raj Project Co Ltd has forecasted cash flow of the
mining project as follows

Year Y0 Y1 Y2 Y3 Y4 Y5
Cash Flow (Rs. Mn) -1,100 1,000 1,000 100 -100 -1010

Calculate the NPV at the following Discount Rates: 0%, 5%, 10%
and 40%. What is the unusual dimension of the above project?

Depicts the NPV Profile of the Project based on the estimated

NPVs at 0%, 5%, 10% and 40%
Answer
Year NPV @ 0% NPV @ 5% NPV @ 10% NPV @ 40&
0 (1,100) (1,1000) (1,100) (1,100)
1 1,000 952 909 715
2 1,000 907 826 510
3 100 86 75 37
4 (100) (82) (68) (26)
5 (1,010) (792) (627) (188)
NPV (110) (29) 15 (52)

The Project has an unusual dimension as there are apparently two IRRs due to
the NPV Profile intersects the horizontal axis at two different points (Project
has a single positive NPV and three negative NPVs)
 Case 4

• Ram considering to purchase an equipment at a cost of

Rs. 5.0 Mn for printing purposes. This will be do away
for hiring of a sub contractor to do the printing job
which presently cost about Rs.1.75 Mn per year. The
equipment will also do additional job for a value of Rs.
0.65 Mn per year. The operating cost of the equipment
will be Rs. 1.25 Mn per year and its life span will be 5
years only. It has a residual value of Rs.1.0 Mn.
Assuming the cost of capital is 12% and decide whether
Ram should purchase the equipment. Assume equipment
will be delivered and installed in the year 0 and will be
fully operated from year 1.
 Answer
In Rs. Mn

Description Y0 Y1 Y2 Y3 Y4 Y5
Capital Cost (5.0)
Operating Cost - (1.25) (1.25) (1.25) (1.25) (1.25)
Hire Savings - 1.75 1.75 1.75 1.75 1.75
Value of Additional Work - 0.65 0.65 0.65 0.65 0.65
Residual Value - - - - - 1.0
NCF (5.0) 1.15 1.15 1.15 1.15 2.15

NPV = ( Rs.0.288) < 0. Project will not be recommended

Check and validate the above answer?

Q&A