Modified NPV

Reinvestment rate
Term
Discount rate

14%
4
10%

Year

TV
0
1
2
3
4

20%

110,000
31,000
40,000
50,000
70,000

NPV

TV
<---Outflow
45,928
51,984
57,000
70,000
224,912

53,568
57,600
60,000
70,000
241,168

43,618

54,721

IRR
0
1
2
3
4
5
6

(120)
(80)
20
60
80
100
120

16.81% <--IRR
(120.00)
(68.49)
14.66
37.64
42.97
45.98
47.24
0.00

Supreme Industries is evaluating a new project with life of 6 years. Relevant information
a)
b)
c)
d)
e)
f)
g)

Supreme Industries is evaluating a new project with life of 6 years. Relevant information is g
Total outlay - Rs.450mm. FA - 250mm and CA - 200mm
Proposed financing - Equity - 100, Term loans - 200 and WC Advance - 100, Trade credit - 50
Term loan - repayable in 10 equal semi-annual instalments. First instalment due after 18 months
Int rate is 15%
WC advance and trade credit will remain same till end of 6 years. WCA interest - 18%
Expected revenues - 500mm per year. Operating costs (exclu depr and int) - 320mm p.a.
Depr rate - 33.33% as per WDV method
Net salvage value of FA and CA at end of project life - 80mm and 200mm respectively
Tax rate - 50%
Define cash flows from point of view of
I) Equity funds
II) Long term funds
III) Total funds

ation is given below

Exhibit 11.1 Cash Flow Forecast for Naveen's Flour Mill Project
Year 0
Years 1-10
1. Investment
-20000
2. Sales
18000
3. Variable Cost (2/3rd of Sales)
12000
4. Fixed Cost
1000
5. Depreciation
2000
6. Pre-tax Profit
3000
7. Taxes
1000
8. Profit After Taxes
2000
9. Cash Flow from Operations
4000
10. Net Cash Flow
-20000
4000
Cash Flow for financial BE analysis
Variable Cost as a Percentage of Sales
Discount Rate

66.67%
12.00%

Exhibit 11.2 Sensitivity of NPV to Variations in the Value of Key Variables

Range
Key Variable
Pessimistic Expected
Optimistic
Investment (Rs. In Million)
24000.00
20000.00
18000.00
Sales (Rs. In Million)
15000.00
18000.00
21000.00
Variable cost as a percentage of sales
70.00%
66.67%
65.00%
Fixed Costs
1300.00
1000.00
800.00

1. Investment
2. Sales
3. Variable Cost (2/3rd of Sales)
4. Fixed Cost
5. Depreciation
6. Pre-tax Profit
7. Taxes
8. Profit After Taxes
9. Cash Flow from Operations
10. Net Cash Flow
NPV
Variable Cost Prop

1.
2.
3.
4.
5.

Investment
Sales
Variable Cost (2/3rd of Sales)
Fixed Cost
Depreciation

Year 0
-20000

-20000

Years 1-10
18000
12000
1000
2000
3000
1000
2000
4000
4000

2,600.89
66.67%
12.00%
Year 0
-20000

Years 1-10
18000
12000
1000
2000

4000

6. Pre-tax Profit
7. Taxes
8. Profit After Taxes
9. Cash Flow from Operations
10. Net Cash Flow

-20000

NPV

2,600.89
12.00%

3000
1000
2000
4000
4000

4000

the Value of Key Variables

Pessimistic
-645.74
-1165.92
340.80
1470.85

NPV
Expected
2600.89
2600.89
2600.89
2600.89

Optimistic
4224.21
6367.71
3730.94
3354.26

$2,600.89
-20000 2600.89211
-24000 -645.74482
-18000 4224.21058

4000

4000

4000

4000

Data Table
Sales
NPV
Var Cost
2,600.89
18000 2600.892114
66.67%
15000 -1165.92324
70.00%
21000 6367.707466
65.00%

4000

NPV
###
2600.892
340.8029
3730.937

4000

4000

Fixed Cost NPV

###
1000 2600.892
1300 1470.848
800 3354.255

4000

4000

4000

4000

4000

4000

4000

4000

4000

Certainty Equivalent Method

Initial Investment=
4,500,000
Risk free interest rate
5%

Year
1
2
3
4

Expected
Cash Flow
1,000,000
1,500,000
2,000,000
2,500,000

Certainty
Equivalent
Coefficient
0.90
0.85
0.82
0.78

CE * CF
900,000
1,275,000
1,640,000
1,950,000

NPV

PV
857,143
1,156,463
1,416,694
1,604,270
5,034,569
534,569

Optimal Timing Decision

Time

12%
Net Future Value (Rs mm) Current value
0
20.00
20.00
1
28.00
25.00
2
33.00
26.31
3
36.00
25.62
4
38.00
24.15

Exhibit 13.8 Calculation of the Present Value of Tax Shield

Year
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00

Debt Outstanding at the

Beginiing
2,400,000.00
2,100,000.00
1,800,000.00
1,500,000.00
1,200,000.00
900,000.00
600,000.00
300,000.00

Interest
336,000.00
294,000.00
252,000.00
210,000.00
168,000.00
126,000.00
84,000.00
42,000.00

Tax Shield
134,400.00
117,600.00
100,800.00
84,000.00
67,200.00
50,400.00
33,600.00
16,800.00
Total

Initial Debt
Annual Repayment
of Principle
Interest Rate
Tax Rate

300,000.00
14%
40%

Present Value of
Tax Shield
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