Financial Management Assignment

CIA
On
Working Capital Case Management

Submitted ByAnshul
Khanna
Reg. no.
1422101

MBA-Ex
Semester 2

Question:- Working Capital Case Management

Build a car
Land Rover manufactures SUV. It has a very strong innovation wing which has developed
very successful models in the last 20 years. However, 2 models developed by it in the last
year have not done well and were prematurely withdrawn from the market. The engineers at
its innovation wing have recently developed a prototype for a new SUV that would have a
capacity of 8 tons. After a lengthy discussion, the board of directors of Land Rover decided to
carefully evaluate the financial worthwhileness of manufacturing this model which they have
Labeled LR4. You have been recently hired as the consultant to Rahul Bose, Managing
Director of Land Rover. Rahul Bose has entrusted you with the task of evaluating the project.
LR 4 would be produced in the existing factory which has enough space for one more
product. LR 4 will require plant and machinery that will cost Rs.400 million. You can assume
that the outlay on plant and machinery will be incurred over a period of one year. For the sake
of simplicity assume that 50 per cent will be incurred right in the beginning and the balance
50 per cent will be incurred after 1 year. The plant will commence operation after one year.
LR 4 project will require Rs.200 million toward gross working capital. You can assume that
gross working capital investment will occur after 1 year.
The proposed scheme of financing is as follows: Rs.200 million of equity, Rs.200 million of
term loan, Rs.100 million of working capital advance, and Rs.100 million of trade credit.
Equity will come right in the beginning by way of retained earnings. Term loan and working
capital advance will be raised at the end of year 1. The term loan is repayable in 8 equal semiannual instalments of Rs.25 million each. The first instalment will be due after 18 months of
raising the term loan. The interest rate on the term loan will be 14 per cent. The levels of
working capital advance and trade credit will remain at Rs.100 million each, till they are paid
back or retired at the end of 5 years, after the project commences, which is the expected life
of the project. Working capital advance will carry an interest rate of 12 per cent per annum.
The project is expected to generate revenue of Rs. 750 million per year. The operating cost
excluding depreciation is expected to be Rs. 525 million per year.
For Tax purposes, depreciation rate on fixed assets would be 25% WDV method.Net salvage
value of plant and machinery is expected to be Rs. 100 million at the end of project.
Recovery of working capital will be at book value.
Income Tax rate will be 30%.
Chart out the Cash flow during the project life time.

Solution:
Cash Flows from the Point of all Investors
Item
1. Plant &equipment

0
20
0

2. Net working capital

1
20
0
10
0

3. Revenue

750

4. Operating costs

525

5. Depreciation

100

6. Profit before tax

125

7. Profit after tax

8. Net salvage value 100 of plant and
equipment
9. Recovery of net working capital
10. Initial investment

87.5

75
0
52
5

750

750

750

525

525

525
31.
6
193
.4
135
.4

75 56.3 42.2
15 168. 182.
0
7
8
10 118.
5
1 128

100
20
0

30
0

11. Operating cash flow (8 + 5)

12. Terminal cash inflow
13. Net cash flow

20
0

30
0

100
187.
5

18 174. 170.
0
4
2

187
.5

18
0

Cash Flows from the Point of Equity Investors

Item
0 1

174
.4

167
200

170
.2 367

1.
2.
3.
4.
5.

Equity funds
Revenues
Operating costs
Depreciation
Interest on working capital

200
750
525
100
12

6. Interest on term loan

28

7. Profit before tax

85
59.
5

8. Profit after tax

9. Net salvage value of plant & equipment
10. Recovery of working capital
11. Repayment of term loans
12. Repayment of working capital advance
13. Retirement of trade credit
14. Initial investment

50

50

50

200
159
.5
109
.5

15. Operating cash inflows

16.Liquidation and Retirement Cash flow
10+11-14-15-16
17. Net cash flow

750
750
750
525
525
525
75
56.3
42.2
12
12
12
26.
3
19.3
12.3
111
.7 137.4 158.5 1
78.
2
96.2
111 1

20
0 -

269

146.3 142.1 1
8
6
1
102 96.38 92.16
152

254

242.
76

234.
32