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Basics of Capital Budgeting

Basics of Capital Budgeting

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Published by nenu_100

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Published by: nenu_100 on Jun 21, 2009
Copyright:Attribution Non-commercial


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1Revenue1Revenue2COGS2COGS3=1-2Gross Profit3=1-2Gross Profit4SG&A4SG&A5=3-4EBITDA5=3-4EBITDA6Depreciation and Amortization6Dep&Amortz7=5-6EBIT7=5-6EBIT8EBIT(1-t)8Less: InterestAdd: 6Depreciation and Amortization9=7-8EBT9Less: Δ Investment in Working Capital10Less: Tax10Less: Δ Investment in Fixed Assets11=9-10Net Income11Add: Working capital Salvaged12Add: Fixed Assets Salvaged13FREE CASH FLOWS TO FIRM
South India Paper Mills is examining a five year life project on which theInitial Investment in Plant will be Rs 45 crores and the Investment in W/Cwill be Rs 5 crs. This is a paper recycling project on which the revenues thefirst year is expected to be Rs 50 crores and the revenues are likely to increaseby 20% . Pa. In the third year of the project , Plant will have to be purchasedat Rs 2 crores. Investment in Plant will be depreciated to zero book value by theend of the project life. Working capital to Revenues will have to be maintained byreinvestment upfront at the beginning of the year. 95% of working capital will besalvaged. The Rate Tax is 35% and the EBITDA margin is estimated at 65% of revenues.The Project will be funded as followsInternal Equity20%New Issue of Eq30%Preference Sh10%Debt40%The 5 year T Bond trades at 9.1% and the Market is expected to return 16%The beta of paper projects ( unleavered ) is .85New Issue of Equity has a floatation cost of 5%Preference Shares will carry a preference dividend at the rate of 12%.Debt will be sourced from IFCI and interest rate will be 17%.Required 1. Cash Flows on the Project 2. Hurdle Rate on the Project 3. NPV and IRRW/C567.28.610.4012345Revenues50607286104EBITDA3339475667Less: Depreciation9991010EBIT2430384657EBIT(1-t)1520253037Add: Dep9991010Less: Δ Investment in W/C1112Less: Δ Investment in F/A2Add: W/C Salvaged9.88FCFF2327303857DCF1122021202229Less: IO50NPV62Levered Beta=1.22Rf9.10%Rm16%Internal Equity20%ke17.51%New Issue of Equity30%New ke=18.43%Preference Sh10%kp=12%

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