Spring Semester 2007 FIN 622 (Corporate Finance) Assignment No.

01
Please read the following Instructions carefully before attempting the assignment solution. Last date for submission of Assignment is March 25, 2007. You can consult the concerned chapters. Make sure that you have uploaded the Assignment before due date. No assignment will be accepted through E-mail after the due date. Cheating or copying of assignment is strictly prohibited; No credit will be given to copied assignment.

Question no 01: M/s Dark Cloud Limited is contemplating the purchase of new computer system for its production facility in order to implement cost reduction policy. Currently, the pattern of manual production processing is as under: Rs. 90,000.00 15,000.00 10,000.00 115,000.00

Salaries Payroll Benefits Variable Production Overheads Total

The cost of computer system including installation is Rs. 150,000/- and it is a deductible expenditure for tax purposes. Project life is estimated at 4 years after which the salvage value of this system will be Rs. 12,000/-. After installation of proposed system the production processing costs will be as under:(Note: Use straight line method of depreciation) Rs. 43,000.00 8,000.00 4,000.00 55,000.00

Salaries Payroll Benefits Variable Production Overheads Total

Spring Semester 2007 FIN 622 (Corporate Finance) Assignment No. 01

The tax rate at present is 40% which is deemed to be unchanged in the next four years. The company has the policy to discount such projects on WACC, which can be calculated from the following information:

Equity Loan - Term Bonds

Rs. (Million) 9 10 12

Cost 14.00 18.00 10.56

Required: Determine the financial viability of the intended project. You are required to calculate: a) Net Profit b) WACC c) NPV d) Conclusion either the project can be under taken or rejected. (3+2+4+1=10)

Note: Use Excel sheet for the solution file.