Problems on Cash Flow Estimations

Problem1: Naveen Enterprises is considering a capital project about which the

following information is available:

 The investment outlay on the project will be Rs 100 Millions. This

consists of Rs 60 mill on plant & machinery and Rs 20 Mill on Net
working Capital. The entire outlay will be incurred at the beginning of
the project.

 The life of the project is expected to be 5 years. At the end of 5 years

fixed assets will fetch a net salvage value of Rs 30 Mill whereas net
working capital will be liquidated at its book value.

 The project is expected to increase the revenues of the firm by Rs 120

Mill per year. The increase in costs on account of project is expected to
be Rs 80 Mill per year( This includes all items of cost other than
depreciation, interest and tax). The effective tax rate will be @ 30%.

 Plant & Machinery will be depreciated at the rate of 25% per year as per
the WDV method. Hence the depreciation charges will be.

o First Year: Rs 20 Mill

o Second Year: Rs 15 Mill

o Third Year: Rs 11.25 Mill

o Fourth Year: Rs 8.44 Mill

o Fifth Year: Rs 6.33 Mill

Given the above details compute the project cash flows for all the 5 years

Problem 2: India Pharma Ltd is engaged in the manufacture of

pharmaceuticals. The company was established in 1991 and has a steady
growth in sales since then. Presently the company manufactures 16 products
and has an annual turnover of Rs 2200 million. The company is considering the
manufacture of new antibiotic preparation, K-cin for which the following
information has been gathered.
 K-Cin is expected to have a product life cycle of 5 years and thereafter it would be withdrawn
from the market. The sales from this preparation are expected to be as follows.

Year Sales
1 100
2 150
3 200
4 150
5 100
 The Capital equipment required for manufacturing K-Cin is Rs 100 Mill
and it will be depreciated at the Rate of 25% per year as per WDV
Method for tax purposes. The expected net salvage value after 5 years
is Rs 20 Mill.

 The working capital requirement for the project is expected to be 20%

of yearly sales. At the end of 5 years working capital of Rs 20 Mill is
expected to be liquidated at Par, barring an estimated loss of Rs 5 Mill
on account of bad debt. The bad debt loss is a tax deductible expense.

 The accountant of the firm has provided the following cost estimates
for K-Cin

i. Raw Material Cost: 30% of Sales

ii. Variable Labour Cost: 20% of sales

iii. Operating & Maintenance Cost: Rs 5 Mill

 The manufacture of K-Cin would also require some of the common

facilities of the firm. The use of these facilities would call for
reduction in the production of other pharmaceutical preparations
of the firm. This would entail a reduction of Rs 15 Mill of
contribution margin

 The tax rate applicable to the firm is 40 %

Based on the above details estimate the Net cash flows of each year.
Problem 3: Futura Limited is considering a capital project about which the
following information is available:

 The investment outlay on the project will be Rs 200 Millions. This

consists of Rs 150 mill on plant & machinery and Rs 50 Mill on Net
working Capital. The entire outlay will be incurred at the beginning of
the project.

 The life of the project is expected to be 7 years. At the end of 7 years

fixed assets will fetch a net salvage value of Rs 48 Mill whereas net
working capital will be liquidated at its book value.

 The project is expected to increase the revenues of the firm by Rs 250

Mill per year. The increase in costs on account of project is expected to
be Rs 100 Mill per year( This includes all items of cost other than
depreciation, interest and tax). The effective tax rate will be @ 30%.

 Plant & Machinery will be depreciated at the rate of 25% per year as per
Written down value method

o Estimate the Post Tax Cash Flows of the Project

o Calculate the IRR of the project

Problem 4: An Ojus enterprise is determining the cash flows for a project

involving replacement of an old machine by a new machine. The old Machine
bought a few years ago has a book value of Rs 4,00,000 and it can be sold to
realise a post tax salvage value of Rs 500000. It has remaining life of 5 years
after which its net salvage value is expected to be Rs 1,60,000. It is being
depreciated at the rate of 25% as per WDV method. The working capital
required for old machine is Rs 4,00,000.

The new machine costs Rs 16,00,000. It is expected to fetch a value of Rs

8,00,000 after 5 years when it will no longer be required. The depreciation rate
applied to it is 25% as per WDV method. The net working capital required for
new machine is Rs 5,00,000. The new machine is expected to bring a savings of
Rs 3,00,000 annually in manufacturing costs(other than depreciation). The tax
rate applicable to the firm is 40%.
Given the above information, calculate the incremental after tax cash flows
associated with the replacement project.

Problem 5: Mr Rao, Finance Director of Modern Synthetics Limited,called Mr

Diwan, Manager, Management Services Division of the company to explore
ways and means of improving the management information system in the
company. On the basis of their discussion it became obvious that the company
needed a computer system for processing efficiently and accurately the
growing volume of information generated in the business. It was fekt that the
computer system would also facilitate the timely preparation of control reports
needed by the management.

Mr Rao asked Mr Diwan to find out which computer system would be

suitable for the needs of the company and estimate the costs and benefits
expected from it . Mr Diwan spoke to the representatives of few computer
manufacturing companies. On the basis of his discussion with them,he felt that
the Alpha III System supplied by Computronics Limited was quite suitable for
the needs of Modern Syntex Limited. He estimated the costs and benefits
associated with this system as follows.

1. Cost of Computer along with Accessories: Rs 1.5 Mill

2. Operation & Maintenance Cost: Rs 0.25 Mill

3. Savings in Clerical Cost: Rs 0.6 Mill

4. Savings in Space Costs : Rs 0.1 Mill

The Computer would have an life of 5 years and it would get depreciated at the
rate of 33.33% per year as per WDV method. After 5 years it would be disposed
off for a value equal to its book value. The tax rate is 50%.

Calculate the Cash Flows for all the 5 years with above details