Plant & Equipment 6

Gross working capital 4

Total outlay on project 10

Equity 4 Rs 7 million of long term funds(equity + long term debt) w

Long term debt (debuntures) 3 and working capital margin (Rs 1 million) - working capit
Short term bank borowings 2 term fund towards working capital.
Trade credit 1
Interest rate on debuntures 15% Initial investment occurring at end of year 0 is Rs 7 millio
Interest rate on short term borrowings 18% of long-term funds to th project. The total outlay on the p
relating to long term funds.
Life of project, years 5
Salvage value 2
Liquidation value of WC (book value) 4

Revenue per year 6

Operating expenses (except dep., int. & taxes) 4
Tax rate 50%

WDV method for depreciation Plant & machinery 33.3%

1st year 2.00
2nd year 1.33
3rd year 0.89
4th year 0.59
0.3951
erm funds(equity + long term debt) will be used for Plant & Equip. (Rs 6 million)
margin (Rs 1 million) - working capital margin is defined as contribution of long
orking capital.

urring at end of year 0 is Rs 7 million. This represents the commitment

th project. The total outlay on the project is 10 million, but focus is on flows
Cash flows for the new project

0 1 2 3 4
A Plant & Equipment -6.00
B Working capital margin -1.00
C Revenues 8.00 8.00 8.00 8.00
D Operating costs 3.50 3.50 3.50 3.50
E Depreciation 2.00 1.33 0.89 0.59
F Interest on short term borrowings 0.36 0.36 0.36 0.36
G Interest on debentures 0.45 0.45 0.45 0.45
H Profit before tax 1.69 2.36 2.80 3.10
I Tax 0.85 1.18 1.40 1.55
J Profit after tax 0.85 1.18 1.40 1.55
K Net salvage value of plant & equipment
L Net recovery working capital margin

M Initial capital investment (A + B) -7

N Operating cash inflows (J+E+Gx(1-T) 3.07 2.74 2.51 2.37
O Terminal cash flow
P Net cash flow -7.000 3.070 2.737 2.514 2.366

The operating cash inflow, relating to long term funds, at the end of year 1 is Rs. 3.7 million. Defined as
Profit after tax + Depreciation + Interest on debentures (1-tax rate)
Rs. 0.845 + 2 + 0.45(1-0.5)

The terminal cash flow relating to long term funds equals

Net salvage value of plant & equipment + Net recovery of working capital margin

On termination of project, liquidation value will equal

Net salvage value of plant & equipment + Net recovery of working capital
The first component belongs to suppliers of long term funds. The second component is applied to
repay the current liabilities and recover working capital margin.
 Rs million
5

8.00
3.50
0.40
0.36
0.45
3.29
1.65
1.65
2.00
1.00

2.27
3.00
5.268

million. Defined as