PROJECT FINANCIAL APPRAISAL
FORMULAE:
COMPOUND VALUE M = (1 +1)"
ACCOUNTING RATE OF RETURN (ARR)
‘Average tnvextment ” 4%
vue
Interest
INTEREST COVER RATION (ICR)
VAT +Deprlewuttons interest on Term Loan
DEBT SERVICE COVER RATIO (DSC = ea er nepal
iterest on Ferm Loans Term Loan Component Kepaid
: : a news a
INTERNAL RATE OF RETURN (IRR) = DCF: arepepre op va * (OCF DCF)
PROFITABILITY INDEX (p.1.) = neh Eases
1, Calculate the Compound Interest :
a) Find Compound value of Rs 10,000/- at the en
b) What is the compound amount at the end of 9 months,
rate of interest and interest is compounded quarterly.
¢) What is the compound amount at the end of 9 months, if Rs 10,000/- is borrowed at 10%
rate of interest and interest is compounded monthly
\d of 5 years when the interest rate is 12% p-2-
if Rs 10,000/- is borrowed at 107
e as given in table below. The investment
2. The cash flows of two project investment options ar
which of the projects is acceptable on the
required for these projects is Rs 10,000/- Determine
basis of the payback period method?
‘CASH FLOW FOR
ee PROJECT A PROJECT B
o_| (10000) (70000)
1 4000 3000
2 3000 1000.
3 | 4000 2000
4 2000 3500
5 1000 4000
6 | 4000 _
7 ~ [5003. A machinery costs Rs 80000/-and has a scrap value of ky 21
value of Rs 20000/-. The company's stream of
income using this machinery before depreci 100/-, The comp:
Stion and taxes during the first five years is Rs
12000/-, Rs 25000/-, Rs 16000/-, Rs 18000/- and Rs 11000/. Fespectively. Assume depreciation
on straight line basis and 40% tax rate. Calculate the accounting Rate of Return (ARR) for the
project.
4+ Your company is considering two mutually exclusive projects A & 8. Project A involves an outlay
OF Rs 100 million and will generate an expected cash inflow of Rs 25 million per year for 6 years.
Project B calls for an outlay of Rs 50 million which will produce an expected cash inflow of Rs 13
million per year for 6 years. The company’s cost of capital is 1296. Suggest with appropriate
reasons your choice of the project.
5. ABC Ltd has the following Data for projection for the next five years. It has an existing term loan
Of Rs 720 lakhs repayable over next five years and has got sanctions for the new term loan of Rs
1000 lakhs which is also repayable in five years. As a Finance Manager you are required to
calculate (i) Debt Service Coverage Ratio, and (i) Interest Service Coverage Ratio for each year
and the average of S years.
(Rs in Lakhs)
fr [a 2 3 a 5
Profit After | 960 1150 1270 1300 1370
Tax
[Depreciation [310 300 280 270 20.
[Taxation [250 406 508 550 598
[interest on | 324 250. 174 100 32 |
| Term toan
Repayments | 344 344 344 344 34a
[oa Ferm oan | 7 \
6. A Company is considering a capital project about which the following information is available,
i The investment outlay on the project will be Rs 200 million. This consists of Rs 150
million on the plant and machinery and Rs 50 million on net working capital. The entire
outlay will be incurred in the beginning.
li, 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 48 million whereas the net working capital will be
liquidated at its book value.
The project is expected to generate the revenue of the firm by Rs 250 million per year.
The incur in costs on account of the project is expected to be Rs 100 million per year.
(This includes all items on cost other than depreciation, interest & tax). The tax rate is
30%.
Plant and machinery will be depreciated at the rate of 25% per year as per the written
down method.
Estimate the post-tax cash flows of the project, assuming cost of capital 12%.5 tet considering 2 capital project about which the following information is available:
utlay on the project will be Rs. 400 lakhs. This consists of Rs. 300 lakhs on the
Plant and machinery and Rs. 100 lakhs on net working capital. The entire outlay willbe incurred
at the beginning of the project
b) The life of the project is expected to be 5 years,
96 lakhs whereas net working capital will be liquidated at its book value.
<)_ The project is expected to increase the revenue of the firm by RS. £40 lakhs per year. The
increase in costs on account of the project is expected to be Rs. 250 lakhs per year (This includes
all items of cost other than depreciation, interest and tax). The tax rate is 30%.
4) Plant and Machinery will be depreciated at the rate of 20% per year as per the written down
fixed assets will fetch a net salvage value of Rs.
method.
€) Cost of Capital is 10:
Using Net Present Value (NPV) method, determine whether the company should undertake the
above proposal or not.
8. Aco. intends to produce a single product whose estimated demand in year 2 is 1700 units. Its
expected to increase by 85 units each subsequent year. Estimated price for yeer 1 is Rs. 600/unit
which is expected to increase by Rs. 15/unit each subsequent year. Operating expenses
jon and interest on term loan for'year 1 are estimated to be Rs. 178000/-
excluding depre:
which are expected to increase by Rs. 20000/- each Subsequent year. At the beginning of project
{at end of year 0) liabi ’s include equity capital of Rs 6 lakhs and Term loan of Rs. 12 lakhs.
Assets include Land Rs 1 lakh and other Fixed Assets Rs. 17 lakh. Term loan is to be repaid in S
years with equal annual installments ‘and carries 12% rate of interest charged on opening
balance of that year. Other fixed asséts are depreciated at 10% per year by written down value
method. Calculate DSCR (debt service coverage ratio) and ICR (interest coverage ratio) for years
dand2.
Assume income tax rate is 35%. All units produced are sold in same year. All payments and
expenses realized in the same year. (MAY 2018 Q 1b - 10 Marks)
9. Answer any two of the below: (May 2018 Q.4-10 Marks)
a) Calculate Internal Rate of Return if Investment is 200 & cash inflows for 2 years are 120 & 144.
b) Calculate discounted payback period in moths of project with initial investment 210 and inflows
25, 55, 155, & 200. Assume rate of discounting 10% per year.
investment is 500 & cash inflow for subsequent years are 50, 75, 125,
c) Calculate NPV if ini
225, & 300. Assume rate of discounting is 10% per annum.10, For a project with the given data, calculate the internat rate of returns
Cash
Year _| Cash Outflow Inflow
0 | Rs. 10,00,000
Rs,
L 4,00,000
Tis.
2.50,000
is
3 2,50,000
Rs.
a 200,000
Rs.
200,000
(NOV 2018 Q 3a~10 Marks)
(Nov 2019 Q3 (a) ~ 10 Marks in this the cash outflow & cash inflow were halved, year remaining
same.)
11. ABC Manufacturing Co. Ltd is planning to purchase a machine to increase the manufacturing
capacity. Three different types of machines are available in the market with the following
(NOV 2018 Q 4a ~10 Marks)
details:
| ‘Machine | Machine | Machine
Particulars x Y z
Cost of Machine (Rs) 17,500 | 12,500 | 9,000
Estimated Savings in scrap/yr(Rs)____| 400. 750 250
Estimated Savings in direct wages/yr (Rs) 2,750 | 6,000 | 2,250
‘Additional cost of Indirect Materials/ yr (Rs) nil 400 nil
Expected Savings in Indirect Materials/ yr (Rs) | __100 | _nil 250
‘Additional cost of maintenance/ yr (Rs) 750 550 500
Additional cost of supervision (Rs) nil 800 nil
Estimated life of machine (years) 10 6 5
Based on Payback period, you are requested to give your suggestion to the management of ABC
Manufacturing Co. Ltd to purchase preferred type of machine.12. A co. with
2 10% cost of funds and limited investment of Rs 160 lakhs is evaluating the
(NOV 2018 5b ~ 10 Marks)
of several investment proposals:
desirabil
project | tial investment [fe] Annual Cashflow
takhs of Rs) __ | (years) | (in lakhs of Rs)
__120 s_ | 30
80 3 32
80a
ao | 7 | 8
mo [| 9 | 6
ted following cash flows for a project: (Nov 2019 O4(a) ~ 10 Marks)
13. ABC Ltd. has estima}
Year 4 2 | ai a| 5]
Cash Inflows before |
depreciation & tax (Rs.) 10000 8000 4000 10000 10000.
Initial Investment: Rs 20000
Life Time of the project: S years
10%
Required Rate of Return:
Tax Rate: 5%
will be depreciated on straight line method. Find out Net Present Value & Profitability Index.
The project