Project Overview:

Premier Computers, Inc., a prominent technology company based in the USA, is exploring the possibility of inves
in a manufacturing project for computers in India. The project entails producing and selling desktop computers, w
an initial target of 20,000 units in the first year and an anticipated annual volume growth of 10%. Premier plans to
operate the manufacturing plant for five years before selling it to Indian investors, complying with Indian governm
regulations that permit repatriation of net cash flows to the USA annually.

Key Components:
1)Investment: Premier will invest $10 million in building the manufacturing plant and an additional $5 million fo
initial working capital. The working capital requirement is expected to remain constant throughout the project's
duration.
2)Revenue: Sales revenue is projected based on the selling price of $500 per computer, converted into Indian rupe
at the prevailing exchange rate each year.
3)Expenses: Operating expenses in India are estimated at the equivalent of $250 per computer in Indian rupees.
4)Financing: Premier plans to finance the project with a debt-equity ratio of 0.50. Debt will be raised in rupees, w
a market borrowing rate of 10% for five years, with principal repayable in four equal installments starting from th
second year.
5)Depreciation: The plant will be depreciated over five years on a straight-line basis for tax purposes.
6)Taxation: The corporate tax rate in India is 35%, and no further taxes are payable in the US due to a double tax
treaty.

Objectives:
1)Evaluate the financial feasibility of investing in the manufacturing project in India.
2)Determine the projected cash flows in Indian rupees for each year of the project.
3)Calculate the Indian rupee cost of capital and the US dollar cost of capital.
4)Assess the project's NPV in rupees to determine its economic viability.

Key Learnings:
1)Understanding cross-border investment considerations: This project exemplifies the complexities involved i
international investments, including currency exchange rates, government policies, and tax implications.
2)Financial modeling for project evaluation: The project necessitates comprehensive financial modeling to asse
feasibility, considering factors such as sales projections, expenses, depreciation, and financing costs.
3)Risk assessment and cost of capital determination: Calculating the cost of capital involves evaluating market
risks, asset betas, and prevailing interest rates to estimate appropriate discount rates for NPV analysis.
4)Incorporating tax implications: The project's financial viability heavily relies on understanding and optimizin
implications in both the USA and India, including corporate tax rates and double taxation treaties.
5)Strategic decision-making under uncertainty: Evaluating the project requires strategic decision-making unde
uncertainty, considering factors such as market demand, exchange rate fluctuations, and regulatory changes.
 he possibility of investing
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Rupees Cash Flow of the Project

A)Sales revenue

Year Units To be Sold Exchange Rate Selling Price (per unit in $)

Year 1 20000 45 500
Year 2 22000 45 500
Year 3 24200 45 500
Year 4 26620 45 500
Year 5 29282 45 500
Total 122102 45 500

B)Operation Expenses

Year Units To be Sold Exchange Rate Selling Price (per unit in $)

Year 1 20000 45 250
Year 2 22000 45 250
Year 3 24200 45 250
Year 4 26620 45 250
Year 5 29282 45 250
Total 122102 45 250

C)Depreciation expense (straight-line depreciation over 5 years):

Assest Value(Plant) $10,000,000.00

Life Of Assest 5
Exchange Rate 45

Depreciation expense per year ₹44,444.44

Total Depriciation ₹222,222.22

D)Interest expense

Principal amount $5,000,000.00

Interest rate 10%
Number of payments(Given as afte 4

Interest payment per year $125,000.00

Total Interest per year (in Rupees) ₹5,625,000.00
Total Interest ₹22,500,000.00

Given Debt To Equity = 0.5

E)Taxable income

Taxable income = Sales revenue - Operating expenses - Depreciation expense - Interest expense
Taxable Income ₹1,350,925,277.78

F)Taxes 35%
Taxes =Taxable income * Tax rate ₹472,823,847.22

G)Net Income
Net income = Taxable income - Taxes
Net Income (Rupees) ₹878,101,430.56
Sales (Rupees)
450000000
495000000
544500000
598950000
658845000
2747295000

Operating Expense
225000000
247500000
272250000
299475000
329422500
1373647500
 Calculate the Indian rupee cost of capital and US dollar cost of capital.

Cost of equity = Risk-free rate + (Market risk premium * Asset beta)

Indian Rupee Cost of Capital:
Risk-free rate in India 9%
Market risk premium 8%
Asset beta = 1.25

Cost of Equity 19.00%

Indian Rupee Cost of Capital = Cost of Equity

US Dollar Cost of Capital

Risk Free Rate 6%
Market risk premium 8%
US Dollar cost of capital = Risk-free rate + Market risk premium

Cost Of Capital 14%

Here are the assumptions for calculating the cost of equity using the Capital Asset Pricing Model (CAPM)
for Premier Computers, Inc.:
Risk-free rate:
Risk-free rate in the USA: 6%
Risk-free rate in India: 9%
Assumption: The risk-free rate represents the return on investment with zero risk, typically approximated
by the yield on government bonds. The risk-free rate in each country reflects the prevailing economic
conditions and government bond yields.
Market risk premium:
Market risk premium: 8%
Assumption: The market risk premium represents the additional return that investors expect to receive for
bearing the systematic risk of investing in the overall market compared to risk-free investments. It reflects
the average return of the market above the risk-free rate.
Asset beta for computer manufacturers:
Asset beta: 1.25
Assumption: Asset beta measures the systematic risk of an investment relative to the market as a whole. A
beta greater than 1 indicates that the investment is more volatile than the market. The asset beta for
computer manufacturers of 1.25 suggests that Premier Computers, Inc., carries slightly higher systematic
risk compared to the overall market.

With these assumptions, we can calculate the cost of equity using the CAPM formula:
Cost of Equity=Risk-free rate+(Market risk premium×Asset beta)Cost of Equity=Risk-free rate+
(Market risk premium×Asset beta)
Net Cash Flow

To calculate NPV, discount the cash flows using the Indian Rupee cost of capital
Calculate the rupees cash flows of the project

1)Sales revenue
Year 1 Year 2 Year 3 Year 4 Year 5
₹450,000,000.00 ₹495,000,000.00 ₹544,500,000.00 ₹598,950,000.00 ₹658,845,000.00

2)Operating expenses(Per Year)

Year 1 Year 2 Year 3 Year 4 Year 5
₹225,000,000.00 ₹247,500,000.00 ₹272,250,000.00 ₹299,475,000.00 ₹329,422,500.00

3)Depreciation expense ₹44,444.44

4)Interest Expense Per Year (Rupees) ₹5,625,000.00
5)Indian Rupee Cost of Capital 19%
6)US Dollar Cost of Capital 14%
7) Tax Rate 35%

Net Present Value

Using Indian Cost of Capital

Cash flow = (Sales revenue - Operating expenses - Depreciation expense - Interest expense) *(1 - Tax rate) + Depr

Cash Flows (Year wise)

Year 1 Year 2 Year 3 Year 4 Year 5
₹142,609,305.56 ₹157,234,305.56 ₹173,321,805.56 ₹191,018,055.56 ₹210,483,930.56

Net Present Value

NPV = (Cash flow Year 1 / (1 + Indian Rupee Cost of Capital)^1)
+ (Cash flow Year 2 / (1 + Indian Rupee Cost of Capital)^2)
+ (Cash flow Year 3 / (1 + Indian Rupee Cost of Capital)^3)
+ (Cash flow Year 4 / (1 + Indian Rupee Cost of Capital)^4)
+ (Cash flow Year 5 / (1 + Indian Rupee Cost of Capital)^5)

Net Cash Flow ₹517,182,881.78

se) *(1 - Tax rate) + Depreciation expense