CORPORATE FINANCE

ESTIMATION OF
PROJECT CASH FLOWS

1
 Futura Limited is considering a capital project as follows:

 The investment outlay on the project will be Rs 200M. This consists

of Rs 150M on plant and machinery and Rs 50M on net working
capital. The entire outlay will be incurred in the beginning.
 The life of project is expected to be 7 yrs, fixed assets will fetch a
net salvage value of Rs 48M whereas net working capital will be
liquidated at its book value.
 The project is expected to increase the revenues of the company by
Rs 250M per year. The increase in costs due to the project is
expected to be Rs 100M per year. The tax rate is 30%.
 Plant and machinery will be depreciated at 25% per year as per
WDV method.
Estimate the post tax cash flows from the project.

2
Naveen Enterprises is considering a capital project about
which the following is known:
 The investment outlay on the project will be Rs150M (Rs

110M on P&M and Rs 40M on net working capital). Entire

outlay will be incurred in the beginning.
 The life of the project is expected to be 5 years, after
which fixed assets will fetch a net salvage value of Rs
30M whereas net working capital will be liquidated at its
book value.
 The project will increase revenue of the firm by Rs 150M
per year. The increase in costs on account of the project
is expected to be Rs 90M per year (incl all items except
depreciation, interest and tax). Effective tax rate will be
30%.
 P&M will be depreciated at 25% p.a. as per WDV
method.
Estimate the project cash flows.
3
Ojus Enterprises is determining the cash flow for a project
involving replacement of a machine.
 The old machine has a book value of Rs 500K and it can be
sold for Rs 600K salvage value. It has a remaining life of 5
years after which salvage is expected to be Rs 180K. Depc
at 25% p.a under WDV method.
 The working capital required for the old machine is Rs
300K.
 The new machine costs Rs 1400K It is expected to fetch a
net sal val of Rs 650K after 5 years. NWC needed for the
new machine is Rs 400K. The new machine will save the
company Rs 500K p.a. The tax rate for the firm is 40%.
Find out post tax cash flows for the replacement project.