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Solution - Part2

# Solution - Part2 - PART A Part(i BEST CASE SCENARIO...

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PART – A Part (i) BEST CASE SCENARIO: Calculation of Cost of Capital as per CAPM Ks = Rf + (Rm - Rf) x b where, Ks = Required rate of return Rf = Risk free rate of return Rm = Market rate of return b = beta Ks =5%+(12%-5%)*.9 11.30% Required rate of return for new venture =11.3%+2.7% 14.00% Now this rate of interest will be used for the purpose of evaluating the coffee machine project Calculation of the Terminal Cash flow: Recovery of Working Capital 66,886,506.74 Land & Building 40,000,000.00 Un-depreciated machine 5,000,000.00 111,886,506.74 Year--------> 1 2 3 4 5 6 7

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Sales Price 12,000.00 12,600.00 13,230.00 13,891.50 14,586.08 15,315.38 16,081.15 16,885.21 Units Sold 800.00 1,200.00 1,800.00 2,200.00 4,000.00 5,000.00 6,000.00 6,000.00 Sales Revenue(machines) 9,600,000.00 15,120,000.00 23,814,000.00 30,561,300.00 58,344,300.00 76,576,893.75 96,486,886.13 101,311,230.43 Sales Revenue(coffee) 3,168,000.00 4,752,000.00 7,128,000.00 8,712,000.00 15,840,000.00 19,800,000.00 23,760,000.00 23,760,000.00 Total Sales Revenue 12,768,000.00 19,872,000.00 30,942,000.00 39,273,300.00 74,184,300.00 96,376,893.75 120,246,886.13 125,071,230.43 Material Costs (per unit): Metal Part & electric components 2,525.00 2,777.50 3,055.25 3,360.78 3,696.85 4,066.54 4,473.19 4,920.51 Add: Wastage 252.50 277.75 152.76 168.04 184.84 203.33 223.66 246.03 Total 2,777.50 3,055.25 3,208.01 3,528.81 3,881.70 4,269.86 4,696.85 5,166.54 Plastic Part 925.00 971.25 1,019.81 1,070.80 1,124.34 1,180.56 1,239.59 1,301.57 Rubber Part 530.00 556.50 584.33 613.54 644.22 676.43 710.25 745.76 1,455.00 1,527.75 1,604.14 1,684.34 1,768.56 1,856.99 1,949.84 2,047.33 Add: Wastage 145.50 152.78 80.21 84.22 88.43 92.85 97.49 102.37 Total 1,600.50 1,680.53 1,684.34 1,768.56 1,856.99 1,949.84 2,047.33 2,149.70 Material Cost Metal Part & electric components 2,222,000.00 3,666,300.00 5,774,422.50 7,763,390.25 15,526,780.50 21,349,323.19 28,181,106.61 30,999,217.27 Plastic & Rubber parts 1,280,400.00 2,016,630.00 3,031,819.88 3,890,835.51 7,427,958.69 9,749,195.79 12,283,986.69 12,898,186.02 Total Material Cost 3,502,400.00 5,682,930.00 8,806,242.38 11,654,225.76 22,954,739.19 31,098,518.97 40,465,093.30 43,897,403.29 Labour Cost (per hour): Grade A 30.00 31.50 33.08 34.73 36.47 38.29 40.20 42.21 Grade B 42.00 44.94 48.09 51.45 55.05 58.91 63.03 67.44 72.00 76.44 81.16 86.18 91.52 97.20 103.23 109.66 Add: Down time cost 4.32 4.59 4.87 5.17 5.49 5.83 6.19 6.58 76.32 81.03 86.03 91.35 97.01 103.03 109.43 116.24 Add: Training Cost 11.45 8.10 4.30 4.57 4.85 5.15 5.47 5.81 Total Labour cost per 87.77 89.13 90.33 95.92 101.86 108.18 114.90 122.05
hour Total Hours Required: Grade A 25,600.00 38,400.00 57,600.00 70,400.00 128,000.00 160,000.00 192,000.00 192,000.00 Grade B 19,200.00 28,800.00 43,200.00 52,800.00 96,000.00 120,000.00 144,000.00 144,000.00 Total hours required 44,800.00 67,200.00 100,800.00 123,200.00 224,000.00 280,000.00 336,000.00 336,000.00 Total Labour Cost 3,932,006.40 5,989,471.49 9,105,462.62 11,817,215.73 22,816,690.17 30,290,042.88 38,606,041.98 41,007,773.19 Variable Overheads (40% of total labour cost) 1,572,802.56 2,395,788.60 3,642,185.05 4,726,886.29 9,126,676.07 12,116,017.15 15,442,416.79 16,403,109.28 Fixed Cost: - Unallocated 3,000,000.00 3,150,000.00 3,307,500.00 3,472,875.00 3,646,518.75 3,828,844.69 4,020,286.92 4,221,301.27 - Allocated 5,000,000.00 5,250,000.00 5,512,500.00 5,788,125.00 6,077,531.25 6,381,407.81 6,700,478.20 7,035,502.11 Total Fixed Cost 8,000,000.00 8,400,000.00 8,820,000.00 9,261,000.00 9,724,050.00 10,210,252.50 10,720,765.13 11,256,803.38 Working Capital (20% of sales) 1,920,000.00 3,024,000.00 4,762,800.00 6,112,260.00 11,668,860.00 15,315,378.75 19,297,377.23 20,262,246.09 Year--------> 1 2 3 4 5 6 7 Capital Investment Land & Factory Building 40,000,000.00 Manufacturing Unit 10,000,000.00 10,000,000.00 50,000,000.00 10,000,000.00 Depreciation Expense (on straight line method) 6,250,000.00 6,250,000.00 6,250,000.00 6,250,000.00 7,500,000.00 7,500,000.00 7,500,000.00 7,500,000.00 Capital Allowance 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 8,000,000.00 Calculation of Tax expense Sales Revenue 12,768,000.00 19,872,000.00 30,942,000.00 39,273,300.00 74,184,300.00 96,376,893.75 120,246,886.13 125,071,230.43 Less:

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- Material Cost 3,502,400.00 5,682,930.00 8,806,242.38 11,654,225.76 22,954,739.19 31,098,518.97 40,465,093.30 43,897,403.29 - Labour Cost 3,932,006.40 5,989,471.49 9,105,462.62 11,817,215.73 22,816,690.17 30,290,042.88 38,606,041.98 41,007,773.19 - Variable Overheads 1,572,802.56 2,395,788.60 3,642,185.05 4,726,886.29 9,126,676.07 12,116,017.15 15,442,416.79 16,403,109.28 - Non - Allocated Fixed OH 3,000,000.00 3,150,000.00 3,307,500.00 3,472,875.00 3,646,518.75 3,828,844.69 4,020,286.92 4,221,301.27 - Capital Allowance 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 8,000,000.00 Total Cost 13,007,208.96 18,218,190.08 25,861,390.04 32,671,202.77 60,544,624.18 79,333,423.69 100,533,838.99 113,529,587.02 Net Profit (239,208.96 ) 1,653,809.92 5,080,609.96 6,602,097.23 13,639,675.82 17,043,470.06 19,713,047.13 11,541,643.41 Tax Liability @ 20% (47,841.79 ) 330,761.98 1,016,121.99 1,320,419.45 2,727,935.16 3,408,694.01 3,942,609.43 2,308,328.68 Calculating the NPV Year--------> 1 2 3 4 5 6 7 Sales Revenue 12,768,000.00 19,872,000.00 30,942,000.00 39,273,300.00 74,184,300.00 96,376,893.75 120,246,886.13 125,071,230.43 Less: - Material Cost 3,502,400.00 5,682,930.00 8,806,242.38 11,654,225.76 22,954,739.19 31,098,518.97 40,465,093.30 43,897,403.29 - Labour Cost 3,932,006.40 5,989,471.49 9,105,462.62 11,817,215.73 22,816,690.17 30,290,042.88 38,606,041.98 41,007,773.19 - Variable Overheads 1,572,802.56 2,395,788.60 3,642,185.05 4,726,886.29 9,126,676.07 12,116,017.15 15,442,416.79 16,403,109.28 - Non - Allocated Fixed OH 3,000,000.00 3,150,000.00 3,307,500.00 3,472,875.00 3,646,518.75 3,828,844.69 4,020,286.92 4,221,301.27 - Allocated Fixed OH 5,000,000.00 5,250,000.00 5,512,500.00 5,788,125.00 6,077,531.25 6,381,407.81 6,700,478.20 7,035,502.11 - Depreciation 6,250,000.00 6,250,000.00 6,250,000.00 6,250,000.00 7,500,000.00 7,500,000.00 7,500,000.00 7,500,000.00 - Working Capital 1,920,000.00 3,024,000.00 4,762,800.00 6,112,260.00 11,668,860.00 15,315,378.75 19,297,377.23 20,262,246.09 Profit Before Tax (12,409,208.96 ) (11,870,190.08 ) (10,444,690.04 ) (10,548,287.77 ) (9,606,715.43 ) (10,153,316.51 ) (11,784,808.30) (15,256,104.79) Less: Tax (47,841.79 ) 330,761.98 1,016,121.99 1,320,419.45 2,727,935.16 3,408,694.01 3,942,609.43 2,308,328.68 Profit after tax (12,361,367.17 ) (12,200,952.07 ) (11,460,812.03 ) (11,868,707.22 ) (12,334,650.59 ) (13,562,010.52 ) (15,727,417.72) (17,564,433.47) Add: Depreciation 6,250,000.00 6,250,000.00 6,250,000.00 6,250,000.00 7,500,000.00 7,500,000.00 7,500,000.00 7,500,000.00 Operating Cashflow (6,111,367.17 ) (5,950,952.07 ) (5,210,812.03 ) (5,618,707.22 ) (4,834,650.59 ) (6,062,010.52 ) (8,227,417.72) (10,064,433.47) Add: Terminal Cashflow 127,362,922.06
Net OCF (6,111,367.17 ) (5,950,952.07 ) (5,210,812.03 ) (5,618,707.22 ) (14,834,650.59 ) (6,062,010.52 ) (8,227,417.72) 117,298,488.59 PVF @ 14% 0.87719 0.76947 0.67497 0.59208 0.51937 0.45559 0.39964 0.35056 PV (5,360,848.39 ) (4,579,064.38 ) (3,517,149.70 ) (3,326,725.73 ) (7,704,652.67 ) (2,761,770.44 ) (3,287,983.19) 41,120,047.29 Total PV of Cash flows 10,581,852.80 Less: Initial Investment (50,000,000.00 ) NPV (39,418,147.20 ) Alternative Option to but the machine Cost of machines to be purchased Year--------> 1 2 3 4 5 6 7 No. of units required 800.00 1,200.00 1,800.00 2,200.00 4,000.00 5,000.00 6,000.00 6,000.00 Purchase price per unit 10,800.00 11,340.00 11,907.00 12,502.35 13,127.47 13,783.84 14,473.03 15,196.68 Purchase Cost 8,640,000.00 13,608,000.00 21,432,600.00 27,505,170.00 52,509,870.00 68,919,204.38 86,838,197.51 91,180,107.39 Calculating the NPV Year--------> 1 2 3 4 5 6 7 Sales Revenue 12,768,000.00 19,872,000.00 30,942,000.00 39,273,300.00 74,184,300.00 96,376,893.75 120,246,886.13 125,071,230.43 Less: - Material Cost 8,640,000.00 13,608,000.00 21,432,600.00 27,505,170.00 52,509,870.00 68,919,204.38 86,838,197.51 91,180,107.39 - Non - Allocated Fixed

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Solution - Part2 - PART A Part(i BEST CASE SCENARIO...

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