20. Lodha Chemical Company is considering a project involving a cash outlay of 6 million. Sales are...
Question:
20. Lodha Chemical Company is considering a project involving a cash outlay of 6 million. Sales are expected to be 1.20 million in year 1 and 2 million in year 2 and thereafter, to grow at 10 per cent due to general rise is price. Operating expenses are estimated to be 600,000 in year 1 and to rise at 10 per cent thereafter. An initial working capital of 500,000 would be needed and afterwards working capital is expected to be 25 per cent of sales. The life of the project is 7 years, and it could be sold for 20 per cent of its original cost adjusted for inflation. Depreciation is charged at 25 per cent on the written down value basis. The company pays tax at 35 per cent. Assume that no tax is payable on the sale of the project at the end of its life. Calculate the project's NPV when the opportunity cost of capital is 21 per cent. Would your answer change if you analyse the project in real terms?
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