PROBLEM 10.4 Television Ltd is a highly profitable firm, it has a proposal for manufacturing car televisions.

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PROBLEM 10.4 Television Ltd is a highly profitable firm, it has a proposal for manufacturing car televisions. The project would involve cost of plant of 500 lakh (or *55 million), installation cost of 100 lakh and working capital of 125 lakh. The annual capacity of the plant is to manufacture 20,000 sets. The price per set in the first year would be 12,000. The variable cost to sales ratio is expected to be 65 per cent. The fixed cost per annum would be 300 lakh (excluding depreciation). The company would have to incur promotion expenditure of 120 lakh in the first year. Written-down depreciation rate for tax purposes is 25 per cent. Working capital requirement is estimated to be 25 per cent of sales. The company expects that the plant's capacity utilization over its economic life of 7 years will be as follows; Year 1 2 3 4 5 6 7 Capacity utilization (%) 40 40 50 75 100 100 100 The terminal value of the project is expected to be 20 per cent of its original cost. (1) Calculate the project's NPV assuming a target rate of return of 14 per cent. The corporate tax rate of 35 per cent and profit from the sale of the asset is taxed as ordinary income. (2) How will NPV change if you consider the tax effects on the remaining book value and salvage value as per the current tax laws in India?

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