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A telecommunications company is planning an investment of Rs. 900 lakhs in new infrastructure. The project is expected to generate the following earnings (before depreciation
A telecommunications company is planning an investment of Rs. 900 lakhs in new infrastructure. The project is expected to generate the following earnings (before depreciation and taxes) over the next seven years:
Year | Earnings (Rs. in lakhs) |
---|---|
1 | 220 |
2 | 230 |
3 | 240 |
4 | 250 |
5 | 260 |
6 | 270 |
7 | 280 |
The company's cost of capital is 8%, and the infrastructure will be depreciated on a straight-line basis over the project's life. The residual value at the end of seven years is estimated to be Rs. 70 lakhs. Assume no income tax.
Requirements:
- Calculate the net present value (NPV) of the project.
- Determine the internal rate of return (IRR) of the project.
- Compute the payback period.
- Evaluate the profitability index of the project.
- Advise whether the company should proceed with the investment based on the NPV and IRR.
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