Case: G.S.PetroPull Company (GSPC)

GSPC is a fast growing profitable company. The company is situated in Western India. TIs sales are expected to grow about three times from Rs 360 million in 2003-04 to Rs 1100 million in 2004-05. The company is considering of commissioning a 35 km pipeline between two areas to carry gas to a state electricity board. The project will cost Rs 250 million. The pipeline will have a capacity of 2.5 MMSCM. The company will enter into a contract with the state electricity board (SEB) to supply gas. The revenue from the sale to SEB is expected to be Rs 120 million per annum. The pipeline will also be used for transportation of LNG to other users in the area. This is expected to bring additional revenue of Rs 80 million per annum. The company management considers the useful life of the pipeline to be 20 years. The financial manager estimates cash profit to sales ratio of 20 percent per annum for the first 12 years of the projects operations and 17 percent per annum for the remaining life of the project. The project has no salvage value. The project being in a backward area is exempt from paying any taxes. The company requires a rate of return of 15 percent from the project.

Questions

1. What is the projects payback period and return on investment (ROI)?
2. Compute the projects NPV and IRR.

Should the project be accepted? Why?