Harjinder Motors Ltd$.($HML$),$ located in Ludhiana, and Saalsa Electric Cars $($SEC$)$ are exploring

the possibility of HML setting up a company, Teensaal Electric Cars Limited $($TECL$),$ to

manufacture and market electric cars in India with technical collaboration from SEC.

Accordingly, HML and SEC appointed two consulting firms $-$ an engineering consultant and a

marketing research firm to undertake a detailed evaluation of the project. They paid a fee of

Rs $15$ crore to the consulting firms $($which was borne equally by HML and SEC$)$; the fee will not

be charged to the project.

In their report, the engineering consultant opined that SEC's existing design of the electric car

should be modified to suit the Indian road conditions involving a one$-$time development

expenditure of Rs $40$ crores that would form part of the capital expenditure of the project.

TECL's manufacturing plant would be set up in the existing manufacturing facility of HML in

Ludhiana. The cost of land in that geography at current prices is Rs $10,000$ per square yard.

The engineering consultant estimated that the plant would require $30,000$ square yards, and

the required land will be "sold" to the TECL by HML at the market price. Putting up the factory

building would cost a further Rs $65$ crores. Furthermore, the plant and machinery to be

installed for manufacturing these cars in India would be Rs $375$ crores. The factory building

$($Rs $65$ crores$)$ and the plant and the machinery $($Rs $375$ crores$)$ would be fully depreciated on

a straight$-$line basis over three years.

The marketing research firm estimates the demand for these cars to be $40,000$ in the first

year, growing at $10\%$ a year for each of the next two years. The price would be Rs $5\mathrm{.}00$ lakhs

per unit at launch. The price could be increased by $10\%$ a year for each of the next two years.

The unit cost of manufacturing would be $75\%$ of the price per car. Of this, $55\%$ would be the

cost of materials and $20\%$ direct labour plus all other costs $($i$.$e$.,$ for every Rs $75$ in

manufacturing costs, material costs are Rs $55,$ and Rs $20$ is due to labour and other costs$).$

The inventories and receivables would be equal to $30$ days' sales, and payables would also be

equal to $30$ days' consumption of material. Assume $360$ days in a year. The investment in

working capital required in year $t$ will be made in year $t$ itself. The electric car projects would

be charged a tax rate of $20\%$ on the earnings before tax. The capital expenditure to be incurred

for the project would be fully equity funded. TECL would pay a royalty of Rs $30,000$ per car to

SEC for the first three years.

All costs are considered in Indian Rupees, and the project's cost of capital is $12\%.$ The project

will be implemented only if it is found viable on an NPV basis in a time frame of three years

from commencement. Any cashflows beyond three years should not be considered in the

current evaluation.

Estimate the cash flows and NPV for the TECL project. Should the project go ahead based on

its NPV$?$