Illustration 13: TSL Ltd., a highly profitable and taxpaying company is planning to expand its present capacity by 100%. The estimated cost of the project is Rs. 1,000 lakhs out of which Rs. 500 lakhs is to be met out of loan funds. The company has received two offers from their bankers: 51 Option 1 Option @ Value of loan Rs. 500 lakhs US $ 14 lakhs equal to Rs. 500 lakhs Interest 15% payable yearly 6% payable (fixed yearly in US $) Period of Repayment 5 years in 5 5 Years installment is payable after draw down) Other expenses (to 1% of the value of 1% at US $ = Rs. 36 be treated as the loan (Average) revenue Expenditure) Future Exchange End of 1 year 1 US Rate $ = Rs. 38 thereafter to increase by Rs. 2 per annum The company is liable to pay income tax at 35% and eligible for 25% depreciation on W.D. value. You may assume that at the end of 5th year the company will be able to claim balance in WDV for tax purposes. The company follows Accounting Standard AS-11 for accounting changes in Foreign Exchange Rate. (1) Compare the total outflow of cash under the above options (2) Using discounted cash flow technique, evaluate the above offers. (3) Is there any risk, which the company should take care of? (4) In case TSL has large volume of exports would your advice be different. The following discounting table may be adopted : Year 0 1 2 3 5 Discount Factor 1 0.921 0.848 0.781 0.720 0.663 4