Kumar plans to finance the proposed projects with 60% equity and 40% debt, with an 8.65% interest rate on the bank loan. Kumar expects a 20% return on equity capital employed, with a 14.42% weighted average cost of capital.

What is the Payback Period, IRR, and NPV for both options?

Fixed Crane:

Mobile Crane:

Entering the Mobile Crane Market Government infrastructure development projects - such as one hundred smart city initiatives; a growing freight corridor; and India's first smart city, Gujarat International Finance Tec-City (GIFT) had boosted the demand for mobile cranes. Based on his experience and market research, Kumar expected the sales revenue from this project would be around US\$13 million for the first year and would increase at a rate of 5 per cent for the succeeding years if the economic conditions remained favourable. To set up a mobile crane manufacturing plant, the company could rent an adjacent warehouse space at a total up-front expense of US\$5 million for a five-year lock-in period. The estimated cost of the plant and machinery for producing mobile cranes, including installation costs, would be US\$1 million. After its expected life of five years, the plant would have a salvage value of US\$0.1 million. This plant and machinery could be depreciated over the usage period using a straight-line basis. An additional amount of US $0.2 million would be needed for research and development to build blueprints for mobile cranes. Apart from the fixed or lump-sum cash outlay, the company would incur additional operating expenses. The annual variable cost for raw materials would start at US $5 million and increase at a rate of 3 per cent year on year. Other manufacturing expenses, such as wages for labourers, freight, and factory overhead, would cost US $1.5 million in the first year, but this was expected to increase by 1.5 per cent in subsequent years. The office and administrative expenses for managing operations, such as salaries to technical staff and professional fees, added another US\$1.8 million to the cash outflow. To fulfill its growth aspirations and achieve economies of scale, Concise Industries could increase the scale of its operations by setting up a new manufacturing unit. The company might cut its cost of production by reaching economies of scale, and it could then pass on these savings to customers in the form of reduced prices. Because input prices were rising due to supply restrictions and supply chain disruptions caused by the adverse impacts of COVID-19, Kumar had thought to establish this new manufacturing plant near the suppliers of raw materials such as iron, carbon steel, and high-strength steel, which constituted the core of a fixed crane. This step would help cut transportation and logistical costs. Kumar proposed setting up another fixed-crane manufacturing plant, which would require a capital outlay of US $5.7 million for both the plant (US $5.0 million) and the machinery (US $0.7 million). For its fixed assets, the company followed a straight-line depreciation policy. Because depreciation was a non-cash expense that was also tax deductible, this could result in tax savings for the company in the form of a depreciation tax shield. Additional cash outflows to meet operational requirements would include direct materials costs of US $4.7 million, workers' wages and other factory expenses of US\$0.8 million, and office and administrative expenses of US\$1.7 million. To account for price increases or any other unforeseen issues, these expenses were expected to increase by 1.5 per cent, 1.0 per cent, and 0.0 per cent, respectively, over each of the next three years. The sales revenue from this project was expected to be around US\$11 million per year and to increase at a rate of 2 per cent year on year for the next four years. In manufacturing organizations, working capital decisions played a crucial part in overall operating decisions. The kind of products Concise Industries manufactured had long inventory conversion periods that required a large amount of working capital. Therefore, Kumar made the following decisions regarding working capital: An inventory of raw materials for smooth operations would account for around 6 per cent of the annual material consumption cost. As far as trade receivables were concerned, Concise Industries had a policy of providing a twenty-day collection window to its clients. However, to attract potential customers, the company planned to increase the average collection period to thirty-five days. The company had maintained good relationships with its raw materials suppliers by making payments on time and sometimes even paying in advance. As a result, the suppliers agreed to provide a forty-day window to Concise Industries for clearing trade payables bills. Verma, the CFO, briefed Kumar about the financing decisions that would make this project expansion plan feasible. According to Verma, the timing could not be better for financing purposes because the central Reserve Bank of India was holding the repurchase agreement (or repo rate) fixed at 4 per cent through its monetary policy tools. 7 Similarly, the Indian Ministry of Finance had launched economic relief packages to revive the economy after the second wave of COVID-19. To finance the proposed projects, Verma recommended a mix of 40 per cent debt and 60 per cent equity. Kumar and Verma held a meeting with the Concise Industries' designated bank and shared the project expansion proposals. Provided that Concise Industries generated a return on equity for the shareholders of around 23 per cent in the financial year ending 2021 (see Exhibits 3 and 4), the bank agreed to sanction a loan, at 8.65 per cent interest for five years, to finance the expansion project. Kumar expected a minimum return of 20 per cent on his equity capital investment. The prevailing corporate tax rate was 30 per cent, and the company would make the same working capital and financing decisions regardless of the expansion project