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Metaland is a major manufacturer of light commercial vehicles. It has a very strong R&D center which has developed very successful models in the last

Metaland is a major manufacturer of light commercial vehicles. It has a very strong R&D center which has developed very successful models in the last fifteen years. However, two models developed by it in the last few years have not done well and were prematurely withdrawn from the market. The engineers at its R&D centre have recently developed a prototype for a new light commercial vehicle that would have a capacity of 4 tons. After a lengthy discussion, the board of directors of Metaland decided to carefully evaluate the financial worthwhileness of manufacturing this model which they have labeled Meta 4. Till this point Rs.50 Mn has been invested in R&D.
You have been recently hired as the executive assistant to Vijay Mathur, Managing Director of Metaland. Vijay Mathur has entrusted you with the task of evaluating the project.
Meta 4 would be produced in the existing factory which has enough space for one more product. Meta 4 will require plant and machinery that will cost Rs.500 million. You can assume that the outlay on plant and machinery will be incurred over a period of one year. For the sake of simplicity assume that 50 percent will be incurred right in the beginning (end of the 0th Year) and the balance 50 percent will be incurred after 1 year (end of the 1st Year). The plant will commence operation after one year. Meta 4 project will require Rs.250 million toward gross working capital. You can assume that gross working capital investment will occur after 1 year(end of the 1st Year).
The proposed scheme of financing is as follows: Rs.250 million of equity, Rs.250 million of term loan, Rs.125 million of working capital advance, and Rs.125 million of trade credit. Equity will come right in the beginning by way of retained earnings. Term loan and working capital in advance will be raised at the end of year 1. The term loan is repayable in 5 equal semi-annual instalments of Rs.50 million each. The first instalment will be due after 30 months of raising the term loan. The interest rate on the term loan will be 14 percent.
The levels of working capital advance and trade credit will remain Rs.125 million each, till they are paid back or retired at the end of 5 years, after the project commences, which is the expected life of the project. Working capital advance will carry an interest rate of 12 percent.
Meta 4 project is expected to generate a revenue or Rs.800 million per year. The operating costs (excluding depreciation and taxes) are expected to be Rs.500 million per year. For tax purposes, the depreciation rate on fixed assets will be 25 percent as per the written down value method. Assume that there is no other tax benefit.
The net salvage value of plant and machinery is expected to be Rs.100 million at the end of project life. Recovery of working capital will be at book value.
The income tax rate is expected to be 30 percent. Vijay Mathur wants you to estimate the cash flows from two different point of View:
a) Cash flows from the point of all investors (which is also called the explicit cost funds point of view).
b) Cash flows from the point of equity investors.

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