• Precision Engineers Ltd. Is considering a proposal to replace one of its machines. The following data is available regarding the same:

a. The machine was purchased 4 years ago for Rs.15 lacs and has been depreciated at 25% p.a. as per the WDV method. The machine has a remaining life of 5 years, after which its salvage value is expected to be Rs.0.80 lacs. Its present salvage value is Rs.6.0 lacs.

b. The new machine costs Rs.22lacs, and would be depreciated at 40% p.a. as per WDV method. Its expected life is 8 years and after 5 years it is expected to fetch Rs.6 lacs. The installation of this machine will increase the annual revenue by Rs.5 lacs, apart from decreasing the operational costs by Rs.1.10 lacs per annum.

Assume no change in the depreciation rate if old machine is continued to be used.

If the company uses a discounting factor of 17% p.a. for calculating the present value of future cash flow, should it go for the replacement of existing machine with the new machine? Marginal tax rate of the company is 20%.

Show all your workings.

2. Matrix pharma Ltd. Is considering investing in a new line of pharmaceuticals. The Company has a plan that after five years it will sell the unit at a good profit to a pharmaceutical major. The project outlays are as follows:

Particulars Rs. In lacs.

Land 80

Building 100

Plant & machinery 500

Other fixed assets 100

Technical know-how fees 160

Gross working capital 450

The project to be financed is as follows:

Rs. In lacs.

Equity share capital 500

12% Preference share capital 250

16% term loan 300

18% Bank loan for working capital 340

The Unit is expected to generate sales value of Rs.10 crores in the first year, Rs.12 crores in the second year and Rs.15 crores for the next 3 years. The cost of production excluding depreciation would be to the extent of 70% of the sales. The applicable rate of depreciation on building is 4% on straight line method and 33% written down value method on plant and machinery and other fixed assets. The technical know-how fees will be written-off over the period of five years. The salvage value of plant and machinery after five years would be 20% of the acquisition cost, nil for other fixed assets and book value for land and building. The term loan for the project will be repaid after 5 years when the project would be sold. The effective tax rate for the company is 30%.

You are required to :

a. Define the cash flows for the investment proposal from the long term funds point of view.

b. Calculate the net present value at a cost of capital of 20%.

c. Calculate the internal rate of return for the investment period.

d. Comment on the investment proposal of Matrix Pharma Ltd. Will your recommendation change, if an additional cash flow of Rs.5 crore arise by disposing off the project? Explain.

3. Conservative Industries Ltd. Is considering a proposal for the purchase of a new machine requiring an outlay of Rs.1500 lacs. Its estimate of the cash flow distribution for the three years life of the machine is given below:

Rs. In lacs

Year 1 Year 2 Year 3

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cash flows probability cash flows probability cash flows probability

800 0.1 800 0.1 1200 0.2

600 0.2 700 0.3 900 0.5

400 0.4 600 0.4 600 0.2

200 0.3 500 0.2 300 0.1

The probability distribution is assumed to be independent. The risk-free rate of interest is 5%.

From the above information, determine the following:

a. The expected NPV of the project

b. The standard deviation of the probability distribution of NPV

c. The probability that the NPV will be zero or less.

4. Following are the details related to M/S GLOBAL SPICES, who wants to set up spices manufacturing unit in India which is estimated to cost Rs.2500 crores:

a. Estimated sales Rs.1500 crores

b. Estimated input costs Rs. in crores

Raw material 700

Consumables 150

Other production overheads 100

Repairs and maintenance 44

Administration overheads 110

Selling overheads 60

c. International prices for spices are about 25% greater than domestic prices on an average.

d. Raw materials and consumables if imported would cost about Rs.600 crores and Rs.200 crores respectively at current prices.

e. Current Re./$ exchange rate is Rs.45/-

You are required to compute the Effective rate of Protection (ERP), if any, enjoyed by the project as well as its Domestic Resource Cost (DRC). Interpret the figures computed by you clearly stating the assumptions you need to make.

5. A project is subjected to a preliminary evaluation before a detailed appraisal is done. What is the criteria that are usually applied for such preliminary evaluation? Give brief details.

Assignment-B

Following are the details related to Ten Investment projects:

Rs. in lacs.

Project cash outflow in cash outflow in cash outflow in Net present Value

Year 1 Year 2 Year 3

1 20 40 0 12

2 25 35 0 19

3 23 28 5 20

4 30 24 4 22

5 34 21 0 10

6 38 26 10 32

7 19 45 7 14

8 12 20 35 24

9 10 33 10 9

10 6 44 9 15

The budget constraints for years 1, 2 and 3 are Rs.150 lacs Rs.200 lacs and Rs.80 lacs respectively.

The following project interrelationships exist:

a. Of the set of projects 3,4 and 8, at most two can be accepted.

b. Projects 5 and 9 are mutually exclusive, but one of the two must be accepted.

c. Project 6 cannot be accepted unless both projects 1 and 10 are accepted.

d. Project 2 can be delayed by a year. Though the cash flows required will be the same, the net present value will drop by 50%.

e. Projects 3 and 7 are complimentary. If the two are accepted together, the total cash flows will be reduced by 10% and net present value will be increased by 12%.

You are required to develop Integer Linear Programme from the above information.

• Why Conflicts arise between two or more mutually exclusive projects? Analyse the situations where conflicts may arise and suggest how these conflicts can be resolved.
• Write a note on lending norms and policies of the institutions.

Case Study

A new company incorporated recently in Andhra Pradesh is in the processing of setting up a 10 million tones per annum capacity cement project and has appointed a new project manager to study various aspects of project appraisal in respect of the proposed cement project. Put yourself in the place of the project manager and present the appraisal process covering all the aspects.