Q1) Mohan Enterprises is considering a capital project about which the following information is available.

1. The investment outlay on the project will be Rs 100 million. This consists of Rs 80 million on plant and machinery and Rs 20 million on net working capital. The entire outlay will be incurred at the beginning of the project.
2. The project will be financed with Rs 45 million of equity, Rs 5 million of preference capital and Rs 50 million of debt capital. Preference capital will carry a dividend rate of 15 percent; debt capital will carry an interest rate of 15 percent.
3. The life of the project is expected to be 5 years. At the end of 5 years, fixed assets will fetch a net salvage value of Rs 30 million whereas, net working capital will be liquidated at its book value.
4. The project is expected to increase the revenue of the firm by Rs120 million per year. The increase in costs on account of the project is expected to be Rs 80 million per year. (This excludes all items of cost other than depreciation, interest and tax). The effective tax rate will be 30 percent.
5. Plant and machinery will be depricatied at the rate of 25 percent per year as per the written down value method. Hence, the depricarion charges will be:

Year	1	2	3	4	5
Depreciation	Rs 20mn	Rs 15 Mn	Rs. 11.25 Mn	Rs8.44 Mn	6.33 Mn

Required:

Forecast the project cash flows for the given period.

Q2) Teja international is determining the cash flow for a project involving replacement of an old machine by a new machine. The old machine bought a few years ago has a book value of Rs. 800,000 and it can be sold to realize a post tax salvage value of Rs. 900,000. It has a remaining life of five years after which its net salvage value is expected to be Rs. 200,000. It is being depreciated annually at a rate of 25 percent as per the WDV method. The working capital associated with this machine is Rs. 500,000.

The new machine costs Rs. 3,000,000. It is expected to fetch a net salvage value of Rs. 1,500,000 after five years. The depreciation rate applicable to it is 25 percent under WDV method. The new machine is expected to bring a saving of Rs. 650,000 annually in manufacturing costs (other than depreciation). The tax rate applicable to the firm is 30 percent.

Required:

1. Estimate the cash flow associated with the replacement project.

2. What is the NPV of the replacement project if the cost of capital is 14 percent?

ANSWER BOTH QUESTION Q1 & Q2