Q5. What do you understand by the terms i) Fixed or Permanent Working Capital ii) Variable or Temporary Working Capital (4 marks)

Q6. Westeros Auto Co is considering evaluating a new project for manufacturing high-end automobile components for exports. Project Cost of Setting up the factory is estimated at Rs 20 cr. The company has spent approx. Rs 1.25 cr so far, on doing R&D for this project. The capacity of the factory is 40,000 units p.a. Selling price is estimated at Rs 8,000 per unit. But the company is also aware that, due to this new product, it may lose sales volume of an existing product. Lost contribution due to this is estimated at Rs 1 cr p.a. Capacity utilization is expected to be 60% in year 1, 80% in year 2, and 90% thereafter. Variable cost is 45% of sales, and fixed costs attributable to the project are Rs 2 cr p.a. The existing sales of the company are Rs 80 cr, and its corporate overheads are Rs 2.8 cr. For Management Accounting purpose, the company allocates corporate overhead to each project in proportion to its sales. Rate of Depreciation on fixed assets is 20% WDV, while tax rate is 30%. The project shall be entirely equity financed. The companys beta is 1.50, rate of return on market portfolio is expected to be 14%, and yield on GoI Securities is given to be 6%. Life of the project is 5 years, at the end of which, the fixed assets can be sold at 10% of original cost, while working capital will be recovered at book value. The company has a policy of accepting only those projects that have a benefit/cost ratio of 1.50 or more. Would you approve this project? Show all the assumptions and calculations clearly. (10 marks)