Question 10

A business is evaluating a potential project that requires an initial investment of Rs. 420 lakhs. The project is expected to generate the following earnings before depreciation and tax (EBDT):

Year	EBDT (Rs. in lakhs)
1	180
2	190
3	200
4	210
5	220

The cost of capital is 13%, and depreciation is charged at 10% per year on a written-down value basis. The estimated salvage value at the end of the project is Rs. 20 lakhs. No taxes are considered.

Requirements:

1. Calculate the net present value (NPV).
2. Determine the internal rate of return (IRR).
3. Compute the payback period.
4. Assess the project's profitability index.
5. Make a recommendation based on the financial metrics calculated.

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Type somethingQuestion 1

ABC Corporation is planning to launch a new product with an estimated project life of 10 years. The project qualifies for a one-time government subsidy of $15,00,000 on capital investments. Initial equipment costs will be $2.5 million, and additional equipment costing $500,000 will be purchased at the end of the fourth year. At the end of the project life, the original equipment will have no resale value, but additional equipment can be sold for $200,000. Working capital of $30,000 will be needed and released at the end of the project. The sales volumes over ten years are estimated as follows:

Years	1	2	3	4	5	6	7	8	9	10
Units	50k	80k	120k	150k	170k	190k	200k	180k	160k	140k

A selling price of $100 per unit is expected, and variable expenses will amount to 50% of sales revenue. Fixed cash operating costs will amount to $500,000 per year. The company is subject to a 25% corporate tax rate and considers 10% to be an appropriate after-tax cost of capital for the project. The company uses straight-line depreciation for tax purposes.

Requirements:

1. Calculate the Net Present Value (NPV) of the project.
2. Determine the Internal Rate of Return (IRR) for the project.
3. Compute the payback period.
4. Assess the profitability index.
5. Advise whether the project should be undertaken based on the calculated financial metrics.