Question 10

A manufacturing company plans to introduce a new product line. The initial investment in production equipment is $1,000,000. The product line is expected to generate $200,000 in annual sales with annual operating costs of $80,000 for 10 years. The equipment will be depreciated straight-line over 10 years with no salvage value. The tax rate is 25%, and the required rate of return is 10%. Calculate:

1. Annual depreciation expense.
2. Annual after-tax cash flows.
3. Net Present Value (NPV).
4. Internal Rate of Return (IRR).
5. Payback Period.

Question 1

A company is planning to invest in a new project requiring an initial investment of Rs. 500 lakhs in equipment and other assets. The project is expected to generate the following annual earnings (before depreciation and taxes) over the next five years:

Year	Earnings (Rs. in lakhs)
1	200
2	220
3	240
4	250
5	230

The cost of raising additional capital is 10%, and assets must be depreciated at 15% on a straight-line basis. The scrap value at the end of five years is expected to be Rs. 50 lakhs. Assume zero income tax applicable to the company.

Requirements:

1. Calculate the net present value (NPV) of the project.
2. Determine the internal rate of return (IRR) of the project.
3. Calculate the payback period.
4. Compute the accounting rate of return (ARR) on the project.
5. Advise the management on whether to proceed with the project based on the financial metrics.