Question 10

A telecommunications company is evaluating a new infrastructure project that requires an investment of Rs. 900 lakhs. The project is expected to generate the following cash flows over the next eight years:

Year	Cash Flow (Rs. in lakhs)
1	150
2	160
3	170
4	180
5	190
6	200
7	210
8	220

The company's discount rate is 12%. The project will have a residual value of Rs. 50 lakhs at the end of year 8. The annual operating expenses are estimated at Rs. 60 lakhs. The company uses straight-line depreciation and has a tax rate of 25%.

Required:

1. Calculate the Net Present Value (NPV) of the project.
2. Determine the Internal Rate of Return (IRR).
3. Calculate the Discounted Payback Period.
4. Compute the Modified Internal Rate of Return (MIRR).
5. Advise the management on whether to undertake the new infrastructure project.

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Question 1:

ABC Corporation is evaluating a new investment project with an expected life of 6 years. The initial investment cost is ₹3 crores. Additional equipment costing ₹1 crore will be required at the end of year 2. At the end of 6 years, the equipment can be sold for ₹50 lakhs. The project will require a working capital of ₹30 lakhs, which will be recovered at the end of the project. The project is expected to generate the following sales volume and price per unit over the years:

Year	Sales Volume (Units)	Price per Unit (₹)
1	1,00,000	150
2	1,50,000	160
3	2,00,000	170
4	2,20,000	180
5	2,00,000	190
6	1,80,000	200

Variable costs are expected to be 60% of the sales revenue. Fixed operating costs are ₹1.5 crores per year. The corporate tax rate is 30%. The company uses a discount rate of 12% for its investment appraisal.

Requirements:

1. Calculate the annual cash flows of the project.
2. Compute the Net Present Value (NPV) of the project.
3. Determine the Internal Rate of Return (IRR) of the project.
4. Advise whether the project should be accepted based on NPV and IRR.
5. Analyze the impact of a 10% increase in variable costs on the project's NPV.