Question 7:

STU Company is evaluating a project with a 10-year life. The project requires an initial investment of ₹6 crores. Additional working capital of ₹50 lakhs is needed at the start and will be recovered at the end of the project. The expected annual revenue is ₹1.5 crores for the first 3 years and ₹2 crores for the remaining 7 years. Operating costs are 25% of the revenue.

The equipment's salvage value at the end of 10 years is ₹1 crore. The corporate tax rate is 30%, and the company's discount rate is 12%.

Requirements:

1. Calculate the annual net cash flows.
2. Compute the Net Present Value (NPV) of the project.
3. Determine the project's Internal Rate of Return (IRR).
4. Evaluate the project's Profitability Index (PI).
5. Perform a sensitivity analysis on the NPV if the operating costs increase to 30% of the revenue.