Question No: 04 The MBA intern from a reputed institute is given the task of analyzing two mutually exclusive projects' proposals at Headquarters of H.E.C. Ltd. (A heavy engineering company). It had two plants; one at Ranchi (referred as Plant R); the other at Bokaro (referred as Plant B). The plant managers of the two plants had submitted proposals related to the expansion of their respective plants. The proposals provided the incremental benefits in terms of cash flow projections from the expansion of their respective plants. However, H.E.C. Ltd. could take up only one of the two projects for expansion currently as with expanding only one of the two projects, it will be able to meet the demand for heavy machinery. The cash flow projections of the two proposals is provided in Table 1. The initial outlay for Plant R expansion would be 200 million and for Plant B would be 1410 million. The benefit in terms of cash flows for Plant R would be 150 million starting from Year I and will grow at a growth rate of 5% till perpetuity and for Plant B it will be T250 million also growing at a rate of 5% till perpetuity from Year 1 onwards. Plant T-1 till perpetuity with growth rate of g=5% T=0 Plant R - 5200 *150 Plant B -*410 250 *All values in millions Options able to meet the demand for heavy machinery. currently The cash flow projections of the two proposals is provided in Table I. The initial outlay for Plant R expansion would be *200 million and for Plant B would be *410 million. The benefit in terms of cash flows for Plant R would be 5150 million starting from Year 1 and will grow at a growth rate of 5% till perpetuity and for Plant B it will be 250 million also growing at a rate of 5% till perpetuity from Year 1 onwards. Plant T=0 T=1 till perpetuity with growth rate of g=5% Plant R - 5200 *150 Plant B A -5410 7250 *All values in millions The cost of capital was not known. The main task of the intern was to find out the cost of capital for which HEC Ltd. would be indifferent between choosing any of the two projects. What is the cross-over rate, the IRRs and what should the MBA intern suggest regarding investment decision; provide overall solution? [10] Options Question No: 04 The MBA intern from a reputed institute is given the task of analyzing two mutually exclusive projects' proposals at Headquarters of H.E.C. Ltd. (A heavy engineering company). It had two plants; one at Ranchi (referred as Plant R); the other at Bokaro (referred as Plant B). The plant managers of the two plants had submitted proposals related to the expansion of their respective plants. The proposals provided the incremental benefits in terms of cash flow projections from the expansion of their respective plants. However, H.E.C. Ltd. could take up only one of the two projects for expansion currently as with expanding only one of the two projects, it will be able to meet the demand for heavy machinery. The cash flow projections of the two proposals is provided in Table 1. The initial outlay for Plant R expansion would be 200 million and for Plant B would be 1410 million. The benefit in terms of cash flows for Plant R would be 150 million starting from Year I and will grow at a growth rate of 5% till perpetuity and for Plant B it will be T250 million also growing at a rate of 5% till perpetuity from Year 1 onwards. Plant T-1 till perpetuity with growth rate of g=5% T=0 Plant R - 5200 *150 Plant B -*410 250 *All values in millions Options able to meet the demand for heavy machinery. currently The cash flow projections of the two proposals is provided in Table I. The initial outlay for Plant R expansion would be *200 million and for Plant B would be *410 million. The benefit in terms of cash flows for Plant R would be 5150 million starting from Year 1 and will grow at a growth rate of 5% till perpetuity and for Plant B it will be 250 million also growing at a rate of 5% till perpetuity from Year 1 onwards. Plant T=0 T=1 till perpetuity with growth rate of g=5% Plant R - 5200 *150 Plant B A -5410 7250 *All values in millions The cost of capital was not known. The main task of the intern was to find out the cost of capital for which HEC Ltd. would be indifferent between choosing any of the two projects. What is the cross-over rate, the IRRs and what should the MBA intern suggest regarding investment decision; provide overall solution? [10] Options