Sample Exam Qs Modern Pharma is considering the manufacture of a new drug, Floxin, for which the following information has been gathered: Floxin is expected to have a product life of seven years and after that it would be withdrawn from the market. The sales from the drug is expected to be as follows: F.Y. Ending 2024 2025 2026 2027 2028 2029 2030 Amount (Crores) 10 12 16 20 16 12 4 The capital equipments required for manufacturing Floxin is Rs. 12 Crore and it will be depreciated @ 15 percent per year as per WDV method. The expected net salvage value of the plant at the end of project period would be Rs. 2.5 Crore. The Net working capital requirement would be Rs. 2 Crore and would be salvaged at book value at the end of project period. The cost sheet of the firm prepared by costing experts is as under- Raw material cost: 30% of sales Variable manufacturing cost: 10% of sales Fixed cost for rent, office salary, sales expenses etc., (excluding depreciation and interest) is Rs. 4.1 Crore per year The project is funded by Rs. 4 Crore equity and Rs. 10 Crore debt The cost of equity is estimated as 15% and cost of debt is 12% The tax rate is 30% The debt is repaid in six years Estimate A. The operating and free cash flow of the company B. Weighted average cost of capital C. Project and Equity IRR D. Recommend on investment decision of the company