Question
The Case: Mr. Ali wants to establish a business of manufacturing plastic PVC pipes. He estimates a start-up cost of business with machinery of worth
The Case: Mr. Ali wants to establish a business of manufacturing plastic PVC pipes. He estimates a start-up cost of business with machinery of worth Rs. 20 million. He further projects that the revenue (before tax and depreciation) from the business will be Rs. 5 million for the first year and it will keep on growing at a rate of 5% annually up to year 6. Some other information regarding the project is as follows: The machinery is fully depreciated under the straight line method till the end of year 6. Cost of capital is 10% while the tax rate is 30%. As per an estimate, the machinery dismantling and the site restoration would require an outlay of Rs. 2 million; while the machinery would not be able to fetch any sale price. Being a financial consultant of Mr. Ali, you have to conduct a feasibility analysis for his project. You have to suggest Mr. Ali about the viability of the project after performing different Capital Budgeting techniques. Requirement: Keeping your task into consideration, provide answers to the following: 1. Calculate projected net cash flows for 6 years. (10 Marks) 2. Evaluate the project by using the following capital budgeting techniques: a. Net Present Value (5 Marks) b. Profitability Index (3 Marks) 3. Would you recommend Mr. Ali to start his business based upon your analysis? (0
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