Question
You have been approached by your CFO to evaluate a Long Term Proposal of starting a new service line/ product; Following numbers are expected to
You have been approached by your CFO to evaluate a Long Term Proposal of starting a new service line/ product; Following numbers are expected to play out over the next 5 years
Initial Investment: Rs 20 Cr
Revenues: Rs 120 Cr in Year 1; annual growth of 20% each year
EBITDA Margin: 0% in Year 1; annual improvement of 500 basis points each year (i.e. 5%, 10%, 15% and so on)
Working Capital Requirements: 10% of Revenue
You also have the following information from the CFOs team
Opportunity cost of capital for your company is 12%
Taxes are paid at 34% on Profit Before Tax
Depreciation is charged at 10% p.a. on the initial investment on a Straight Line basis
Historically, projects undertaken by your company have paid back in 3 years
Based on the above information, you are required to
a) Build a Cash Flow based model b) Comment whether the project should be undertaken or not using NPV, IRR and Payback tools c) What would your recommendation be for (b) above if the opportunity cost of capital was 15%
What would your recommendation be for (b) above if you got to know that another project being evaluated has the following results: NPV= Rs 10 Cr; IRR= 13%
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