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Zensa Auto Ltd is considering the manufacture of a new bike, Gale for which the following information has been gathered. Gale is expected to have
Zensa Auto Ltd is considering the manufacture of a new bike, Gale for which the following information has been gathered.
Gale is expected to have a product life cycle of five years after which it will be withdrawn from the market. The sales from this product is expected to be as follows:
Year
Sales Rs in Million
The capital equipment required for manufacturing Gale costs Rs million and it will be depreciated at the rate of percent per year as per the WDV method for tax purposes. The expected net salvage value after years is Rs million.
The working capital requirement for the project is expected to be of sales. Working capital level will be adjusted at the beginning of the year in relation to the sales for the year. At the end of five years, working capital is expected to be liquidated at par, barring an estimated loss of Rs Million on account of bad debt, which of course, will be tax deductible expense.
The accountant of the firm has provided the following estimates for the cost of Gale.
Raw Material cost : percent of sales
Variable manufacturing cost : percent of sales
Fixed annual operating and : Rs million
Maintenance costs
Variable selling expenses : percent of sales
The tax rate for the firm is percent.
Required:
a Estimate the posttax incremental cash flows for the project to manufacture Gale.
b What is the NPV of the project if the cost of capital is percent?
c What is the IRR of this project?
d What is the MIRR of this project?
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