Suggested Answers Project Management II (242) : October 2003

Part D : Case Study 1. a. Cost the Project:

Particulars Rs in Lakhs Rs. In Lakhs Land: Basic Cost 24.00 Registration Charges @ 12.5% 3.00 Site Development 15.00 Cost of Laying internal roads 8.00 Cost of Approach Roads 5.00 Cost of Boundary and Main Gate 0.50 55.50Buildings: Main Process Building 55.00 Hydraulic Room 5.00 Pneumatic Room 3.00 Water Treatment Plant 20.00 Administrative Office 5.00 Building for Time Office 1.00 Building for godowns 8.00 Building for Canteen 2.00 Building for Garages 1.00 100.00Plant and Machineries: Imported Items: Process Equipments 1200.00 Electric Cars 24.00 Custom Duty @ 35% 428.40 Indigenous Items: Water Supplying Equipments 3.50 EOT Cranes 30.00 Process Automation 25.00 Plant Lightings 5.00 Plant Electrics 3.00 Compressed Air System 7.00 Hydraulic System 6.00 Pipe Lines 2.00 Power and Control Cables 3.00 Excise Duty @ 16% 13.52 Octoroi, Freight, Transportation, Loading, Unloading etc.

70.02

Erection Charges 130.85 1951.29

Miscellaneous Fixed Assets 50.00 50.00 Preliminary Expenses (Excepting issue cost):

Legal Charges 0.50 Cost of market Survey 2.00 Cost of Feasibility Report 0.80 3.30

Pre-operative Expenses: Traveling Expenses 1.25 Postage, Telegram, Telephone etc 0.50 Printing and Stationery 0.70 Advertisement Expenses 10.00 Insurance Premium 3.00 15.45 Contingency (1951.29 + 50.00 + 100.00) * 0.10

210.13 210.13

Margin Money for Working Capital 639.9 Total 3025.27

Public contribution in equity = Cost of the project Term loan Promoters contribution = 3025.27 1000 800 = 1225.27

Cost of public issue is 5%. In absolute cost of issue is 1225.27 = 64.50 So the total preliminary cost = 64.50 + 3.30 = Rs 67.80 Lakhs

So the cost of the project is 3025.27 + 64.50 Rs 3090 Lakhs.

b. Means of Finance (Rs. In Lakhs)

Means Rs in Lakhs Equity:

Promoter 800.00

Public 1290.00

Term Loan 1000.00

Total 3090.00 Working Note 1: Computation of Margin Money: (Rs. In Lakhs)

Particulars Months Year 1

Year 2

Year 3

Year 4 Year 5

Raw Material 1.1 155.5 175.3 194.8 194.8 194.8

Consumables 2.5 33.3 37.5 41.7 41.7 41.7

Final Goods 0.5 88.6 98.6 108.7 109.2 109.7

Debtors 1.2 340.0 382.5 425.0 425.0 425.0

Expenses 1.0 22.2 22.8 23.6 24.6 25.7

Total Working Capital 639.9 716.7 793.8 795.3 796.9

Finance @ 75% from 2nd year onwards 537.5 595.4 596.5 597.7

Margin 179.2 198.4 198.8 199.2

Interest @ 12% 64.5 71.45 71.58 71.72< TOP >

2. Profitability Statement: (Rs. In Lakhs)

Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Capacity Utilization 80% 90% 100% 100% 100%Sales: 3400.00 3825.00 4250.00 4250.00 4250.00Costs: Raw materials 1700.00 1912.50 2125.00 2125.00 2125.00 Consumables 160.00 180.00 200.00 200.00 200.00 Power 28.50 23.70 21.50 21.50 21.50 Repairs and Maintt. 43.20 45.40 47.60 50.00 52.50Wages and Salaries 135.00 141.80 148.80 156.30 164.10Administrative O/h 60.00 62.40 64.90 67.50 70.20Selling O/h 102.00 114.80 127.50 127.50 127.50Depreciation 225.30 225.30 225.30 225.30 225.30Interest on long term loan 140.00 112.00 84.00 56.00 28.00Interest on short term loan 64.5 71.45 71.58 71.72Preliminary Expenses W/off 13.56 13.56 13.56 13.56 13.56Profit before tax 792.44 929.04 1120.39 1135.76 1150.62Tax 274.76 330.73 405.02 417.01 428.13Profit after tax 517.68 598.31 715.37 718.75 722.49

Working Note 2 : (Rs. In Lakhs)

Assets Value Preoperative Expenses

Contingency Total Depreciation Rate

Depreciation

Building 100.00 0.73 10.00 110.73 3.34% 3.7

P & M 1951.30 14.35 195.13 2160.78 10.00% 216.1 MFA 50.00 0.37 5.00 55.37 10.00% 5.5 Total 2101.3 15.45 210.13 2326.88 225.3

Working Note 3: (Rs. In Lakhs)

Year Opening Balance

Interest @ 14%

Repayment Closing Balance

1 1000.00 140.00 200.00 800.00 2 800.00 112.00 200.00 600.00 3 600.00 84.00 200.00 400.00 4 400.00 56.00 200.00 200.00 5 200.00 28.00 200.00 0.00

Working Note 4: (Rs. In Lakhs)

Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Buildings Opening

Balance 110.73 99.657 89.6913 80.72217 72.64995 Depreciation @10% 11.073 9.9657 8.96913 8.072217 7.264995 Closing Balance 99.657 89.6913 80.72217 72.64995 65.38496

Plant and Machineries

Opening Balance 2160.78 1944.702 1750.232 1575.209 1417.688 Depreciation @10 % 216.078 194.4702 175.0232 157.5209 141.7688 Closing Balance 1944.702 1750.232 1575.209 1417.688 1275.919

Miscellaneous Fixed Assets

Opening Balance 55.37 49.833 44.8497 40.36473 36.32826 Depreciation @10% 5.537 4.9833 4.48497 4.036473 3.632826 Closing Balance 49.833 44.8497 40.36473 36.32826 32.69543

Total Depreciation 232.688 209.4192 188.4773 169.6296 152.6666 Working Note 5: (Rs. In Lakhs)

Particulars Year 1 Year 2 Year 3 Year 4 Year 5

Profit before tax 792.44 929.04 1120.39 1135.76 1150.62

Add: Dep (SLM) 225.3 225.3 225.3 225.3 225.3

Less:Dep(WDV) 232.7 209.4 188.5 169.6 152.7

Net Income 785.04 944.94 1157.192 1191.46 1223.216

Less: Unabsorved Depreciation 0.00 0.00 0.00 0.00 0.00

Taxable Income 785.04 944.94 1157.192 1191.46 1223.216

Tax 274.76 330.73 405.02 417.01 428.13< TOP >

3. Cashflows: (Rs. In Lakhs)

Year 0 Year 1 Year 2 Year 3

Year 4 Year 5

Initial Outlays (2450.10) Operating Cash flows: (+) PAT 517.68 598.31 715.37 718.75 722.49 (+) Interest (1 T) 91.00 72.80 54.60 36.40 18.20 (+) Depreciation 225.30 225.30 225.30 225.30 225.30 (+) Preli. Expenses w/off 13.56 13.56 13.56 13.56 13.56

() Increase in w/c margin 639.90 460.70 19.20 0.40 0.40

Terminal Cash flows: Salvage value of F.A. 1135.84 Salvage value of WCM 199.20

Annual Cashflows -2450.10 207.94 1370.67 989.63 993.61 2314.19< TOP >

4. Average asset beta of the companies in the group is 0.80. As the companies are all in the

same business so that can be used as a proxy for the asset beta of the company. Debt-Equity ratio of the company is 10:20.9and tax rate applicable is 35%.

So the equity beta of the STL is

= 1.0488 So the cost of equity = Rf + (Rm Rf) = 5.2 + 1.0488 (6) = 11.49 %.

So, Cost of capital = = 2.945 + 7.772 = 10.72 % Terminal value of the cashflows:

207.94 (1.08)4 + 1370.67 (1.08)3 + 989.63 (1.08)2 + 993.61 (1.08) + 2314.19 = 282.90 + 1726.65+ 1154.30 + 1073.10 + 2314.19 = 6551.14

So the modified NPV = 2450.10 = 1487.09 or Rs 1487.09 Lakhs

b. Modified IRR = c.

Year Cashflows PV at 10.72 %

Cumulative PV

1 207.94 187.81 187.81

2 1370.67 1118.10 1305.91

3 989.63 729.11 2035.02

4 993.61 661.17 2696.19

5 2314.19 1390.81 4087.00

We see that the long term capital is being paid back in discounted form during fourth year, sothe discounted payback period is 4 years