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8/13/2019 Smooth Drive Tyres
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Calculation of Cash InflowsParticulars Year 0 Year 1Production Equipment 720,000,000(+) Working capital 211,680,000 225,255,060(-) Sales of machine 5,600,000(+)Tax on sale of existing machines 287,109
(+) Removal cost 350,000(+) Cost of layoff 643,500Sales Revenue 1,411,200,000 Add:Cost SavingsMaintenance cost (WN 3) 1,700,000 Cost of utilities 250,000Labour cost (WN 4) 1,848,000
3,798,000
Less:Incremental CostIncremental depreciation (WN 6 )(a) 178,600,000 Bad debt loss (b) NilInsurance (WN 5) 14,246,910
192,846,910
Less: Total costs 610,600,000
Earning before tax 611,551,090 Tax @ 35% 214042882Earning after tax 397,508,209
CFAT (a+b+c) 576,108,209 Add: Net salvage value of equipment (d)Add: Tax benefit on short-term capital loss Release of working capital (f)Initial Investment 927,360,609 Changes in working capital 13,575,060Terminal cash inflow (d+e+f)Net cash flow -927,360,609 562,533,149 PV Factor @ 15% 1 0.869565217PV of cash flows -927,360,609 489,159,259.57
NPV
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Year 2 Year 3 Year 4
239,701,422 255,075,059
1,501,700,400 1,598,009,479 1,700,500,393
1,700,000 3,500,000 3,500,000 250,000 250,000 250,000
2,032,800 2,236,080 2,459,688 3,982,800 5,986,080 6,209,688
133,950,000 100,462,500 NilNil Nil 15,000,000
12,822,219 11,539,997 10,385,997 146,772,219 112,002,497 25,385,997
649,060,700 689,970,559 733,486,505
709,850,281 802,022,503 947,837,579248447598 280707876 331743153461402683 521314627.2 616094426
595,352,683 621,777,127 631,094,426100,000,000
70,485,625240,075,059
14,446,362 15,373,637 410,560,684
580,906,321 606,403,490 1,041,655,1100.756143667 0.657516232 0.571753246
439,248,635.72 398,720,138.23 595569690.2
995,337,115
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Total cash revenues:OEM Market (4,00,000 cars*4 tyres*Rs. 1200 *0.11) 211200000Replacement Market( 1,00,00,000 tyres*Rs. 1500*0.08) 1200000000
1411200000Total Costs
Cost of tyres in OEM Market (4,00,000 cars*4 tyres*Rs. 600*0.11) 105600000Cost of tyres in Replacement Market(1,00,00,000 tyres*Rs. 600*0.08) 480000000Selling and administrative costs 25,000,000
610,600,000
Net working capital (15 % of sales) 211680000
Total cash revenues:OEM Market (4,10,000 cars*4 tyres*Rs. 1251 *0.11) 225680400
Replacement Market( 1,02,00,000 tyres*Rs. 1563.75*0.08) 12760200001501700400
Total CostsCost of tyres in OEM Market (4,10,000 cars*4 tyres*Rs. 625.50*0.11) 112840200Cost of tyres in Replacement Market(1,02,00,000 tyres*Rs. 625.50*0.08) 510408000Selling and administrative costs 25,812,500
649060700
Net working capital (15 % of sales) 225255060
Total cash revenues:OEM Market (4,20,250 cars*4 tyres*Rs. 1304.17 *0.11) 241153612.4Replacement Market( 1,04,04,000 tyres*Rs. 1630.21*0.08) 1356855867
1598009479Total CostsCost of tyres in OEM Market (4,20,250 cars*4 tyres*Rs. 652.08*0.11) 120576806.2Cost of tyres in Replacement Market(1,04,04,000 tyres*Rs. 652.08*0.08) 542742346.8Selling and administrative costs 26,651,406
689970559
Net working capital (15 % of sales) 239,701,422
Total cash revenues:OEM Market (4,30,756 cars*4 tyres*Rs. 1359.59 *0.11) 257687707Replacement Market( 1,06,12,080 tyres*Rs. 1699.49*0.08) 1442812686
Cash Flows and Net Working Capital Requirement for Year 1
Cash Flows and Net Working Capital Requirement for Year 2
Cash Flows and Net Working Capital Requirement for Year 3
Cash Flows and Net Working Capital Requirement for Year 4
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1700500393Total CostsCost of tyres in OEM Market ( 4,30,756 cars*4 tyres*Rs. 679.80*0.11) 128843853Cost of tyres in Replacement Market( 1,06,12,080 tyres*Rs. 679.80*0.08) 577125074.5Selling and administrative costs 27517577
733486505
Net working capital (15 % of sales) 255075059
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No. of cars in OEM Market (4,00,000*1.025) 410000
Selling price per tyre (1200* 1.0425) 1251No. of cars in Replacement market (1,00,00,000*1.02) 10200000Selling price per tyre (1500* 1.0425) 1563.75Variable cost per tyre (600*1.0425) 625.5Selling and administrative cost (Rs. 2,50,00,000*1.0325) 25812500
No. of cars in OEM Market (4,10,000*1.025) 420250Selling price per tyre (1251* 1.0425) 1304.17No. of cars in Replacement market (1,02,00,000*1.02) 10404000Selling price per tyre (1563.75* 1.0425) 1630.21Variable cost per tyre (625.5*1.0425) 652.08Selling and administrative cost (Rs. 2,58,12,500*1.0325) 26651406
No. of cars in OEM Market (4,20,250*1.025) 430756Selling price per tyre (1304.17* 1.0425) 1359.5946
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No. of cars in Replacement market (1,04,04,000*1.02) 10612080Selling price per tyre (1630.21* 1.0425) 1699.4933Variable cost per tyre (652.08*1.0425) 679.79731Selling and administrative cost (Rs. 2,66,51,406*1.0325) 27517577
15,373,637
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Working Notes:1. Tax on Profi ts From Sale of Existing MachineSales proceeds from existing machines 5,600,000Less: Book value of existing machine (Working note 6) 4,429,687Gross Profit 1,170,313Less: Removal cost (7 machines *Rs. 50,000) 350,000
Net profit 820,313Tax payable on profits 287,109
2. Cost of Laying off 34 PersonnelSalary paid as compensation 990,000Tax benefits 346500Cost of layoff 643,500
3. Savings in Maintenance Costs
Year Existing Machine New equipment1 2,500,000 800,000 2 2,500,000 800,000 3 6,500,000 3,000,000 4 6,500,000 3,000,000
4. Savings in Labour and Employee CostsExisting Costs:Unskilled labour(20*Rs. 4,000* 12 months) 960,000
Skilled personnel (20*Rs. 6,000*12 months) 1,440,000 Supervising executives (2* Rs. 7,000*12 months) 168,000 Maintenance personnel (2* Rs. 5,000*12 months) 120,000
(A) 2,688,000
Proposed CostsSkilled personnel (9* Rs.7,000*12 months) 756,000 Maintenece personnel (1* Rs. 7,000*12 months) 84,000
(B) 840,000
Savings in labour cost (A-B) 1,848,000 This cost will increase
5. InsuranceYear Existing machine New equipment
1 153090 144000002 137781 129600003 124003 116640004 111603 10497600
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Cost Savings1,700,0001,700,0003,500,0003,500,000
y 10 % in subsequent years.
Incremental Insurance14246910128222191153999710385997
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6. Incremental DepreciationWDV of the existing machine in the beginning of year 4:Initial cost of machines (7 machines * Rs. 15 lakh) 10500000Less: Depreciation chargesYear 1 (Rs. 10500000*0.25) 2625000Year 2 (Rs. 7875000*0.25) 1968750
Year 3 (Rs. 5906250*0.25) 1,476,5636070313
WDV of Existing machines 4429687
Depreciation base of new equipmentWDV of Existing machines 4,429,687Add: Cost of new machines 720,000,000Less: Sale value of existing machien -5,600,000
718,829,687
Base for incremental depreciation (Rs. 71,88,29,687-Rs. 44,29,687) 714,400,000
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Calculation of Incremental DepreciationYear WDV Depreciation
1 714,400,000 1786000002 535,800,000 133950000
7875000 3 401,850,000 1004625005906250 4 301,387,500 Nil
Short-term capital loss (Rs. 30,13,87,500- Rs. 10,00,00,000)Tax benefit on shor-term capital loss (Rs. 20,13,87,500*0.35)
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201,387,50070485625