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Capital Budgeting Project done for a ordinance factory.
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Aasman Ordnance Factory
Capital Budgeting project
AOF: The company
Arms & Ammo Manufacturer Deal with Ministry of Defense for 5 years Customers
Indian Defense forces Para-Military Private firms
Will manufacture bullets for AK-47, AK-56 INSAS Rifle SLR
The Deal: Ministry of Defense
The order size is fixed for the span of 5 years
The selling price is fixed by the Govt Some output for private players Government would buy back the
project after 5 years Terms fixed like salvage value of
machinery building etc
Setting up the Project
Factory to be set up in Dehradoon Manufacturing process to begin and
start delivering within a year Demand for 5 years already estimated Initially to manufacture only bullets for various rifles like AK-47,56.
Future Prospects
AOF plans to expand slowly to cater for all the following fields of defense Ammunition & Explosives Weapons, Vehicles and Equipment Materials and Components Armoured Vehicles Ordnance Equipment Group of
Factories
Capital Structure
Breakup of the requirement capital Raised through Equity, Debentures & Loan
Break-up of the capital Amt in INR
Capital Structure
Requirement 50000000
Equity 30000000
13% Debentures 15000000
18% Bank Loan 5000000
Total 50000000
Financial Details: RequirementsProjectRequirements Depreciation Method
Terminalvalue
Land 20000000 20000000
Building 6500000
lifetime 10 years : written down depreciation at 15% 3000000
Machines 15000000lifetime 5 years : straight line
depreciation 0
Vehicles 5000000lifetime 5 years : written
down at 15% 3000000
OfficeEquipments 1000000
lifetime 5 years : written down at 20% 400000
Working capital 2500000
Total 50000000
WACC Weighted Average Cost of Capital Cost of equity by CAPM model
Capital Structure
Capital Structure weights Rate(K)Effective rate
(w*k)
Requirement 50000000
Equity 30000000 0.6 13.4 8.04
13% Debentures 15000000 0.3 8.45 2.535
18% Bank Loan 5000000 0.1 11.7 1.17
Total 50000000
WACC 11.745 %
Calculations: Depreciation
Years 1 2 3 4 5
Depreciation
Machines(straight line) 3000000 3000000 3000000 3000000 3000000
Vehicles (wd@ 15%) 750000 637500 541875 460593.75 391504.6875
Building (wd @15%) 975000 828750 704437.5 598771.875 508956.0938
Officeequipments (wd @ 20%) 200000 160000 128000 102400 81920
TotalDepreciation 4925000 4626250 4374312.5 4161765.625 3982380.781
Calculations: Capital Gains Tax Capital Gain/loss
Building Vehicles LandOffice
Equipmenmt Total
Book Value after 5yrs 2884084.5 2218526.6 20000000 327680 25430291
Sales Value 3000000 3000000 20000000 400000 26400000
Capital Gain/loss 115915.46 781473.44 0 72320 969708.90
Net Capital Gain 969708.90
Capital Gain Tax 339398.11
Net Inflow 26060601.8
Calculations: Interest
Interest given on bank loan and debentures
Year 1 2 3 4 5
bank 18% 900000 900000 900000 900000 900000
Debenture @ 13% 1950000 1950000 1950000 1950000 1950000
TotalInterest 2850000 2850000 2850000 2850000 2850000
Operating Variables The sale price has been fixed by the ministry
of defense in the deal. The variable cost is calculated as 60% of the
sales price. Fixed price includes all expenses which tend to
rise at the rate of 15% yearly.
Particulars INR
Sale price per Bullet (Rs/unit) 50
Variable cost per Bullet (Rs/unit) 30
Fixed Cost (increase at 15% yearly) 2000000
Discount rate 12%
Income statementIncome statement
Years 1 2 3 4 5
Bullets produced 1100000 1210000 1331000 1464100 1610510
Bullets sold 1070000 1210000 1331000 1464100 1610510
Sales 53500000 60500000 66550000 73205000 80525500
less variable 33000000 36300000 39930000 43923000 48315300
Contribution 20500000 24200000 26620000 29282000 32210200
less fixed cost 2000000 2300000 2645000 3041750 3498012.5
EBITDA 18500000 21900000 23975000 26240250 28712187.5
less depreciation 4925000 4626250 4374312.5 4161765.625 3982380.781
EBIT 13575000 17273750 19600688 22078484.38 24729806.72
less interest 2850000 2850000 2850000 2850000 2850000
EBT 10725000 14423750 16750688 19228484.38 21879806.72
less tax 3753750 5048312.5 5862740.6 6729969.531 7657932.352
Net Income 6971250 9375437.5 10887947 12498514.84 14221874.37
Cash Flows & CalculationsCASH FLOW
Years 0 1 2 3 4 5
Net Income 6971250 9375437.5 10887946.8 12498514.8 14221874.3
add Terminal Value 0 0 0 0 26060601.8
add Working Capital 0 0 0 0 2,500,000
add depreciation 4925000 4626250 4374312.5 4161765.62 3982380.78
Cash inflow (50000000) 11896250 14001687.5 15262259.3 16660280.4 46764857.0
PV@12% 10621652 11162059.5 10863374.7 10587909.4 26535635.7
Total PV 69770631
NPV 19770631
IRR 24%
PI 1.3954126
Project Analysis
Results of evaluation carried out
Initial Investment 50000000.0
Total PV @ 12% 69770631
NPV 19770631
IRR 24%
Profitability Index (PI) 1.3954126
WACC 11.75%
Decision making
Indicator Value Evaluation Decision
NPV 19770631 Positive Accept It
IRR 24% IRR > WACC Accept It
Profitability Index (PI)
1.39 PI > 1 Accept It
Thank You!