Maram & Company Case: Maram & Company are manufacturers of furniture. They are contemplating the introduction of a new line which will require investment of Rs. 20 million in plant and machinery, which would have to be incurred by the end of December 2016. Production, and the resultant revenue and costs will start immediately. In the first year, revenue is expected to be Rs. 10 million followed by an increase of 30% each year for the next 2 years, and then decline by 20% each year for the next 2 years, after which the line will be discontinued. There is a fixed cost of Rs. 2 million each year and the variable cost of production comes to 60% of sales revenue. Depreciation is straight line over the 5 year period. The value of plant and machinery at the end of 5 years can be assumed to be zero. Maram will have to invest in working capital equal to 20% of sales revenue at the beginning of each year. You may assume that the entire working capital investment is recovered at the end of the project. The applicable tax rate for Maram is 33%. Maram has a Weighted Average Cost of Capital of 10%. (Assume that all cash flows occur at the end of each year for convenience.) Q.The NPV of the project is: A- Rs. 3.15 million B- Rs. 8.05 million C- Rs. 10.75 million D- Rs. 22.19 million
Maram & Company Case: Maram & Company are manufacturers of furniture. They are contemplating the introduction of a new line which will require investment of Rs. 20 million in plant and machinery, which would have to be incurred by the end of December 2016. Production, and the resultant revenue and costs will start immediately. In the first year, revenue is expected to be Rs. 10 million followed by an increase of 30% each year for the next 2 years, and then decline by 20% each year for the next 2 years, after which the line will be discontinued. There is a fixed cost of Rs. 2 million each year and the variable cost of production comes to 60% of sales revenue. Depreciation is straight line over the 5 year period. The value of plant and machinery at the end of 5 years can be assumed to be zero. Maram will have to invest in working capital equal to 20% of sales revenue at the beginning of each year. You may assume that the entire working capital investment is recovered at the end of the project. The applicable tax rate for Maram is 33%. Maram has a Weighted Average Cost of Capital of 10%. (Assume that all cash flows occur at the end of each year for convenience.) Q.The NPV of the project is: A- Rs. 3.15 million B- Rs. 8.05 million C- Rs. 10.75 million D- Rs. 22.19 million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Maram & Company Case:
Maram & Company are manufacturers of furniture.
They are contemplating the introduction of a new line which will
require investment of Rs. 20 million in plant and machinery, which
would have to be incurred by the end of December 2016. Production,
and the resultant revenue and costs will start immediately.
In the first year, revenue is expected to be Rs. 10 million followed by
an increase of 30% each year for the next 2 years, and then decline by
20% each year for the next 2 years, after which the line will be
discontinued.
There is a fixed cost of Rs. 2 million each year and the variable cost of
production comes to 60% of sales revenue.
Depreciation is straight line over the 5 year period.
The value of plant and machinery at the end of 5 years can be assumed
to be zero.
Maram will have to invest in working capital equal to 20% of sales
revenue at the beginning of each year.
You may assume that the entire working capital investment is
recovered at the end of the project.
The applicable tax rate for Maram is 33%.
Maram has a Weighted Average Cost of Capital of 10%.
(Assume that all cash flows occur at the end of each year for
convenience.)
Q.The NPV of the project is:
A- Rs. 3.15 million
B- Rs. 8.05 million
C- Rs. 10.75 million
D- Rs. 22.19 million
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education