NPV of the project is: - Rs. 3.15 million - Rs. 8.05 million - Rs. 10.75 million - Rs. 22.19 milli

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
icon
Related questions
Question

The NPV of the project is:

- Rs. 3.15 million
- Rs. 8.05 million
- Rs. 10.75 million
- Rs. 22.19 million
Corporate Finance
Professor Ashok Thampy
IIMB
तेजस्वि नावधीतमस्तु
IIMBX
Graded Question Week Five
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.)
All Rights Reserved. This document has been authored by Professor Ashok Thampy and is permitted for use only within the course "Corporate
Finance" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts,
may be reproduced, or stored in a retrieval system or transmitted in any firms or by any means – electronic, mechanical, photocopying, recording
or otherwise – without the prior permission of the author.
Transcribed Image Text:Corporate Finance Professor Ashok Thampy IIMB तेजस्वि नावधीतमस्तु IIMBX Graded Question Week Five 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.) All Rights Reserved. This document has been authored by Professor Ashok Thampy and is permitted for use only within the course "Corporate Finance" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any firms or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.
Corporate Finance
Professor Ashok Thampy
IIMB
IIMBX
Graded Question Week Five
तेजस्वि नावधीतमस्तु
The table given below shows the different components associated
with the calculation of Free Cash Flow for this company.
MARAM & COMPANY
2016
2017
2018 2019 | 2020 2021
Investment
-20.00
0.00
Revenue
10.00
13.00 | 16.90 13.52
10.82
2.00| 2.00 2.00 2.00
7.80 10.14
4.00 4.00 4.00
-2.00 -0.80 0.76
Fixed cost
2.00
Variable cost
6.00
?
6.49
Depreciation
4.00 4.00
Profit before Interest and Taxes
-0.59 -1.67
Corporate Tax (33%)
-0.66 -0.26 0.25
-0.20 -0.55
Unlevered Profit after Tax
-1.34
-0.54
?
-0.40
-1.12
2.60 3.38 2.70
-0.78 0.68 0.54
Net Working Capital
2.00
2.16 0.00
Investment in Net Working Capital
-2.00
-0.60
2.16
Free Cash Flow
-22.00
2.06
2.68
5.19
4.14
All Rights Reserved. This document has been authored by Professor Ashok Thampy and is permitted for use only within the course "Corporate
Finance" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts,
may be reproduced, or stored in a retrieval system or transmitted in any firms or by any means – electronic, mechanical, photocopying, recording
or otherwise – without the prior permission of the author.
Transcribed Image Text:Corporate Finance Professor Ashok Thampy IIMB IIMBX Graded Question Week Five तेजस्वि नावधीतमस्तु The table given below shows the different components associated with the calculation of Free Cash Flow for this company. MARAM & COMPANY 2016 2017 2018 2019 | 2020 2021 Investment -20.00 0.00 Revenue 10.00 13.00 | 16.90 13.52 10.82 2.00| 2.00 2.00 2.00 7.80 10.14 4.00 4.00 4.00 -2.00 -0.80 0.76 Fixed cost 2.00 Variable cost 6.00 ? 6.49 Depreciation 4.00 4.00 Profit before Interest and Taxes -0.59 -1.67 Corporate Tax (33%) -0.66 -0.26 0.25 -0.20 -0.55 Unlevered Profit after Tax -1.34 -0.54 ? -0.40 -1.12 2.60 3.38 2.70 -0.78 0.68 0.54 Net Working Capital 2.00 2.16 0.00 Investment in Net Working Capital -2.00 -0.60 2.16 Free Cash Flow -22.00 2.06 2.68 5.19 4.14 All Rights Reserved. This document has been authored by Professor Ashok Thampy and is permitted for use only within the course "Corporate Finance" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any firms or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 2 images

Blurred answer
Knowledge Booster
Capital Budgeting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
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…
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