Reliance Enterprises is considering a new investment project of Rs.70 Mn comprising of Rs.60 Mn. on Plant & Equipment and Rs.10 Mn. on net working capital. The project will be financed by Equity capital (Rs.40 Mn) and Long-term debt of Rs 30Mn @ 13.5% The expected life of the project is 5 years at the end of which the plant and equipment would fetch a salvage value of Rs. 20 Mn while the liquidation value of working capital will be equal to its book value of Rs.10 Mn. The project will increase the revenues of the firm by Rs.85 Mn. each year and also increase the expenses (other than depreciation, interest on Long-Term loans & taxes) by Rs.40 Mn each year. Plant and equipment will be depreciated @ 25% per year on WDV basis. The marginal tax rate will be 30% and cost of equity is 21%. Estimate the FCFF & FCFE flows for the proposed project and its NPV & IRR.

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
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Reliance Enterprises is considering a new investment project of
Rs.70 Mn comprising of Rs.60 Mn. on Plant & Equipment and
Rs.10 Mn. on net working capital. The project will be financed by
Equity capital (Rs.40 Mn) and Long-term debt of Rs 30Mn @ 13.5%
The expected life of the project is 5 years at the end of which the
plant and equipment would fetch a salvage value of Rs. 20 Mn
while the liquidation value of working capital will be equal to its
book value of Rs.10 Mn. The project will increase the revenues of
the firm by Rs.85 Mn. each year and also increase the expenses
(other than depreciation, interest on Long-Term loans & taxes) by
Rs.40 Mn each year. Plant and equipment will be depreciated @
25% per year on WDV basis. The marginal tax rate will be 30% and
cost of equity is 21%. Estimate the FCFF & FCFE flows for the
proposed project and its NPV & IRR.
Transcribed Image Text:Reliance Enterprises is considering a new investment project of Rs.70 Mn comprising of Rs.60 Mn. on Plant & Equipment and Rs.10 Mn. on net working capital. The project will be financed by Equity capital (Rs.40 Mn) and Long-term debt of Rs 30Mn @ 13.5% The expected life of the project is 5 years at the end of which the plant and equipment would fetch a salvage value of Rs. 20 Mn while the liquidation value of working capital will be equal to its book value of Rs.10 Mn. The project will increase the revenues of the firm by Rs.85 Mn. each year and also increase the expenses (other than depreciation, interest on Long-Term loans & taxes) by Rs.40 Mn each year. Plant and equipment will be depreciated @ 25% per year on WDV basis. The marginal tax rate will be 30% and cost of equity is 21%. Estimate the FCFF & FCFE flows for the proposed project and its NPV & IRR.
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