Television Ltd is a highly profitable firm; it has a proposal for manufacturing car televisions. The project would involve cost of plant of Rs 500 lakh (or Rs 55 million), installation cost of Rs 100 lakh and working capital of Rs 125 lakh. The annual capacity of the plant is to manufacture 20 000 sets. The price per set in the first year would be Rs 12000. The variable cost to sales ratio is expected to be 65 per cent. The fixed cost per annum would be Rs 300 lakh (excluding depreciation). The company would have to incur promotion expenditure of Rs 120 lakh in the first year. Written-down depreciation rare for tax purpose is 25 per cent. Working capital requirement is estimated to be 25 per cent. Working capital requirement is estimated to be 25 per cent of sales. The company expects that the plant’s capacity utilization over its economic life of 7 years will be as follow. Year 1 2 3 4 5 6 7 Capacity utilization (%) 40 40 50 75 100 100 100 The terminal value of the project is expected to be 20 per cent of its original cost. Calculate the project’s NPV assuming a target rate of return of 14 per cent. The corporate tax rate of 35 per cent and profit from the sales of the asset is taxed as ordinary income.
Television Ltd is a highly profitable firm; it has a proposal for manufacturing car televisions.
The project would involve cost of plant of Rs 500 lakh (or Rs 55 million), installation cost of
Rs 100 lakh and working capital of Rs 125 lakh. The annual capacity of the plant is to
manufacture 20 000 sets. The price per set in the first year would be Rs 12000. The variable
cost to sales ratio is expected to be 65 per cent. The fixed cost per annum would be Rs 300
lakh (excluding
Rs 120 lakh in the first year. Written-down depreciation rare for tax purpose is 25 per cent.
Working capital requirement is estimated to be 25 per cent. Working capital requirement is
estimated to be 25 per cent of sales. The company expects that the plant’s capacity utilization
over its economic life of 7 years will be as follow.
Year 1 2 3 4 5 6 7
Capacity utilization (%) 40 40 50 75 100 100 100
The terminal value of the project is expected to be 20 per cent of its original cost. Calculate
the project’s
per cent and profit from the sales of the asset is taxed as ordinary income.
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