im ex appraisal criteria 12nov13

8/10/2019 IM Ex Appraisal Criteria 12nov13

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Pem

Appraisal of Returns

Ex 1 : New Quarry business

Tower Construction Corp. is taking up a stone quarry for executing a Road cum bridge construction

project. A separate subsidiary unit is going to be established for this purpose. Following details are

gathered.

Project life - 5 years

Project outlay - fixed Assets : Rs. 150 Cr

- Current assets : Rs. 30 Cr.

Means of finance - Equity : Rs. 60 Cr.

- Term Loans : Rs. 100 Cr.

- Cash credit (C/C limit) : Rs. 20 cr.

Term loan repayment - 4 annual instalments of Rs. 25 Cr. each payable at end of

2ndt to 5

thyr.

Average C/C availed - Rs. 20 Cr (throughout project life)

Interest Rates - Term loan : 14 % & Cash credit 16% p.a.

Expected yearly sale - Rs. 200 Cr for all future yrs.

Operating costs - Rs. 140 Cr. per year ( excl. depreciation & Interest costs).

Depreciation - 25% by written down method (on all fixed Assets).

Tax rate - 35%.

At end of 5 years ..

Fixed assets released value - Rs. 50 Cr..(Salvage Value)

Current assets realized value - Rs. 20 Cr..

Required Rate - 20%

Ascertain the Cash flows associated with entire project from owners point of view and long

term funds point of view. ( Ignore tax or tax shield on capital gain or loss )

Ex 2 : Star Power : Identification of Cash Flows

Star Power has been in business of EPC contracting for Transmission lines for over 10 years.

Star was earlier procuring these lines from another manufacturer. Star has decided tomanufacture those lines at its own factory. About 4 acres of its existing factory land is

identified for installing the plant. Star anticipates a substantial savings in costs of

Transmission lines. This new manufacturing project will have a life of 3 years only..

Cost of plant. : Rs. 80 Cr.

Means of finance : Owners : 40%

: Bank : 60%

Repayment : 3 equal yearly instalments.


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Interest on loan : 14 % p.a.

Salvage value : Rs. 20 Cr.

Savings in Costs : Rs. 36 Cr p.a.

Owners required returns : 18%.

Depreciation : 25% (Written down value method)

Tax rate : 30%.

Additional information:

a) Companys mechanical Dept. containing permanent employee will be attending to

regular maintenance of the new project. They can find time within their existing

working hours and are expected to spend 20% of his time for the crane. The

proportionate cost of such work for new project is Rs 2.4 cr. pa.

b) The company had long ago constructed a shed which was not being used for any

productive activity and had almost negligible scrap value. It is going to be used for

some processing activity under new project. Shed was erected at cost of Rs 2 cr. 3

years ago.

c) The Shed was used for parking some heavy transport vehicles. Now these vehicles will

have to be parked elsewhere for which an amount of Rs. 25 lacs will have to be

incurred towards rent annually.

d) Recently there was an offer for sublease of 4 acres of land on which the transmission

project is to come up . The offer was Rs. 1.50 Cr. per annum.

Reqd : I) Identify the cash flows associated with the investment in the crane.

ii) Find out whether the investment is advisable?

iii) Management anticipates that the savings may come down by 10%, Interest

rate may go upto 16% and Salvage value may go down by 20% . Comment on

the adverse impact on project financial viability


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Ex 3 : Choice of Equipment

Cost Annual O&M Life in yrs

Modern 75 Lacs 12 lacs 5

Economy 40 Lacs 20 lacs 3

Salvage value of the both machineries is negligible.

Cost of capital is 16%.

Reqd : Which machine is preferable?

Ex. 4: (outsource)

A company is considering installing a Fly ash treatment system. It can either buy the system

or hire the system. The system is required for 4 years. The new system costs Rs.1,500,000.

The operating cost are expected to be as follows:

Year Operating Cost (Rs)

1 300,000

2 360,000

3 400,000

4 450,000

The estimated salvage value at the end of Four years is Rs. 300,000. The depreciation rate

applicable is 80% on WDV basis. Tax rate is 35%. Cost of capital is 18 per cent.

The alternative is to hire the system by paying Rs. 7,00,000 per year.

Reqd : Which course of action is more beneficial ?

Ex 5 : BOT project : finding out the upfront bid amount

0 1 2 3 4 5 6 7 8 9 10

Project Costs -50

Upfront payment

to Govt0

Revenue 16 17 18 19 19 20 21 23 24 25O&M Costs -3 -3 -4 -4 -4 -5 -5 -6 -6 -7

Net cashflows -50 13 14 14 15 15 16 16 17 17 18

IRR 26.0%

NPV @ 18% 15.9

Company requires 18% return from this project having concession period of 10 years.

Reqd : How much maximum bid the company can quote ?


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Ex 6 : Replacement ofEquipment

A power generating Company is planning to sell old equipment and buy a new one . In either

case equipment will be used for next 5 years only.

Old New

Present value / Cost 50 lacs 200 Lacs

Annual O&M 70 lacs 35 lacs

Salvage value NIL 60 Lacs

Loan Max 75% of cost

Repayment5 equal yearly

instalments

Interest rate 14% p.a.

Depreciation on Written Down

Method (WDV) method10% 10%

Ignore taxes on capital gains. Tax rate 35%. Power Company require return at 18%.

Is it worth going in for new Equipment??

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im ex appraisal criteria 12nov13

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