mechanical drying equipment - anuj

8/12/2019 Mechanical Drying Equipment - Anuj

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Case Background: Topic Cash Flow DeterminationNew Drying M/c by IMM Objective: Highlight Incremental CF concRam Ratan (PCC) - Engineer To determine CF focussing onR Ramesh - GM of PCC

Operating Cash Cost 10.00 Operating Cash CostDepreciation(WDV) 25.00% Cost of Equipment (in 1997)Useful Life (Years) 12 Useful Life (Years)Salvage Value (% of Orginal Value) 10% Installation Cost (in 1997)Delivery Time (Months) 12 Salvage Value - Now (1999)Installation Cost 15 Salvage Value - End (2004)Payment @ Order 32.5

Payment @ Delivery 32.5

% of Fuel Cost% Annual Rise in Fuel Cost

Expected Rate of Inflation

Overall Inflation

New drying Equipment Existing Drying Equipm

Operating Cost


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pttreatment if Depr, Inv Allowance, Salvage Value, etc.

28 Operating Cash Cost 2225 Capital Expenditure 258 Life Extension 5 upto 2009

10 New Useful Life 134 Salvage Value - End (2009) 32

80% Years 1010% Annual Interest Rate 15%

6% Govt. Bond Yield 12.50%

Risk Premium (Long Term) 7.50%9.20% Risk Premium (Replacement) 3.50%

Cost of Capital (Long Term) 20.00%Cost of Capital (Replacement) 16.00%

Corporate Tax 35.00%

nt Overhauling Drying Equipment

Debt Option


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No. Year Depreciation

(Old Machine)

Tax Saving

(Old

Depreciation)

Book Value

(Old Machine)

Depreciation

(New Machine)

1997 8.75 26.25

1998 6.56 19.69

1999 4.92 14.77

1 2000 3.69 1.29 11.07 22.69

2 2001 2.77 0.97 8.31 17.02

3 2002 2.08 0.73 6.23 12.76

4 2003 1.56 0.55 4.67 9.57

5 2004 1.17 0.41 3.50 7.18

6 2005 0.88 0.31 2.63 5.38

7 2006 0.66 0.23 1.97 4.04

8 2007 0.49 0.17 1.48 3.03

9 2008 0.37 0.13 1.11 2.27

10 2009 0.28 0.10 0.83 1.70

11 2010 0.21 0.07 0.62 1.28

12 2011 0.16 0.05 0.47 0.96

Value on New Machine 80 Opening Block

Salvage Value -4

BV of Old Machine 14.77 Add: New Inv

Net Value 90.77 Less: SV or BV

Value of New Machine New Bloc


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Tax Saving

(New Depreciation)

Book Value

(New Machine)

Incremental Benefit

(Depreciation)

i.e. Increase in DTS

ATCS

i.e.PAT

7.94 68.07 6.65 11.70

5.96 51.06 4.99 11.70

4.47 38.29 3.74 11.70

3.35 28.72 2.81 11.70

2.51 21.54 2.10 11.70

1.88 16.15 1.58 11.70

1.41 12.12 1.18 11.70

1.06 9.09 0.89 11.70

0.80 6.82 0.67 11.70

0.60 5.11 0.50 11.70

0.45 3.83 0.37 11.70

0.34 2.88 0.28 11.70

(25+10) - (Depr. For 1997-19999)

14.77

80

-490.77

k For Depreciation


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Investment

Allowance

Tax Shield

(IATS)

Tax Shield

(Loss)

Salvage

Value Net Cash Flow PV of NCF

7.00 3.77 4 33.12 28.55

16.69 12.40

15.44 9.89

14.51 8.01

-2 11.80 5.62

13.28 5.45

12.88 4.56

12.59 3.84

12.37 3.25

12.20 2.77

12.07 2.36

6.5 18.48 3.11

PV 89.81

Cash Out Flow 85.2

NPV 4.61

IRR

-89.81 33.1 -56.69203125

16.7 16.6875

15.4 15.440625

14.5 14.50546875

11.8 11.80410156

13.3 13.27807617

12.9 12.88355713

12.6 12.58766785

12.4 12.36575089

12.2 12.19931316

12.1 12.0744848718.5 18.48086365

22%


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Net Cash Flow

(Without Inv. All)

PV of NCF

(Without Inv.

All)

26.12 22.52

16.69 12.40

15.44 9.89

14.51 8.01

11.80 5.62

13.28 5.45

12.88 4.56

12.59 3.84

12.37 3.2512.20 2.77

12.07 2.36

18.48 3.11

PV 83.78

Cash Out Flow 85.2

NPV -1.42


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N0. Year Depreciation

(Old Machine)

Book Value

(Old Machine)

Depreciation

(New Machine)

1997 8.75 26.25

1998 6.56 19.69

1999 4.92 14.771 2000 3.69 11.07 22.69

2 2001 2.77 8.31 17.02

3 2002 2.08 6.23 12.76

4 2003 1.56 4.67 9.57

5 2004 1.17 3.50 7.18

6 2005 0.88 2.63 5.39

7 2006 0.66 1.97 4.04

8 2007 0.49 1.48 3.03

9 2008 0.37 1.11 2.27

10 2009 0.28 0.83 1.70

11 2010 0.21 0.62 1.28

12 2011 0.16 0.47 0.96

Value on New Machine 80

Salvage Value -4

BV of Old Machine 14.77

Net Value 90.77

Value of New Machine


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Book Value

(New Machine)

Tax Saving

(Old Depreciation)

Tax Saving

(New Depreciation)

Incremental Benefit

(Depreciation)

68.08 1.29 7.94 6.65

51.06 0.97 5.96 4.99

38.29 0.73 4.47 3.74

28.72 0.55 3.35 2.81

21.54 0.41 2.51 2.10

16.16 0.31 1.88 1.58

12.12 0.23 1.41 1.18

9.09 0.17 1.06 0.89

6.82 0.13 0.80 0.67

5.11 0.10 0.60 0.50

3.83 0.07 0.45 0.37

2.88 0.05 0.34 0.28


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PAT Investment

Allowance

Tax Shield

(Loss)

Salvage


12.78 7.00 3.77 4 34.19 29.48

13.95 18.94 14.08

15.24 18.98 12.16

16.64 19.44 10.74

18.17 -2 18.27 8.70

19.84 21.42 8.79

21.66 22.85 8.08

23.66 24.55 7.49

25.83 26.50 6.97

28.21 28.71 6.51

30.81 31.18 6.09

33.64 6.5 40.42 6.81

PV 125.89

Cash Out Flow 85.2

NPV 40.69


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Net Cash Flow

(Without Inv. All)

PV of NCF

(Without Inv.

All)

27.19 23.44

18.94 14.08

18.98 12.16

19.44 10.74

18.27 8.70

21.42 8.79

22.85 8.08

24.55 7.49

26.50 6.97

28.71 6.51

31.18 6.09

40.42 6.81

PV 119.85

Cash Out Flow 85.2

NPV 34.65 -32.5

-32.5 -47.5

-47.5 27.19475156 27.1947516

18.93961591 18.9396159

18.97623738 18.9762374

19.44268383 19.4426838

18.27188519 18.2718852

21.41725447 21.417254522.84790877 22.8479088

24.54511653 24.5451165

26.49966737 26.4996674

28.70993686 28.7099369

31.18047612 31.1804761

40.42099873 40.4209987

23.81%


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(Old Machine)

Book Value

(Old Machine)

Depreciation

(OH)

Book Value

(OH)

1997 8.75 26.25

1998 6.56 19.69

1999 4.92 14.77

1 2000 3.69 11.07 9.94 29.82

2 2001 2.77 8.31 7.46 22.37

3 2002 2.08 6.23 5.59 16.78

4 2003 1.56 4.67 4.19 12.58

5 2004 1.17 3.50 3.15 9.44

6 2005 0.88 2.63 2.36 7.08

7 2006 0.66 1.97 1.77 5.31

8 2007 0.49 1.48 1.33 3.98

9 2008 0.37 1.11 1.00 2.99

10 2009 0.28 0.83 0.75 2.24

Value 25

Old BV 14.77

Net Value 39.77

Value of OH Machine


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Tax Saving

(Old Depreciation)

Tax Saving

(OH)

Incremental Benefit

(Depreciation) PAT

Investment

Allowance

1.29 3.48 2.19 3.90 2.19

0.97 2.61 1.64 3.90

0.73 1.96 1.23 3.90

0.55 1.47 0.92 3.90

0.41 1.10 0.69 3.90

0.31 0.83 0.52 3.90

0.23 0.62 0.39 3.90

0.17 0.46 0.29 3.90

0.13 0.35 0.22 3.90

0.10 0.26 0.16 3.90


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Salvage


Net Cash Flow

(Without Inv. All)

PV of NCF

(Without Inv. All)

8.28 6.90 6.09 5.07

5.54 3.85 5.54 3.85

5.13 2.97 5.13 2.97

4.82 2.33 4.82 2.33

-2 2.59 1.04 2.59 1.04

4.42 1.48 4.42 1.48

4.29 1.20 4.29 1.20

4.19 0.97 4.19 0.97

4.12 0.80 4.12 0.80

3 7.06 1.14 7.06 1.14

PV 22.67 PV 20.85

Cash Out Flow 25 Cash Out Flow 25

NPV -2.33 NPV -4.15


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(Old Machine)

Book Value

(Old Machine)

Depreciation

(OH)

Book Value

(OH)

1997 8.75 26.25

1998 6.56 19.69

1999 4.92 14.77

1 2000 3.69 11.07 9.94 29.82

2 2001 2.77 8.31 7.46 22.37

3 2002 2.08 6.23 5.59 16.78

4 2003 1.56 4.67 4.19 12.58

5 2004 1.17 3.50 3.15 9.44

6 2005 0.88 2.63 2.36 7.08

7 2006 0.66 1.97 1.77 5.31

8 2007 0.49 1.48 1.33 3.98

9 2008 0.37 1.11 1.00 2.99

10 2009 0.28 0.83 0.75 2.24

Value 25

Old BV 14.77

Net Value 39.77

Value of OH Machine


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Tax Saving

(Old Depreciation)

Tax Saving

(OH)

Incremental Benefit

(Depreciation) PAT

Investment

Allowance

1.29 3.48 2.19 4.26 2.19

0.97 2.61 1.64 4.65

0.73 1.96 1.23 5.08

0.55 1.47 0.92 5.55

0.41 1.10 0.69 6.06

0.31 0.83 0.52 6.61

0.23 0.62 0.39 7.22

0.17 0.46 0.29 7.89

0.13 0.35 0.22 8.61

0.10 0.26 0.16 9.40


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Salvage


Net Cash Flow

(Without Inv. All)

PV of NCF

(Without Inv. All)

8.63 7.19 6.45 5.37

6.29 4.37 6.29 4.37

6.31 3.65 6.31 3.65

6.47 3.12 6.47 3.12

-2 4.75 1.91 4.75 1.91

7.13 2.39 7.13 2.39

7.61 2.12 7.61 2.12

8.18 1.90 8.18 1.90

8.83 1.71 8.83 1.71

3 12.57 2.03 12.57 2.03

PV 30.40 PV 28.58

Cash Out Flow 25 Cash Out Flow 25

NPV 5.40 NPV 3.58


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Existing Vs New Equipment Without Inflation

With Investment Allowance 4.61

Without Investment Allowance -1.42

Existing Vs Overhauling Without Inflation

With Investment Allowance -2.33

Without Investment Allowance -4.15

Computed NPV's for various Combinations


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With Inflation

40.69

34.65

With Inflation

5.40

3.58

mechanical drying equipment - anuj

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