A Note On The Financial Evaluation Of Projects
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CASH FLOWS FROM LONG TERM FUNDS POINT OF VIEW Contd..Example
Suppose a project has the following cash outlays and sources of finance:
(Rs.[4] in
millions)
Plant & Machinery
|
230
|
Working Capital
|
126
|
Sources of Finance |
Equity
|
135
|
Long term loans
|
120
|
Trade Credit
|
44
|
Commercial Banks
|
57
|
|
The life of the project is 8 years. Plant & Machinery is to be
depreciated on a written down value method at the rate of 15% per annum.
Annual sales are expected to remain constant over the period at Rs. 340
million. Cost of sales (including depreciation but excluding interest)
is expected to be Rs. 180 million a year.
The company is under the 40% tax bracket. At the end of the 8 years,
plant & machinery will fetch a value equal to their book value and the
investment in working capital will be fully recovered. The rate of
interest on long-term loans is 15% p.a. The loans are repayable in six
equal installments starting from the end of the third year. |
|
Short term advances from commercial banks which will carry an interest of 16% p.a. will be maintained at Rs. 57 million. They will be fully liquidated at the end of 8 years. Trade credit would also be uniformly maintained at Rs. 44 million and will be fully paid at the end of 8 years.
Cash Flows (Long-term Point of View)
|
Year |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
|
Initial Investment |
-255 |
|
|
|
|
|
|
|
|
|
Sales |
|
340 |
340 |
340 |
340 |
340 |
340 |
340 |
340 |
|
Op. costs |
|
145.5 |
150.68 |
155.07 |
158.81 |
162 |
164.7 |
167 |
168.94 |
|
Depreciation |
|
34.5 |
29.32 |
24.93 |
21.19 |
18 |
15.3 |
13 |
11.06 |
|
Int. Long Term |
|
18 |
18 |
18 |
15 |
12 |
9 |
6 |
3 |
|
Int. WC |
|
9.12 |
9.12 |
9.12 |
9.12 |
9.12 |
9.12 |
9.12 |
9.12 |
|
PBT |
|
132.88 |
132.88 |
132.88 |
135.88 |
138.88 |
141.88 |
144.88 |
147.88 |
|
Tax |
|
53.15 |
53.15 |
53.15 |
54.35 |
55.55 |
56.75 |
57.95 |
59.15 |
|
PAT |
|
79.73 |
79.73 |
79.73 |
81.53 |
83.33 |
85.13 |
86.93 |
88.73 |
|
Op. Flow* |
|
125.03 |
119.85 |
115.46 |
111.72 |
108.53 |
105.83 |
103.53 |
101.59 |
|
NSV[5]of Fixed Assets |
|
|
|
|
|
|
|
|
62.7 |
|
Net Recovery of WC Margin |
|
|
|
|
|
|
|
|
25 |
|
Terminal Flow |
|
|
|
|
|
|
|
|
87.7 |
|
NCF |
-255 |
125.03 |
119.85 |
115.46 |
111.72 |
108.53 |
105.83 |
103.53 |
189.29 |
|
(Rs. in millions) |
* PAT + Depreciation + Interest on long-term (1-T)
As per long-term funds point of view,
Operating flow = Profit after tax (PAT) + Depreciation + Other non cash charges + Interest on long term (1 – T)
Terminal Flow = Net salvage value of fixed assets + Net recovery of working capital margin
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CASH FLOWS FROM EQUITY FUNDS POINT OF VIEW
CASH FLOWS FROM TOTAL FUNDS POINT OF VIEW
CHOICE OF DISCOUNT RATE
APPRAISAL CRITERIA
DISCOUNTED CASH FLOW/TIME ADJUSTED TECHNIQUES
NET PRESENT VALUE
APPRAISAL TECHNIQUES IN PRACTICE FOR VARIOUS TYPES OF PROJECTS
CONCLUSION
EXHIBIT I ASPECTS OF PROJECT APPRAISAL
EXHIBIT II PROJECT EVALUATION TECHNIQUES
[4] $1 = Rs. 45.87 as on September 25, 2003.
[5] Net Salvage Value (NSV) is arrived after adjusting the sale value of an
asset for either tax or tax shield. If a fixed asset realizes more than its
book value, the profit is taxed and needs to be adjusted. Similarly, if
there is a loss on the sale of a fixed asset (less than the book value of
the asset), you get shield on the loss and needs to be adjusted.
NSV = Sale value – Tax/Tax shield
However, for appraisal purpose, gross salvage value and net salvage value
are assumed equal.
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