Reference no: EM133005836
Jumbo Textiles is considering a capital project about which following information is available:
(1) The investment outlay on the project will be Rs 250 million which will be incurred at the beginning of the project. This consists of Rs 200 million on plant and machinery and Rs 50 million on net working capital.
(2) The project will be financed with Rs 100 million term loan and Rs 150 million equity capital. Term loan will carry an interest rate of 10% and will be repaid at the end of 5th year.
(3) The life of the project is expected to be 5 years. At the end of 5 years, fixed assets will fetch a net salvage value of Rs 80 million whereas net working capital will be liquidated at its book value.
(4) The project is expected to increase the revenue of the firm by Rs 300 million per year. The increase in cost on account of project is expected to be 200 million per year. (This includes all items of cost other than depreciation, interest and tax).
(5) The effective tax rate will be 30%.
(6) Plant and machinery will be depreciated at the rate of 15% per year as per the written down value method.
Problem 1: You are required to calculate project cash flows and NPV of the project from long term funds point of view. Assume cost of capital as 12%.
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