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A Caselet: Nirmal Chemical Company
The Nirmal Chemical Company is planning to invest in a new plant. The team of analysts responsible for investment appraisal has arrived at the following information:
Estimated investment — 10 lac
Estimated life of the plant — 7 years
Annual Cash flows: Years 1–3 — Rs 1.5 lac
Years 4–7 — Rs 2 lac
Appropriate discount rate — 15 percent
Now:
(i) Find the present value of all cash flows.
(ii) How would your answer change if cash flows were to grow at 40 percent per year after year 3 up to the seventh year?
(iii) Now reduce the life of the plant to 6 years. Keeping the other data constant, find the present value.
(iv) Recalculate the present value using a discount rate of 14 percent.
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Adjusted Entries for the journal entries posted
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