Reference no: EM133029819

Question - ALN Foods is negotiating with the State Government to start a manufacturing plant in an abandoned building. The proposed project entails a capital outlay of Rs.100 crores. The expected free cash flow of the project are a 4-year annuity of Rs. 37,17,39,000. The State Government agreed to subsidize the project ALN Foods. The form and timing of the subsidy have not been determined, and depend on which investment criterion is used by ALN Foods. In the preliminary discussion, ALN suggested the following alternatives: 1. Subsidize the project to bring its IRR to 25%. 2. Subsidize the project to provide a two-year payback 3. Subsidize the project to provide an NPV of Rs.7 crores when cash flows were discounted at 20% 4. Subsidize the project to provide an accounting rate of return (ARR) of 40%. ARR is defined as: ARR = (Average annual cash flow - Investment/(number of years) / (investment/2) Recommend a subsidy that minimizes the cost to the State Government. Please mention how much of a subsidy you would recommend for each year under each of the alternatives. Which of the 4 subsidy plans would you recommend if the appropriate discount rate is 20%? How much would be the MIRR to ALN Foods under that alternative?