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Should the company go for the project

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Question - A company is considering an investment project costing Rs 16,000 lakh. It is expected to have a useful life of 8 years and salvage value of Rs 1,200 lakh. The project cost will be depreciated at 25% WDV method on block of assets basis (as specified in the Indian Income Rules). The company will be able to produce and sell 2,500 lakh units in the first year and is expected to grow at 5% annually. The per unit selling price will be Rs 25 and variable cost Rs 18. The annual fixed cost is expected to be Rs 8,000 lakh. The general inflation rate of 5% is expected to have impact on price and costs. The corporate tax rate is 35%. The project will require working capital equal to 25% of sales volume. The firm requires a real rate of return of 7.62% on this type of investment. Should the company go for the project? What shall be the effect on the viability of the project if price, or variable cost, or volume increases or decreases (one at a time)?

Reference no: EM133175955

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