Reference no: EM132569329

ADG Ltd. is considering investing in a new start-up project. The company has a plan that after five years it will sell the project at a good profit to a big Industrialist. The project outlays are Land Rs.80 Lakhs, Plant & Machinery Rs. 500 Lakhs, Building Rs.100 Lakhs, Gross working capital Rs. 450 Lakhs, Other fixed assets Rs.100 Lakhs and technical knowhow fees Rs.160 Lakhs. The project will be financed by Equity Share capital of Rs. 500 Lakhs, 16% Term Loan Rs.300 Lakhs,12% Preference Share Capital Rs. 250 Lakhs and 18% Bank Loan for Working Capital Rs. 340 Lakhs. The unit is expected to generate sales value of Rs.10 Crores in the first year, Rs.12 Crores in the second year and Rs.15 Crores for the next three years. The cost of production (excluding depreciation) would be 70% of sales. The depreciation to be charged on building @4% on Original cost method & 33.33% on Plant & Machinery and other assets as per Written down value method. The technical knowhow fees will be written off over a period of 5 years. The salvage value of Plant & Machinery after 5 years would be 20% of its acquisition cost, book value for Land & Building and nil for other fixed assets. The term loan for the project will be repaid after 5 years when the project would be sold. The tax rate applicable is 30%.

Problem 1:- The total net salvage of Plant & Machinery and other fixed assets in the last year?

a) 320

b) 300

c) 280

d) 270

Problem 2:- The Net Present value at cost of capital of 20%

a) Rs.82 Lakhs

b) (-) Rs.75 Lakhs

c) Rs.19.87 Lakhs

d) (-) Rs.72.15 Lakhs

Problem 3:- The Profitability Index at cost of capital is 20%

a) 0.93

b) 0.82

c) 1.12

d) 0.98

Problem 4:- The total depreciation on Plant & Machinery and other fixed assets in the last year?

a) Rs.38.99 Lakhs

b) Rs.43.51 Lakhs

c) Rs.45.89 Lakhs

d) Rs. 51.47

Problem 5:- Will your recommendation change, if an additional cash flow of Rs. 5 crores arise by disposing of the project?

a) The project is having a positive NPV of Rs.210.45 Lakh, so project is accepted

b) The project is having a negative NPV of (-) Rs.128.79 Lakh, so project is not accepted

c) The project is having a positive NPV of Rs.300.75 Lakh, so project is accepted

d) The project is having a positive NPV of Rs.128.79 Lakh, so project is accepted