Reference no: EM132596757

Question - What will be the recommendation to Nihal? Show the initial investment, annual operating cash flow and the terminal cash flow.

The third and final client is Mr. Nihal representing M/s. Raymobile Motors which is a very profitable company. It needs financial analysis of an investment in a new production machine for Rs. 1000,000. The purchase of this machine will result in an increase in sales revenues of Rs. 425,000 in the first year and the associated expenses (excluding depreciation) are 25% of the revenues. The revenues will be growing at 10% PA. They will incur Rs 25,000 as consultancy fee to the Professor. Because of the new machine overheads will increase by Rs 20,000 pa. Working capital required during the operational life of the project @ 5% of the next-year sales to be invested at the beginning of the year. It will be recovered after the useful life of the machine which is 5 years. Assume straight-line depreciation, that this machine is being depreciated down to zero, a 35 percent marginal tax rate, and a required rate of return of 12 percent.