Project Cash Flows
Cash Flows Relating to Equity
The equity-related cash flow stream reflects the contributions made and benefits receivable by equity
shareholders. It may be divided into three components as follows :

Initial investment
:
Equity funds committed to the project

Operating cash flows
:
Profit after tax – Preference dividend
Depreciation + Other non-cash charges

Liquidation and retirement cash
flow (Terminal cash flow)
:
Net salvage value of fixed assets
+
Net salvage value of current assets
Repayment of term loans
Redemption of preference capital
Repayment of working capital advances
–
Retirement of trade credit and other dues
+
Cash Flows Relating to Long-term Funds
As discussed earlier in this chapter, the cash flow stream relating to long-term funds consists of three
components as follows:

Initial investment
:
Long-term funds invested in the project. This is equal to: fixed
assets + working capital margin

Operating cash inflow
:
Profit after tax
+
Depreciation
+
Other non-cash charges
+
Interest on long-term borrowings (1-tax rate)

Terminal cash flow
:
Net salvage value of fixed assets
+
Net recovery of working capital margin
Project Management
Prof. Harnesh Makhija (K.J.SIMSR)
Cash Flows Relating to Total Funds
The cash flow stream relating to total funds consists of three components as follows:
Initial investment
:
All the funds committed to the project. This is simply the total outlay on
the project consisting of fixed assets as well as current assets (gross)
Operating cash inflow
:
Profit after tax
+
Depreciation
+
Other non-cash charges
+
Interest on long-term borrowings (1-tax rate)
+
Interest on short-term borrowings (1-tax rate)
Terminal cash flow
:
Net salvage value of fixed assets
+
Net salvage value of current assets
Project Management
Prof. Harnesh Makhija (K.J.SIMSR)
Problem No. 1
Naveen Enterprises is considering a capital project about which the following information is available:

The investment outlay on the project will be Rs.100 million. This consist of Rs.80 million on plant &
machinery and Rs.20 million on net working capital. The entire outlay will be incurred at the beginning
of the project.
 The project will be financed with Rs.45 million of equity capital, Rs.5 million of preference capital, and
Rs. 50 million of debt capital. Preference capital will carry a dividend rate of 15%, debt capital will carry
an interest rate of 15%.
 The life of project is expected to be 5 years. At the end of 5 years, fixed assets will fetch a net salvage
value of Rs.30 million whereas net working capital will be liquidated at its book value.
 The project is expected to increase the revenue of the firm by Rs.120 million per year. The increase in
cost on account of the project is expected to be Rs.80 million per year (This includes all items of cost
other than depreciation, interest, and tax). The effective tax rate will be 30%.
 Plant and machinery will be depreciated at the rate of 25% per year as per the WDV method. Hence, the
depreciation charges will be:
First Year
Rs. 20 million
Second Year
15 million
Third Year
11.25 million
Fourth Year
8.44 million
Fifth Year
6.33 million
Given the above details, calculate project cash flows
Problem No. 2
India PharmaLtd.Is engaged in the manufacture of pharmaceuticals. The company was established in 1991 and
has registered a steady growth in sales since then. Presently the company manufactures 16 products and has an
annual turnover of Rs.2200 million. The company is considering the manufacturing of a new antibiotic
preparation, K-cin, for which the following information has been gathered:
1. K-cin is expected to have a product life cycle of five years and thereafter it would be withdrawn from
the market. The sales from this prepration are expected to be as follows:
Years
Sales (Million)
1
100
2
150
3
200
4
150
5
100
2. The capital equipment required for manufacturing K-cin is Rs.100 million and it will be depreciated at
the rate of 25% per year as per WDV method for tax purpose. The expected net salvage value after 5
years is Rs.20 million.
3. The working capital requirement for the project is expected to be 20% of sales. At the end of 5 years,
working capital is expected to be liquidated at par, barring an estimated loss of Rs.5 million on account
of bad debt. The bad debt loss will be tax deductable.
4. The accountant of the firm has provided the following cost estimates for K-cin:
Raw material cost
: 30% of sales
Variable labour cost
: 20% of sales
Fixed cost
: Rs. 5 million
Overhead allocation (Excl. dep,interest)
: 10% of sales
Project Management
Prof. Harnesh Makhija (K.J.SIMSR)
While the project is charged on overhead allocation, it is not likely to have any effect on overhead
expenses as such.
5. The manufacture of K-cin would also require some of the common facilities of the firm. The use of these
facilities would call for reduction in the production of other pharmaceutical preparations of the firm.
This would entail a reduction of Rs. 15 million of contribution margin.
6. The tax rate applicable to the firm is 40%.
Calculate project cash flows.
Problem No. 3:
Magnum Technologies Limited is evaluating an electronics project for which the following information is has
been assembled:
1. The total outlay on the project is expected to be Rs.50 million. This consist of Rs.30 million of fixed
assets and Rs.20 million of current assets.
2. The total outlay of Rs.50 million is proposed to be financed as follows: Rs. 15 millionof equity, Rs.20
million of term loan, Rs.10 million of bank finances for working capital, and Rs. 5 million of trade credit.
3. The term loan is repayable in five equal installments of Rs.4 million each. The first installment will be
due at the end of first year and last installment at the end of the fifth year. The level of bank finance for
working capital and trade credit will remain at Rs.10 million and Rs. 5 million till they are paid back or
retired at the end of five years.
4. The interest rates on the term loan and bank finance for working capital will be 15% and 18%
respectively.
5. The expected revenue from the project will be Rs. 60 million per year. The operating costs, excluding
depreciation, will be Rs.42 million. The depreciation rate on the fixed assets will be 33.33% as per WDV
method.
6. The net salvage value of fixed assets and current assets at the end of year 5 will be Rs.5 million and
Rs.20 million respectiuvely.
7. Tax rate 50%
Calculate Project cash flows from equity, Long term and Total funds point of view.
Problem No. 4
Following information is available about a proposed expansion project
i.
ii.
iii.
iv.
v.
vi.
vii.
Initial project outlay is Rs.100 crores consisting of Rs.80 crores fixed assets & Rs.20 crore current
assets.
The financing pattern: Equity Rs.30 crores, Term loan Rs.60 crores. Working capital advances Rs. 8
crore& Trade credit Rs. 2 crores.
Term loan repayable in ten equal six monthly installment, the first installment due 18 months after
starting of production. Interest on term loan will be @ 12%p.a. applicable on opening balance at the
beginning of the year.
The levels of working capital and trade credit remain unchanged till end. The interest on working
capital advance will be @ 15%p.a.
Sales revenue are Rs.130 cr while operating costs excluding depreciation & interest are Rs.90 cr.
Depreciation on fixed assets is charged @ 25%p.a on WDV. Basis.
Project life being 7 years, the salvage value will be Rs.10.68 cr for fixed assets. Current assets recovery
will be at cost.
Tax rate 40%.
Project Management
Prof. Harnesh Makhija (K.J.SIMSR)
Work out project cash flow during its life “long term funds” point of view.
Problem No. 5
A Company is considering a capital project about which the following information is available:
a) The investment outlay on the project will be Rs.400Lakhs. this consists of Rs.300Lakhs on the plant and
machinery and Rs.100Lakhs on net working capital. The entire outlay will be incurred at the beginning of the
project.
b) The life of the project is expected to be 5 years. Fixed assets will fetch a net salvage value of Rs.96Lakhs
where as net working capital will be liquidated at its book value.
c) The project is expected to increase the revenue of the firm by Rs.440Lakhs per year. The increase in costs on
account of the project is expected to be Rs.250Lakhs per year. (This includes all items of cost other than
depreciation, interest and tax) the tax rate is 30%
d) Plant and machinery will be depreciated at the rate of 20% per year. As per the written down value method
e) Cost of Capital: 10%
Using Net Present value(NPV) method, determine whether the company should undertake the above proposal
or not:
Year
1
2
3
4
5
6
7
Present value at 10%:
0.909
0.826
0.751
0.683
0.621
0.564
0.513
Problem No. 6
A Cosmetics company is considering an investment in a new beauty preparation for which the following
information is available.
1. Investment in new machinery required for manufacture will cost Rs.1,50,000
2. A part of the present machinery that is lying idle for the last two years is also to be used for
manufacturing the new product.
* The machinery was purchased five years ago for Rs.75,000 and its depreciated value today is
Rs.37,500
* It can be used at least another five years with normal maintenance and can be sold at Rs.5000 after
five years.
3. Increase in working capital on account of new product will be as under:
a. Increase in sundry debtors Rs.75,000
b. Increase in inventories Rs.1.00.000
c. Increase in Current liabilities Rs.1,00,000
4. Sales revenues for new product is estimated at Rs.7,50,000 per year.
5. Manufacturing cost (Including allocation of Rs.30,000) fixed cost from service departments) is
estimated to be Rs.3,40,000 per year.
6. Selling & Administrative expenses directly associated with the product are Rs.3,00,000 Per year
7. The new machinery will have trouble free services for eight years but require
overhauling in the
fourth year costing Rs.10,000. its estimated resale value at the
end of five years will be Rs.20,000
8. Introduction of new product will slightly affect the production schedules of existing products resulting
in a loss pf profit contribution on other products to an
extent of Rs.25,000 per year
9. Bad debts to be written off on account of new product are Rs.10,000 p.a
10. Step up promotional expenses in 3rd year are Rs.70,000
11. All new investment and additional working capital requirements would be financed by raising term
loan to be repaid in four years in equal installments interest on term loans @ 15.0%p.a. works out as
Rs.29,500.00, Rs.21,000.00,Rs.12,500.00, & Rs.4,500.00 respectively for the first, second, third,
&
Fourth years.
12. Depreciation being charged on Straight the basis @10.0%p.a. is also acceptable for income tax purpose.
13. Rate of Income Tax 40%
14. Expected project life is 5 years.
Compute the project cash flows from the long term funds point of view .
Project Management
Prof. Harnesh Makhija (K.J.SIMSR)
Problem No. 7
Following is the data pertaining to a project, in which Rs.40000 is invested
Particulars
Year1
PBDIT
10000
Depreciation
2000
Interest
3000
Principle Repayment
0
The applicable tax rate is 30% calculate,
Year 2
13000
2000
3000
0
Year 3
18000
2000
3000
0
Year 4
20000
2000
2000
10000
Year 5
20000
2000
1000
10000
(1) Interest coverage ratio
(2) Debt Service Coverage Ratio
Problem No. 8
ABC Ltd. has the following data for projection for the next five years. It has an existing term loan of Rs.720 lakhs
repayable over the next five years and has got sanctions for the new term loan of Rs.10000 lakhs which is also
repayable in five years. As a finance manager you are required to calculate:
1. DSCR
2. Interest Coverage Ratio
Particulars
Profit after tax
Depreciation
Taxation
Interest on term loan
Repayment of term loan
1
960
310
250
324
344
2
1150
300
406
250
344
3
1270
280
508
174
344
4
1300
270
550
100
344
5
1370
240
598
32
344
Problem No.9
From the following projected figures calculate the yearly DSCR of a firm.
Year
Net Profit After
Depreciation
Depreciation
Interest on Term
Loan for Year
1
2
3
4
5
6
7
10.50
15.50
17.00
20.00
22.00
25.00
25.00
15.50
15.00
14.25
13.50
12.50
11.25
10.00
10.00
9.00
8.00
7.00
6.00
4.00
2.00
Project Management
Repayment of
Term Loan at the
end of year
10.00
10.00
10.00
10.00
20.00
20.00
20.00
Prof. Harnesh Makhija (K.J.SIMSR)