A company has developed the following cash flow forecast for their new project. Rs. in million:
Question:
A company has developed the following cash flow forecast for their new project. Rs. in million:
| Year 0 | Years 1 - 10 |
Investment | (400) |
|
Sales |
| 440 |
Variable costs (75% of sales) |
| 330 |
Fixed costs |
| 20 |
Depreciation(Straight line method) |
| 40 |
Pre-tax profit |
| 50 |
Taxes( at 20 %) |
| 10 |
Profit after taxes |
| 40 |
Cash flow from operations |
| 80 |
Net cash flow |
| 80 |
What is the NPV of the new project? Assume that the cost of capital is 10 percent. The range of values that the underlying variables can take under three scenarios: pessimistic, expected and optimistic are as shown below:
Underlying Variable Investment (Rs. in million) | Pessimistic 420 | Expected 400 | Optimistic 360 |
Sales (Rs. in million) | 350 | 440 | 500 |
Variable cost as a percent of sales | 80 | 75 | 70 |
Fixed costs (Rs. in million) | 25 | 20 | 18 |
Cost of capital (%) | 11 | 10 | 9 |
1.What are the NPVs under the different scenarios ?
2.Calculate the accounting break-even point and the financial break-even point for the new project?
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow