Metaland is a major manufacturer of light commercial vehicles. It has a very strong R&D center which has developed very successful models in the last fifteen years. However, two models developed by it in the last few years have not done well and were prematurely withdrawn from the market. The engineers at its R&D centre have recently developed a prototype for a new light commercial vehicle that would have a capacity of $4$ tons. After a lengthy discussion, the board of directors of Metaland decided to carefully evaluate the financial worthwhileness of manufacturing this model which they have labeled Meta $4.$ Till this point Rs$.50$ Mn has been invested in R&D$.$

You have been recently hired as the executive assistant to Vijay Mathur, Managing Director of Metaland. Vijay Mathur has entrusted you with the task of evaluating the project.

Meta $4$ would be produced in the existing factory which has enough space for one more product. Meta $4$ will require plant and machinery that will cost Rs$\mathrm{.}500$ million. You can assume that the outlay on plant and machinery will be incurred over a period of one year. For the sake of simplicity assume that $50$ percent will be incurred right in the beginning $($end of the $0$th Year$)$ and the balance $50$ percent will be incurred after $1$ year $($end of the $1$st Year$).$ The plant will commence operation after one year. Meta $4$ project will require Rs$\mathrm{.}250$ million toward gross working capital. You can assume that gross working capital investment will occur after $1$ year$($end of the $1$st Year$).$

The proposed scheme of financing is as follows: Rs$\mathrm{.}250$ million of equity, Rs$\mathrm{.}250$ million of term loan, Rs$\mathrm{.}125$ million of working capital advance, and Rs$\mathrm{.}125$ million of trade credit. Equity will come right in the beginning by way of retained earnings. Term loan and working capital in advance will be raised at the end of year $1.$ The term loan is repayable in $5$ equal semi$-$annual instalments of Rs$\mathrm{.}50$ million each. The first instalment will be due after $30$ months of raising the term loan. The interest rate on the term loan will be $14$ percent.

The levels of working capital advance and trade credit will remain Rs$\mathrm{.}125$ million each, till they are paid back or retired at the end of $5$ years, after the project commences, which is the expected life of the project. Working capital advance will carry an interest rate of $12$ percent.

Meta $4$ project is expected to generate a revenue or Rs$\mathrm{.}800$ million per year. The operating costs $($excluding depreciation and taxes$)$ are expected to be Rs$\mathrm{.}500$ million per year. For tax purposes, the depreciation rate on fixed assets will be $25$ percent as per the written down value method. Assume that there is no other tax benefit.

The net salvage value of plant and machinery is expected to be Rs$\mathrm{.}100$ million at the end of project life. Recovery of working capital will be at book value.

The income tax rate is expected to be $30$ percent. Vijay Mathur wants you to estimate the cash flows from two different point of View:

a$)$ Cash flows from the point of all investors $($which is also called the explicit cost funds point of view$).$ 

b$)$ Cash flows from the point of equity investors.

Answer rating: 100% (QA)

Cash Flow Analysis for Metalands Meta 4 Project Assumptions Project life5 years Discount rate14 base... View the full answer