Question: Problem in Financial Analysis Magna Industries Ltd. is being setup to manufacture industrial gears. The expected outlays and proposed financing during construction and the first

Problem in Financial Analysis Magna Industries Ltd. is being setup to manufacture industrial gears. The expected outlays and proposed financing during construction and the first two operating years are shown below.

Rs. ‘000

Cost Outlays	Construction Period	Year 1	Year 2
Land	1220	------	------
Building	6110	------	------
Plant & M/cy	24440	------	------
Misc Fixed Assets	4720	------	------
Prelim Exp.	860	------	------
Pre. Op	4800	------	------
Current Assets	------	22804	2500
Total	42140	22804	2500

Financing

Cost Outlays	Construction Period	Year 1	Year 2
Equity Capital	16300	-----	-----
Term loan	29000	5704	500
Bank Borrowing	----	17100	2000
Total	45300	22804	2500

The following information is available :

(a)The construction period will last for one year (Year0) beginning on 1st April and ending on 31st March the following year.

(b)The operating years would be year 1 and year 2 from April to March.

(c) Interest on Term loan would be10% p.a. Each disbursement of loan would be repaid in 16 equal semi-annual instalments beginning from end of year 1. Interest on term loan for construction period is included in the pre-op. Expenses. Interest there after is payable at the end of 6 months. Term loan disbursement would be at the beginning of the year.

(d)Bank borrowing in year 1 and year 2 will be at the beginning of the year and carry interest @ 8% payable at the end of the year.

(e) Pre-op exps would be allocated to land, building, plant & m/cy and MFA in proportion to their values. Prelim. Exps would be written off @10% per annum.

(f) Net sales is Rs.420 lakh in year 1 and Rs.600 lakh in year 2. Cost of Sales is (excluding depreciation, other amortisation and interest) are Rs.280 lakh and Rs.400lakh. There is no tax liability in these two years.

(g) Depreciation is @3.34% on buildings and 10.34% on other assets in the straight line method. Prepare the following :

1) Projected income statements for Year 1 and Year 2

2) Projected cashflow statements for Year 0, Year 1 and Year 2

3) Projected balance sheets for the year ends of Year 0, Year 1 and Year 2

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