Question 2:

DEF Ltd. is planning to launch a new product line with a project life of 5 years. The initial capital investment is ₹2.5 crores. Additional working capital of ₹20 lakhs will be required immediately. The company expects to sell the product at ₹200 per unit with the following expected sales volume:

• Year 1: 80,000 units
• Year 2: 1,20,000 units
• Year 3: 1,60,000 units
• Year 4: 1,40,000 units
• Year 5: 1,00,000 units

The variable cost per unit is ₹100. Fixed costs are ₹1 crore per year. The salvage value of the equipment at the end of the project is ₹30 lakhs. The tax rate is 35% and the company's discount rate is 14%.

Requirements:

1. Estimate the annual operating cash flows.
2. Calculate the Net Present Value (NPV) of the project.
3. Compute the Payback Period of the project.
4. Determine the Profitability Index (PI) of the project.
5. Conduct a sensitivity analysis on the NPV if the sales price per unit drops by 5%.