Question 5:

MNO Enterprises is evaluating a new technology project with a life span of 5 years. The initial cost is ₹3.5 crores. The project will generate annual revenues of ₹1 crore, ₹1.2 crores, ₹1.5 crores, ₹1.7 crores, and ₹1.8 crores from year 1 to year 5, respectively. The project requires an additional working capital of ₹30 lakhs at the start, which will be recovered at the end of the project.

The operating costs (excluding depreciation) are 30% of revenues. The equipment's salvage value at the end of 5 years is ₹50 lakhs. The tax rate is 30%, and the company's cost of capital is 13%.

Requirements:

1. Compute the project's annual net cash flows.
2. Calculate the Net Present Value (NPV) of the project.
3. Determine the project's Internal Rate of Return (IRR).
4. Compute the Discounted Payback Period.
5. Evaluate the effect on NPV if the salvage value increases by 20%.