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Let us give an example to clear this concept. Suppose there are two firms and both
are having Rs 10,000 investment in fixed asset . One firm financed this fixed asset
entirely by equity and the second firm financed it with 50% debt and 50% equity. As
per Modigliani and Miller hypothesis I both the firm would have the same value as
the productive capacity is same and in a perfect capital market the valuation of the
firm does not depend on the capital structure ( for example see page no 448 to 450.
Proposition II :
This states that the expected return of stock on a firm increases with the degree of
financial leverage. Though the overall cost of capital remains the same, the expected
return on equity goes up with the degree of leverage and the benefit arising out of
low cost debt would be compensated with the increase in required return on equity
resulting in the overall return on asset of the firm unchanged. ( for calculation see
page no 454 , 455 ) . This is represented by the following equation :
rE = rA
+(
rA rD ) [D/E]
.1
Return on asset
= Return on Debt
rA =
10.8% ;
An important formula :
The beta of the firms asset is the weighted average of the betas of the individual
securities. This is explained with the help of the following equation :
Solution : Before the refinancing, Schuldenfrei is all equity financed. The equity beta
is 0.8 and the expected return on equity is 8%. Thus, the firms asset beta is 0.8 and
the firms cost of capital is 8%. We know that these overall firm values will not
change after the refinancing and that the debt is risk-free.
a.
D
E
D +
E
A =
D + E
D+E
b.
Before the refinancing, the stocks required return is 8% and the riskfree rate is 5%; thus, the risk premium for the stock is 3%.
c.
D
E
r =
r +
r
A D + E
D D + E
E
0.08 = (0.5 0.05) + (0.5 rE)
rE = 0.11 = 11.0%
After the refinancing, the risk premium for the stock is 6%.
If the cash flow of the firm does not change with the change in discount rate,
then the minimization of the denominator i.e. the minimization of weighted
average cost of capital would maximise the value of the ratio. However if the
future cash flow of the firm changes due to change in weighted average cost of
capital , then the valuation of the firm does changes. In such case the goal of the
firm should be maximising the value of the firm not the minimization of the
weighted average cost of capital .
According to the traditional view of the capital structure of the firm, they hold that
the valuation of the firm does depend on the capital structure . As per their view ,
the required return on equity does increases with the increase in leverage but not in
the same degree as prescribed by the MM II. So the increase in required return on
equity on levered firm is less than the benefit derived from low cost financing of
debt and this resulted in the maximization of the value of the firm at a particular
debt to equity ratio. So as per their stand point, a firm can have a optimum debt
equity ratio at which the valuation of the firm is maximum. However when an
irresponsible firms borrow excessively then the required return on equity shoots up
faster than MM II proposition and this would reduce the valuation of the firm. For
pictorial comparison of these two theory please see fig 17.3 page number 460.
The required return on equity is given by the CAPM as per the following :
rE = rf + (rm - rf )
15% = 10% + 1.5 (rm 10% )
rm = 13.33% .
Problem 4: Executive Cheese has issued debt with a market value of USD 100
million and has outstanding 15 million shares with a market price of USD 10 a
share. It now announces that it intends to issue a further USD 60 million of debt and
to use the proceeds to buy back common stock. Debtholders , seeing the extra risk,
mark the value of the existing debt down to USD 70 million .
a) How is the market value of the stock affected by the announcement ?
b) How many shares can the Company buy back with USD 60 million of new
debt that it issues?
c) What is the market value of the firm ( equity plus debt ) after the change of
capital structure ) ?
d) What is the debt ratio after the change in structure ?
e) Who gains or losses?
Solution :
a) The value of the existing debt goes down by USD 30 million and this is the
gain of the equity holder as the total value of the firm remains unchanged.
So the value of the equity would be USD 10 * 15 million plus USD 30
million i.e. USD 180 million . The value of per share would be USD 180
million / 15 = USD 12 . The share value gains by USD 2 per share.
b) The number of shares can be bought = USD 60 million/ USD 12 = 5
million;
c) The market value of the firm would remain unchanged.
d) The debt ratio after the change in structure would be 130/250 = 0.52;
e) The gain is for equity holders and the loss is for old debt holders.
amount of
operating cash flow since it is the fixed asset which determines the production
capacity. Let us assume that the firms EBIT is Rs 10 lacs and the cost of debt is 10% .
Now the tax structure is as follows :
For debt borrowing the entire interest payment is deductible ;
For interest earning of the lender , the interest income is taxed at 20% ;
For equity , dividend payment attracts dividend distribution tax at 10% ;
For equity in the case of lender , the dividend income is tax free.
Corporate tax is 30% ;
Based on the above we shall calculate the total return on the lender i.e. both debt
holder and equity holder :
( Rs in lacs)
Firm A
Firm B
EBIT
10
10
Interest
5 ( @10% on Rs 50 lacs)
EBT
10
Tax @ 30%
1.5
EAT
3.5
Dividend Distribution
0.70
0.035
6.30
3.465
6.30
3.465
6.30
3.465
Interest Income
6.30
7.465
tax
Dividend to be paid to
equity lender
Income to equity holder
Income to equity Holder
i.e. Dividend
20%
Income to debt holder
Total Income to lender
i.e. equity holder and
debt holder
If we see from the above example , we find that the return to the lender is increased
from Rs 6.30 lacs for firm A all equity finance to Rs 7.465 lacs for firm B due to tax
shields on interest paid and also due to income from equity is taxed at a lower rate.
So it shows that the value of the firm does change due to change in capital structure .
For relative tax advantage see page no 494 and 495.
Problem 1: Compute the present value of interest tax shields generated by these
three debt issues . The marginal tax rate is 35% :
a) A USD 1000 , one year loan at 8 percent ;
b) A five year loan of USD 1000,at 8 percent , assume no principal payment
until maturity;
c) A five year loan of USD 1000, at 8 percent , with equal annual principal
payment for 5 years ;
d) A USD 1000 perpetuity at 7 percent ;
Solution :
a)
The tax shield is USD 1000 * 8% * 0.35= 28 ; The present value of tax
shield is Rs 28/1.08 = Rs 25.93;
b)
Interest
Discount
PV of
factor at
tax
8%
shield
discount
on
Year
Principal
rate
Interest Amount
rate
interest
1000
8%
28
1.08
25.9259
1000
28
1.1664
24.0055
1000
28
1.259712
22.2273
1000
28
1.360489
20.5808
1000
28
1.4693281 19.0563
111.796
c)
Interest
Year
Principal
rate
Interest Amount
10
Discount
PV of
factor at
tax
8%
shield
discount
on
rate
interest
28
1.08
25.9259
800
22.4
1.1664
19.2044
600
16.8
1.259712
13.3364
400
11.2
1.360489
8.23233
200
5.6
1.4693281 3.81127
1000
8%
70.5103
d) The interest tax shield is given by = (1000 *0 .08 * 0.35) /0.08 = USD 350;
Problem no 2 :
The following is the book and market value balance sheet of the
$ 40
CA
Market Value
$20
Debt
$ 40
CL
Equity
$ 60
$ 100
Long
CA
$20
CL
$ 80
Equity
$120
Long
Term
Term
Asset
Asset
$ 100
$ 160
$ 140
$ 160
Assume that MM theory holds with taxes. There is no growth , and the $ 40 of debt is
expected to be permanent. Assume a 40 percent corporate tax rate.
a)
How much of firms value is accounted for by the debt generated tax
shield ?
b)
How much better off will UFs shareholders be if the firm borrows $ 20
more and uses it to repurchase stock?
c)
11
period of five year what would be the new value of the firm ( assume an
8 percent borrowing rate ) .
Solution :
a) PV of tax shield is the value of the firm increased because of debt
financing . So the value of the firm which is increased because of this is
40*0.40= USD 16 ;
b) The stock holders would be better off by the tax shield = 20 * 0.40=
USD 8 ;
c) The PV of tax shield is :
Interest
Discount
PV of
factor at
tax
8%
shield
discount
on
Year
Principal
rate
Interest Amount
rate
interest
60
8%
1.92
1.08
1.77778
60
1.92
1.1664
1.64609
60
1.92
1.259712
1.52416
60
1.92
1.360489
1.41126
60
1.92
1.4693281 1.30672
7.666
12
Value of the firm = Value if all equity financed + PV ( tax Shield ) PV ( cost of
financial distress) .
Financial distress can be of two nature one is the bankruptcy cost ( page no 497 to
503) and other is the cost before bankruptcy ( 503 to 507) . In case a firm has not
gone bankrupt , then equity holder and debt holder would behave differently . In
the time of distress , the equity holder would go ahead with more risky project
without taking the safe project ( page no 503 ) . The equity holder would also not
likely to contribute to the equity capital required for a project which would increase
the valuation of the firm. This results in the conflict of interest. So to protect the
interest of the debt lenders so that such situation does not arise , at the time of
lending it self debt holders would put negative covenants. This cost of distress varies
from industry to industry depending on the nature of asset financed out of
borrowing. In the case of industry which require more real asset like steel , power
etc, the cost of distress would be less and accordingly we can find that such type of
industry would have more debt than industry like software where the asset is
mostly intangible. So the nature of industry would also like to have a role on the
capital structure .
This would led to trade off theory . This theory states that the Companys borrowing
strategy in terms of loan depends on the advantage of tax shield and disadvantage of
cost of financial distress. Firms depending on the nature of industry have different
target ratios. Companys having more tangible asset would like to set higher debt to
equity target ratio whereas companies having lower tangible asset would be having
13
low debt to equity target ratio. Unlike MM theory which says that the firm should
take more and more debt , trade off theory suggests that the firms should avoid
extreme situation and rationalise moderate debt ratios.
Pecking Order theory of financing choices :
As per this theory a firm would raise fund by issuing the securities in the following
sequence :
First it would prefer internal finance;
They adapt their target dividend payout ratios to their investment
opportunities , while trying to avoid sudden changes in dividends ;
Sticky dividend policies , plus unpredictable fluctuations in profitability and
investment opportunities mean that internally generated cash flows are some
time more or less than the capital expenditure and depending on the amount
the firm pays off or draws down marketable securities;
If external finance is required , firms issue the safest security first. That is they
start with debt , then possibly hybrid securities such as convertible bonds and
then perhaps equity as the last resort.
For financial slack please see page 514.
Problem 4 : The following is the balance sheet of a firm Circular File in terms of
market value :
Liability
Asset
Bond outstanding
25
CA-CL
20
Common Stock
Fixed Asset
10
Total
30
Total
30
14
rE [ E/V]
= rD [D/V] + rE [ E/V]
If we see the above two equations we find out that WACC is less than
opportunity cost of capital because of tax shield. WACC should be applied to
only those project which is of similar risk like the existing one and the D/E
ratio is maintained at the same level during the period of the project.
P0
[C1/(1+rD)1]
+[C2/(1+rD)2]
[C3/(1+rD)3]+
[C4/(1+rD)4]
+.+[Cn/(1+rD)n]
Let us try to value both loan and debenture with the help of the above
equation :
15
Solution :
Interest
Year
Principal Interest
10000
Discount Discount
10%
PV
1000
10000
1000
1000
0.826446 826.4463
10000
1000
1000
0.751315 751.3148
10000
1000
1000
0.683013 683.0135
10000
1000
1000
10%
factor
1000
11000
rate
10000
0.909091 909.0909
0.620921 6830.135
10000
b) What is the cost of a loan when the principal of the loan is paid in 5 annual
installment and interest is paid yearly.
Interest
Year
Principal Interest
10000
rate
PV
2000
1000
2000
8000
800
2000
800
2000
0.826446
6000
600
2000
600
2000
0.751315 1953.418
4000
400
2000
400
2000
0.683013 1639.232
16
10%
factor
1000
10%
Discount Discount
0.909091 2727.273
2314.05
2000
200
200
2000
2000
0.620921 1366.027
10000
c) What is the cost of a loan when the principal of the loan is paid in 20 equated
quarterly installment.
Interest
10000
250
641.471
9608.53
240.213
9207.27
250
PV
9608.53
641.471
240.213 401.258
9207.27
1.05063 610.562
230.182
641.471
230.182 411.29
8795.98
1.07689 595.67
8795.98
219.9
641.471
219.9
421.572
8374.41
1.10381 581.141
8374.41
209.36
641.471
209.36 432.111
7942.3
1.13141 566.967
7942.3
198.557
641.471
198.557 442.914
7499.38
1.15969 553.139
7499.38
187.485
641.471
187.485 453.987
7045.4
1.18869 539.647
7045.4
176.135
641.471
176.135 465.336
6580.06
1.2184 526.485
6580.06
164.502
641.471
164.502 476.97
6103.09
1.24886 513.644
10
6103.09
152.577
641.471
152.577 488.894
5614.2
1.28008 501.116
11
5614.2
140.355
641.471
140.355 501.116
5113.08
1.31209 488.894
12
5113.08
127.827
641.471
127.827 513.644
4599.44
1.34489 476.97
13
4599.44
114.986
641.471
114.986 526.485
4072.95
1.37851 465.336
14
4072.95
101.824
641.471
101.824 539.647
3533.3
1.41297 453.987
17
2.50%
factor
391.471
10%
rate
1.025 625.826
15
3533.3
88.3326
641.471
88.3326 553.139
2980.17
1.4483 442.914
16
2980.17
74.5041
641.471
74.5041 566.967
2413.2
1.48451 432.111
17
2413.2
60.33
641.471
581.141
1832.06
1.52162 421.572
18
1832.06
45.8014
641.471
45.8014 595.67
1236.39
1.55966 411.29
19
1236.39
30.9097
641.471
30.9097 610.562
625.826
1.59865 401.258
20
625.826
15.6456
641.471
15.6456 625.826
0.00
1.63862 391.471
60.33
10000
It means that for all the type of loan ( irrespective of their payment schedule ) the
cost of the debt is interest cost charged on the loan.
e) If the debenture is issued at a premium of Rs 100 /- and face value of the
debenture is Rs 10,000/- and the coupon is 10% and the principal and
interest to be paid in 20 equal quarterly instalment .
Interest
10000
250
641.471
9608.53
240.213
9207.27
250
PV
9608.53
641.471
240.213 401.258
9207.27
1.04847 611.816
230.182
641.471
230.182 411.29
8795.98
1.07358 597.506
8795.98
219.9
641.471
219.9
421.572
8374.41
1.09929 583.531
8374.41
209.36
641.471
209.36 432.111
7942.3
1.12562 569.883
7942.3
198.557
641.471
198.557 442.914
7499.38
1.15258 556.554
7499.38
187.485
641.471
187.485 453.987
7045.4
1.18018 543.537
18
2.39%
factor
391.471
10%
rate
1.02395 626.468
7045.4
176.135
641.471
176.135 465.336
6580.06
1.20844 530.824
6580.06
164.502
641.471
164.502 476.97
6103.09
1.23739 518.409
10
6103.09
152.577
641.471
152.577 488.894
5614.2
1.26702 506.284
11
5614.2
140.355
641.471
140.355 501.116
5113.08
1.29736 494.442
12
5113.08
127.827
641.471
127.827 513.644
4599.44
1.32843 482.878
13
4599.44
114.986
641.471
114.986 526.485
4072.95
1.36025 471.584
14
4072.95
101.824
641.471
101.824 539.647
3533.3
1.39282 460.554
15
3533.3
88.3326
641.471
88.3326 553.139
2980.17
1.42618 449.782
16
2980.17
74.5041
641.471
74.5041 566.967
2413.2
1.46034 439.262
17
2413.2
60.33
641.471
581.141
1832.06
1.49531 428.989
18
1832.06
45.8014
641.471
45.8014 595.67
1236.39
1.53112 418.955
19
1236.39
30.9097
641.471
30.9097 610.562
625.826
1.56779 409.156
20
625.826
15.6456
641.471
15.6456 625.826
0.00
1.60534 399.586
60.33
10100
19
Step 2 : Convert the levered beta into un levered beta by using the following
equation :
UL = L/ [1+(1-T)*D/E]
Step 3 : Convert this un levered beta into levered beta at a targeted debt equity ratio
:
L = UL * [1+(1-T)*D/E]
Step 4 : Finding out the appropriate risk free rate
Step 5 : Finding out the risk premium and then use of the equation:
Ke = Rf + ( Rm-Rf)
Problem 1 :
following information :
Debt $ 75,000,000 book value outstanding . The debt is trading 90 percent of
par value . The YTM is 9 % .
Equity 2,500,000 shares selling at $42 per share. Assume that the expected rate
of return on equity is 18 %;
The marginal tax rate is 35%;
20
Problem 2 : Suppose that the Company decides to move to a more conservative debt
policy. A year later its debt ratio is down to 15% ( D/V) and the interest rate has
dropped to 8.6% . Recalculate the WACC .
Cash flows should not deduct interest . Calculate the tax as if the company is
all equity financed; The value of interest tax shield is picked up in the WACC
formula;
Discounting at WACC we get the value of the firm. If our intention is to get
the value of the equity , we have to deduct the debt part.
21
Liability
Share Holders
Asset
246,300
Equity
Property , Plant
302,000
and Equipment
Deferred taxes
45,000
Other Asset
89,000
208,600
Inventories
125,000
75,600
Accounts
120,000
Receivable
Accounts Payable
62,000
Cash and
1,500
Marketable
Securities
Total Current
137,600
Total Current
Liability
Total Liability
246,500
Asset
637,500
Total Asset
637,500
The Companys operating income is $ 100.5 million . Assume for simplicity that this
figure is expected to remain constant for ever. The long term debt cost is 8 percent,
the short term debt cost is 6% , the expected return on equity is 15 percent. There are
7.46 million shares outstanding , and the shares are trading at $ 46. The tax rate is
35% .
Value the Company by the flow to equity method.
22
Solution :
$100.5
Short-term interest
4.5
Long-term interest
16.7
$79.3
Tax
27.8
Net income
$51.5
23
a) If the firm invests , it has to raise $ 500,000 by stock issue. Issue costs are 15
percent of net proceeds.
b) The firm has ample cash on hand. But if it invests , it will have access to $
500,000 debt financing at a subsidized interest rate . The present value of
subsidy is $ 175,000.
c) If the firm invests its debt capacity increases by $ 500,000. The present value
of interest tax shield on this debt is $ 76,000.
Solution :
a) APV = 0-75000= -75,000;
b) APV = 0+175,000 = 175,000;
c) APV= 0 + 76,000 = 76,000;
Problem 5 : Whispering Pines Inc is all equity financed . The expected rate of return
on the Companys shares is 12 percent.
a) What is the opportunity cost of capital for an average risk Whispering Pines
investment ?
b) Suppose the company issues debt repurchases shares and moves to a 30
percent debt to value ( D/V = 0.30) . What will the Companys WACC a the
new capital structure ? The borrowing rate is 7.5% and the tax rate is 35% ;
Solution : a) The opportunity cost of capital would be 12% ;
c)
b)
Calculate the APV of the project is the 30% of the project cost is equity
financed , the interest cost is 10% and the tax rate is 35%;
Solution :
24
a) The base case NPV is = (1000) +1200/1.20 = 0; The opportunity cost of capital
is the all equity discounting rate.
b)
Problem 8 : Digital Organics has the opportunity to invest $ 1 million now ( t=0) and
expects after tax returns of $6,000,000 in t=1 and $ 7,000,000 in t =2 ; The project
would last for two years only. The appropriate cost of capital is 12 percent with all
equity financing , the borrowing rate is 8 percent and DO will borrow $ 300,0000
against the project. This debt must be repaid in two equal installment. Assume the
25
debt tax shields have a net value of $0.30 per dollar interest paid . Calculate the
projects APV .
600,000
700,000
Discount
rate for
APV
12%
Present
Value
-1000000
APV
93750
535714.2857 558035.714
Principal
Interest Rate
Amount
26
Principal
Closing
Tax
discount
rate of 8%
300,000
150,000
8%
24000
150,000
150,000
7200
6666.66667
12000
150,000
3600
3086.41975
9753.08642
rE (E/V)
Mr Bog wants to check that this calculation is consistent with the CAPM . He has
observed or estimated the following numbers :
Betas
Solution :
Solving for A, we find that:
D
E
+ (E )
A = (1 TC )(D )
V ( TC D )
V ( TC D )
27
D/V
E/V
+ (E )
A = (1 TC )(D )
(
T
D/V)
1
(
T
D/V)
C
C
0.45
0.55
+ (1.09)
= 0.6738
A = (1 0.35)(0.15)
1 (0.35 0.55 )
1 (0.35 0.55 )
Using the Security Market Line, we calculate the opportunity cost of capital for
Sphagnums assets:
28
crores, Rs 30 crores and Rs 50 crores respectively. Since the companys major income
is coming from road sector, the company allocate a Return On Equity of 18% to all
division. Do you think the company is doing the correct practices?
Solution : No the company is not doing the correct practices. The risk of four
divisions are different and accordingly different divisions should be charge with
different ROE.
following method :
For Real Estate Sector , the company would follow the following steps:
Step 1: Identify three proxy companies which are listed
Step 2 : Calculate the levered beta of these three proxy companies by using the stock
price and index price .
Step 3 : Calculate the unlevered beta of the industry by using the levered to
unlevered equation :
L = UL 1
1
E
Step 4 : Calculate the Levered beta of the division by using the debt equity ratio of
the division and using the same formula
Step 5 : Now calculate the Return on Equity by using the Capital Asset Pricing
Model
Similarly for other divisions the Return On Equity is calculated.
If after using these methodologies we have calculated the ROE for Real Estate is 25%
, For Education is 13% and For Entertainment is 21% , now the Weighted Average
Cost of Equity Would be :
ROE =
18%
25%
13%
21% = 19.25%
29
Money is invested at a time i.e. out flow of fund takes place at a time;
Inflow of fund is taking place at different point of time;
So there is time value of money concept is involved in analysing the capital
investment decision since there is a considerable difference between the
inflow and outflow of fund .
So any good project evaluation criteria must consider this time value of money.
However , even today there are certain criteria which does not takes into affect the
time value of money criteria. However this type of evaluation must not be adopted.
Based on this ,we are making a list of different evaluation criteria . The entire
evaluation criteria is divided into two category :
Category I ( where time value of cash flow is not considered )
o Pay Back method
o Book of return
Category II ( where time value of cash flow is considered )
o Discounted Pay back
o Net Present Value
o Internal Rate of Return
Since this method is more scientific, we shall concentrate our discussion only in the
Category II evaluation criteria.
Discounted Payback :
30
In this case we do take the discounted value of the cash flow and from this
discounted value we try to find out in how many years the initial outflow is
recovered. Let us take an example :
A Company wants to invest Rs 100 lacs for installation of a plant and machinery.
After the installation of plant and machinery , the machinery would generate the
following cash flows :
Time ( in
20
30
50
60
years )
Cash Flow ( in
rupees lacs )
If the discount rate is 12% , find the discounted pay back period.
Discounted
Cumulative
Time
Cash flow
20
30
50
60
discount
31
Cash Flow
cash flow
Discounted pay back period is 3.59 years while the pay back period is 3 years.
NPV : This is the most scientific method of evaluation of the project. This is arrived
at with the help of the following formula :
NPV = [ C0 ] +[C1/(1+r)1] +[C2/(1+r)2] + [C3/(1+r)3]+ [C4/(1+r)4]
+.+[Cn/(1+r)n]
Where r is the appropriate discount rate we arrive after applying the concept we
have learnt in chapter 18 and 19. If the project is of same risk and the project does not
involve change in capital structure, this is WACC.
If we take the above mentioned example , then the NPV of the project is calculated
as follows :
Discounted
Factor @ 12 % Discounted
discount
Cash Flow
Time
Cash flow
(100)
20
0.892857143 17.8571429
30
0.797193878 23.9158163
50
0.711780248 35.5890124
60
0.635518078 38.1310847
-100
NPV
15.4930563
IRR of the project : The IRR of the project would be obtained by putting the NPV
value is equal to zero and then solving for r. IRR is the internal rate of return of the
project generates and if the internal rate of return of the project is more than the
required return of the project we shall accept the project.
32
Cash Flow
Time
Cash flow
-100
20
0.84784972
16.96
30
0.718849148
21.57
50
0.609476048
30.47
60
0.516744097
31.00
NPV
0.00
-100
33
Year
Project 1
Project 2
Project 3
PV factor
1+3
2+3
at 10%
0
-100
-100
-100
1.000
-200
-200
225
450
0.909
450
675
550
0.826
550
Project
NPV at 10%
IRR
354.30
134.5%
104.53
125.0%
309.05
350%
1+3
663.35
212.8%
2+3
413.58
237.5%
Projects 1 and 2 are mutually exclusive and project 3 is independent . If the value
additivity principle holds , we should be able to choose the better of the two
mutually exclusive projects without having to consider the independent project. If
we use the IRR rule we select project 1 . But if we consider combinations of projects,
then the IRR rule would prefer projects 2 and 3 to projects 1 and 3. The IRR rule
prefers project 1 in isolation but project 2 in combination with independent project.
So IRR rule does not hold value additivity principle. The implication is that the
34
management would have to consider all the possible combinations. However NPV
principle holds value additivity principle and accordingly we shall choose 1 in
isolation and 1+3 in combination.
Multiple rate of return :
If the projects cash flow involves more than one change in sign ( i.e. project involves
more than one outflow at different point of time during the tenure of the project )
we shall have more than 1 IRR. We have to decide which IRR is to adopt. So in such
case we can not select which IRR we have to take. But such problem would not
happen with NPV.
Capital Investment when resources are limited :
When the capital required for investment is limited, we have to find out a new
measurement called Profitability Index. The method of evaluation criteria is as
follows :
Project
C0
C1
C2
IRR ( %)
Alpha
-4,00,00
+241000
+293000
21
Beta
-2,00,00
+131000
+172000
31
35
The opportunity cost of capital is 8 percent. Suppose you have to choose either
Alpha or Beta but not both, what project would you choose using the IRR rule ?
Solution :
The incremental flows from investing in Alpha rather than Beta are 200,000 and
+110,000 and +121,000 . The IRR on the incremental cash flow is 10 % ( i.e.
200+110/1.10+121/1.102 = 0). The IRR on beta exceeds the cost of capital and so does
the IRR on Incremental investment in Alpha . Choose Alpha.
Problem 2 :
Borghia Pharmaceutical has $1 million allocated for capital expenditure. Which of
the following projects should be company accept to stay within the $ 1 million
budget ? How much does the budget limit cost the Company in terms of its market
value ? The opportunity cost of capital for each project is 11 percent .
Project
Investment
NPV
( $ thousands)
( $ thousands )
300
66
17.2
200
-4
10.7
250
43
16.6
100
14
12.1
100
11.8
350
63
18.0
36
IRR (%)
48
400
13.5
Solution :
Using the fact that Profitability Index = (Net Present Value/Investment), we find
that:
Project
Profitability Index
0.22
-0.02
0.17
0.14
0.07
0.18
0.12
Thus, given the budget of $1 million, the best the company can do is to accept
Projects 1, 3, 4, and 6.
If the company accepted all positive NPV projects, the market value
(compared to the market value under the budget limitation) would increase
by the NPV of Project 5 and the NPV of Project 7: ($7,000 + $48,000) = $55,000.
Thus, the budget limit costs the company $55,000 in terms of its market value.
Problem 10 : You are considering a five year lease of office space for R& D purpose .
Once signed , the lease can not be canceled. It would commit your firm to six annual
$100,000 payments with the first payment due immediately . What is the present
value of the lease if your Companys borrowing rate is 9 percent and the tax rate is
35 percent .
37
Solution :
[$100,000 (1 - 0.35)] + [$100,000 (1 - 0.35) (Annuity Factor5/9 (1 0.35)%)]
= $65,000 + $274,925 = $339,925
We have already discussed in detail about different aspects of discount rate and
what would be the appropriate discount rate for a cash flow. We have discussed that
if the project is of similar risk and the project does not change the capital structure of
the Company , we can use WACC as the appropriate discount rate. However if both
the above conditions are not met ,we have to use the APV rule which says that first
we discount the cash flows with all equity finance rate which is the opportunity cost
of capital and then we add all the benefit of the financing structure and then
deducting the cost associated with such financing structure .
Now we have to decide the determination of cash flows . While calculating the cash
flow we have to adopt the following principles :
We have to always take the incremental cash flow i.e. fist we draw the cash
flow without the project and then with the project and the difference we get
the incremental cash flow ;
In the cash flow we have to include the opportunity cost and we shall not
include the sunk cost;
Working capital adjustment is required to arrive at the cash flow;
We have to treat inflation consistently i.e. if we take nominal cash flow then
the discount rate is nominal and vice versa with respect to real cash flow and
real interest rate.
38
39
Solution :
( Rs in million)
0
Revenues
120
120
120
120
120
Cost
80
80
80
80
80
Depreciation
20
15
11.25
8.44
6.33
Profit Before
20
28.75
31.56
33.67
Fixed Asset
(80.00)
Net
(20.00)
Working
Capital
25
Tax
Tax
7.5
8.63
9.47
10.10
Profit After
14
17.5
20.12
22.09
23.57
Tax
Net Salvage
30.00
Value of
Fixed Asset
Recovery of
20.00
Net
Working
Capital
40
Initial
(100.00)
Outlay
Operating
34.0
32.5
31.37
30.53
29.90
Cash flow
Terminal
50.00
Cash flow
Net cash
(100)
34.0
32.5
31.37
30.53
100
80
65
53.75
45.31
79.90
flow
Book Value
of
Investment
Problem 2 :
Ojus Enterprises is determining the cash flow for a project involving replacement of
an old machinery by a new machine. The old machine bought a few years ago has a
book value of Rs 4,00,000/- and it can be sold to realise a post tax salvage value of Rs
160,000/- . It is being depreciated annually at a rate 25 percent under the written
down value method.
4,00,000.
The new machine costs Rs 1,600,000 . It is expected to fetch a net salvage value of Rs
8,00,000 after 5 years when it will no longer be required. The depreciation rate
applicable to it is 25 percent under the written down value method. The net working
capital required for the new machine is Rs 500,000. The new machine is expected to
bring a saving of Rs 3,00,000 annually in manufacturing costs ( other than
depreciation ). The tax rate applicable to the firm is 40 percent.
41
Solution :
( Rs in 000)
year
180
180
180
180
180
400
300
225
168.8
126.6
100
75
56.3
42.2
31.6
300
225
168.7
126.6
95
120
90
247.5
230.6
218
1. Investment
Outlay
1. Cost of new
(1600)
asset
2.Salvage
5000
value of old
asset
3. Increase in
(100)
Net working
capital
4.Total net
(1200)
investment
II Operating
Cash flow
5. After tax
savings in
manufacturing
cost
6.
Depreciation
on new
machine
7.
Depreciation
on old
machine
8. Incremental
Depreciation (
6-7)
9. Tax saving
on
incremental
depreciation
42
(8*0.40)
10.Net
300
270
247.5
230.6
218
Operating
Cash flow
(5+9)
III Terminal
cash flow
11.Net
800
terminal value
of new
machine
12. Net
160
terminal value
of old machine
13. recovery of
100
incremental
net working
capital
14. Total
740
terminal cash
flow (1112+13)
15. Net cash
(1200)
300
270
247.5
230.6
958
flow
Problem 3 :
M Loup Garou will be paid 1,00,000 euros one year hence. This is a
PV = 100000/1.08 = 92,593
The inflation rate is 4 percent. Calculate the PV of M Garous payment using the
equivalent real cash flow and real discount rate .
Solution :
43
Problem 4 : Machine C was purchased 5 years ago for $ 2,00,000 and produces an
annual cash flow of $ 80,000 . It has no salvage value but is expected to last for
another 5 years. The company can replace machine C with machine B in the previous
example either now or at the end of five years. Which it should do ?
Solution : You can replace it only at the end of 5 years since then it would be
producing cash flow $ 80,000 more than the $ 72,380.
Sensitivity analysis
44
Simulation Run
R
or Scenario Analy
ysis
Category
y II : In thiss type of prroject, the p
project may
y not be com
mpleted and
d there is lo
ot
of unceertainty asssociated with
w
the co
ompletion of
o the pro
oject. For example,
e
o
oil
explorattion projectt. There is no guaranttee that Oil would bee found and
d before th
he
last stag
ge is reacheed , the pro
oject can bee cancelled.. For this ccategory off project, we
w
can captture the unccertainty by
y using :
D
Decision
Treee Analysiss
R
Real
Option
n Analysis
The en
ntire uncerttainty analy
ysis aspect of capital budgeting
g is presentted with th
he
help of the
t followin
ng diagram
m:
Unceertainty
An
nalysis
Project
P
comp
pletion is
certain
Sen
nsitivity
A
Analysis
Pro
oject
complletion is
unceertain
Sim
miulation
ru
un or
sceenario
an
nalysis
Decisson Tree
Analysis
Real Option
O
Anaalysis
L us take an
Let
a examplee :
45
Market Size
Unit Price ;
Fixed Cost ;
Variabl Pessimisti
e
c
Market
Size (
In
units )
900000
Market
Share (
in
numbe
rs )
Unit
Price (
Expected
Optimist
ic
1000000
1100000
0.1
0.16
46
0.04
47
NPV
Variable Pessimistic Expected
Market
Size
1.1
3.43
Market
Share
-10.4
3.43
Unit Price
Unit
Variable
Cost
Fixed
Cost
Optimistic
5.7
17.3
-4.2
3.43
-15
3.43
11.1
0.4
3.43
6.5
Now we know that the following factors are important which can
change the NPV most :
Market Share ;
Unit Price;
Variable Cost;
Now we can do simulation run for this three variables in each year to
find out the NPV under different simulation run.
48
From this we get the probability distribution of NPV in each year and
then we try to see our most likely NPV versus best and worst case
NPV.
If our most likely NPV is favourable then we shall go for the project
otherwise not.
Decision Tree :
In the case of both sensitivity analysis and
assume that the project would be in operation through out the period once
we start it. The option of abandonment or expansion is not calculated in this
assessment.
For this we have to resort to first decision tree analysis and then real option
on project finance. Decision tree is capturing the present value of the project
by taking into account the scope for abandonment and expansion in
subsequent years.
We calculate from right most side of the decisions tree and proceed towards
the left and calculate the present NPV.
49
Probability
of
Success 0.7
Probability
of
Success 0.5
Launch Product
-Rs 2 million
Probability
of
Failure 0.3
Develop a Product
- Rs 1 million
Probability
Abandon Project
of
failure 0.5
Abandon Project
50
Decision Tree Ca
Using the DTA , you can also gain further insight by considering the
best, worst and most likely case scenarios for the above two examples.
Best case represents the scenario where only the best outcomes are
experienced and worst case represents the scenario where only the
worst outcomes. For the above example , the best case is where the
product development and commercialization efforts are successful ,
while the worst case involves successful development followed by
commercial failure.
If the most likely case is close to the best case , there is an excellent
chance of success and vice versa.
51
T= 0
-Rs 100
T=1
Rs 125
15% p.a.
Lets evaluate the value of the project at that time for the good and
bad cases (each with a probability of 0.5), assuming the same
conditions, so you can decide whether it will be to your advantage to
wait for a year.
Time
T=0
T=1
Amount
Probability
Amount
Probability
52
T=2
Rs 170
0.5
Rs 80
0.5
DCF accounts for the downside of the project by using a Risk Adjusted
Discount Rate . ROA on the other hand , captures the value of the
project for its upside potential by accounting for proper managerial
decisions that would presumably be taken to limit the downside risk.
Both DTA and ROA are applicable when there is uncertainty about
project outcomes and opportunity for contingent decision exists. There
are two basic differences between them :
DTA accounted for both Private and Market Risk where as ROA
only accounts for Market Risk;
DTA accounts for limited number of outcomes but ROA accounts for a
larger number of outcomes.
53
54
6. Between IRR and NPV which one is the superior evaluation method ?
a. IRR
b. NPV
c. Can not be said
7. What method should be used to capture uncertainty in case the
project completion risk is lowest ?
a. Sensitivity Analysis
b. Simulation Exercise
c. Real Option Analysis
d. Both a and b
8. In which case real option would give the best result ?
a. When the project has least uncertainty in pre construction stage
and least uncertainty in revenue projections
b. When the project has highest uncertainty in pre construction
stage and least uncertainty in revenue projections
c. When
the
project
has
highest
uncertainty
in
pre
uncertainty in revenue
projections
d. Both a and b
9. If we use the NPV method of project evaluation what would be the
formula :
a. NPV> IRR
b. NPV>0
c. NPV>WACC
d. None of the above
10. If we use the IRR method of evaluation ,what would be the formula :
a. IRR>NPV
b. IRR>WACC
c. IRR> DSCR
d. None of the above
Short Answer Question :
55
Solution :
In order to solve this problem, we calculate the equivalent annual cost for each of the
two alternatives. (All cash flows are in thousands.)
Alternative 1 Sell the new machine: If we sell the new machine, we receive
the cash flow from the sale, pay taxes on the gain, and pay the costs
associated with keeping the old machine. The present value of this alternative
is:
PV1 = 50 [0 .35(50 0)] 20
+
30
30
30
30
30
2
3
4
1.12 1.12
1.12
1.12
1.125
5
0.35 (5 0)
= $93.80
5
1.12
1.12 5
The equivalent annual cost for the five-year period is computed as follows:
PV1 = EAC1 [annuity factor, 5 time periods, 12%]
-93.80 = EAC1 [3.605]
EAC1 = -26.02, or an equivalent annual cost of $26,020
56
Alternative 2 Sell the old machine: If we sell the old machine, we receive the
cash flow from the sale, pay taxes on the gain, and pay the costs associated
with keeping the new machine. The present value of this alternative is:
PV2 = 25 [0.35(25 0)]
20
20
20
20
20
2
3
4
1.12 1.12
1.12
1.12
1.12 5
20
30
30
30
30
30
5
6
7
8
9
1.12
1.12
1.12
1.12
1.12
1.1210
5
0 .35 (5 0)
= $127.51
10
1.12
1.1210
The equivalent annual cost for the ten-year period is computed as follows:
PV2 = EAC2 [annuity factor, 10 time periods, 12%]
-127.51 = EAC2 [5.650]
EAC2 = -22.57, or an equivalent annual cost of $22,570
Thus, the least expensive alternative is to sell the old machine because this
alternative has the lowest equivalent annual cost.
One key assumption underlying this result is that, whenever the machines
have to be replaced, the replacement will be a machine that is as efficient to
operate as the new machine being replaced.
Question No 2 : Problem 4 :
C0
C1
C2
-100
+110
+121
-120
+110
+121
C3
+133
57
Solution :
Year
-100
110
121
0.909090909
0.82645
flow
-100
100
100
NPV
100
Year
-120
110
121
133
0.909090909
flow
-120
100
NPV
180
PV @ 10%
disocunt
rate
PV of cash
PV @ 10%
disocunt
rate
0.82645 0.75131
PV of cash
100
99.9249
58
c.
59
Installation
Cost
Domestic Machine
800
100
Imported Machine
500
50
60
These local vendors carries out the installation and subsequently looks after the
Annual Maintenance Contract ( AMC) on behalf of supplier.
4. The company would install IT systems consisting of Hard ware and Software.
The break up of hard ware and software is given below :
( Rs in lacs)
Hardware
100
Software
50
5. The company would purchase furniture and fixtures as part of project cost.
The amount for which the furniture and fixtures would be purchased is Rs
200 lacs.
6. The company has also projected a contingency of Rs 250 lacs for the project
and the contingency amount would be paid in 6 months . This would be
deducted over a period of 10 years at an uniform rate.
7. The project implementation time is 12 months from the purchase of land and
the interest during this period would be capitalized.
8. The company has projected the following holding level for its current asset for
the entire life of the proposed term loan ( 5 years ) :
( No of Months)
RM
1.5
1.3
1.2
1.1
61
WIP
0.5
0.20
0.20
0.20
0.20
FG
1.2
Receivable
1.5
Creditor ( of
0.5
0.5
0.4
0.35
7%
7%
6%
5%
5%
raw material
consumption
)
Other
Current
Asset as a %
of Inventory
and
Receivable
outstanding
The working capital would be available at the time of starting the commercial
production.
9. The key assumptions about the projected performance of the company is
given as below :
The per unit production of the product requires the following raw
material:
i. Per unit of product would require 0.500 MT steel for first three
years and then the steel requirement would be increased to
0.550 MT .
62
( Rs )
Steel Price
28000
28000
30000
30000
32000
Per MT
Electricity
( Rs)
3.30
3.30
4.10
4.10
Price
The salary and wages have been assumed as per the following :
( Rs in lacs)
Salary and
55
65
75
80
100
Wages
63
Other
12
15
15
18
20
Manufacturing
Expenses
% of sales
10%
8%
7%
6%
5%
The company has assumed the following depreciation for the assets
to be procured for the project :
Asset Name
% on WDV
Building (Factory)
10%
Plant and
15.33%
Machinery
Computers
40%
Furniture and
18.1%
Fixture
64
Asset Name
Land
T=0
Building (Factory)
T=3-6 months
Plant and
T=6-9 months
Machinery
Computers
T=9-12 months
Furniture and
T=9-12 months
Fixture
The company would make payment of the asset at the beginning of the
time period .
The company has assumed the following sales for the next 5 Years :
Production
50000
75000
80000
85000
85000
45000
77000
79000
84500
84500
18000
18000
19500
21000
22500
( no of
units )
Sales ( no
of units )
Sales Price
Per unit ( in
Rs )
The total project cost would be funded by way of Debt : Equity of 2:1 . The company
would bring in the margin money requirement as per 2nd Method of lending under
MPBF. The term loan would be paid in 5 year from the start of the project operation
date in equal annual installment. The working capital would attract an interest rate
65
of 11% p.a. and term loan would attract an interest rate of 12% p.a. The return on
equity is calculated at 17% p.a. under CAPM model.
Carry out the capital budget evaluation process :
Step No
Original
Fixed
Interest
Asset
During
Final Fixed
Cost
Construction Asset Cost
550
44
594
500
30
530
Land
Building
Plant and
Machinery
IT
Furniture and
Fixture
1450
150
Step No
Debt to Equity
Ratio
Land
Building
Plant and
Machinery
IT
Furniture and
Fixture
Step No
2:1
58
3
1508
153
200
4
204
2850
139
2989
2
Determination of Means of Finance
Original
Fixed
Asset
Debt
Cost
Finance
Equity Finance
550
367
183
500
333
167
1450
150
967
100
483
50
200
2850
133
1900
67
950
Term Loan
Interest
12%
Step No
4
Project
Implementation
Period
Months
Step No
5
Land
Amount
Debt Part
IDC
Calculation
Opening
Balance of Debt
Disbursement
of Term Loan
Closing Balance
of Term Loan
Tenure of
Outstanding
Interest Rate of
Term Loan ( %
p.a.)
Interest during
construction
12
Determination of IDC
Plant and
Machinery
IT
Furniture
and
Fixtures
9
9
150
200
100
133
0
550
367
Building
3
500
333
367
333
967
100
133
367
333
967
100
133
12
12%
12%
12%
12%
12%
44
30
58
183
44
167
30
483
58
50
3
67
4
227
197
541
53
71
6
1450
967
Equity Part
Original Value
IDC Part
Total Equity
Required
Step 6
67
Original
Fixed
Interest
Final Fixed
Asset
During
Cost
Construction Asset Cost
550
44
594
500
30
530
Land
Building
Plant and
Machinery
IT
Furniture and
Fixture
1450
150
Step 8
Miscellaneous
expenses
Step 9
2:1
Debt
Finance
Equity Finance
367
227
333
197
541
53
1508
153
133
1900
71
1089
204
2989
250
Determination of IDC on Miscellaneous Expenses
250
166.67
Opening
Balance
Disbursement
167
Closing Balance
Tenure
Interest Rate
IDC
167
6
12%
10
68
594
530
967
100
Original Cost
Debt
1508
153
200
4
204
2850
139
2989
Means of finance for fixed assets
Step 7
Debt to Equity
Ratio
Land
Building
Plant and
Machinery
IT
Furniture and
Fixture
58
3
Equity
Original
Amount
IDC
83.33
10.00
93.33
Step 10
Miscel Exp
Original
IDC
250
Step 11
Debt
Equity
Fixed Asset
Total
10
260
Misc Expenses
MMWC
250
1029
4129
Total Means of Finance
10
0
149
260
1029
4278
Debt
Equity
2753
1525
4278
10000
0
10000
0
10000
0
100000
100000
10000
0
Capacity
Utilisation (%)
50%
75%
80%
85%
85%
85%
Production (
Unit )
50000
75000
80000
85000
85000
85000
Sales ( no of
units )
45000
77000
79000
84500
84500
84500
69
18000
18000
19500
21000
22500
22500
8100
13860
15405
17745
19013
19013
Step2 :
Estimate the consumption
Qty of steel
required for
Per unit of
Production
0.5
0.5
0.5
0.55
0.55
0.55
Total QTY of
steel required
( MT)
25000
37500
40000
46750
46750
46750
28000
28000
30000
30000
32000
32000
Consumption
of Raw
Material ( Rs
lacs )
7000
10500
12000
14025
14960
14960
Step 3 :
10
10
12
12
12
12
Total Unit of
electricity
required for
production
50000
0
75000
0
96000
0
102000
0
102000
0
1E+06
13
13
14.3
14.3
15.73
15.73
Total Cost of
Electricity ( Rs
lacs )
65
97.5
137.28
145.86
160.446
160.45
80
100
100
18
20
20
Step 4
Step 5
65
75
55
12
70
15
15
Step 6
Estimate Depreciation
Depreciation
Step 7
WIP
Step 8
Closing WIP
Step 9
COP
Step 10
Opening
Stock FG
Step 11
Closing FG
Step 12
Cost of Sales
Step 13
178
178
208
241
257
301
185
208
Estimate the COP
7214 11103 12460
Estimate the Opening stock of FG
241
257
257
14448
15403
15418
1043
1192
1276
1192
1276
1284
6183
11031 12520
14300
Estimate the Raw Material and Receivable
15318
15411
1031
1103
Estimate the Closing stock of FG
1031
1103
1043
Estimate the Cost of Sales
7000
2
10500
1.5
12000
1.3
14025
1.2
14960
1.1
14960
1.1
Raw Material
in Rs lacs
Sales
HL
1167
8100
2
1313
13860
1.5
1300
15405
1
1403
17745
1
1371
19013
1
1371
19013
1
1479
1584
1584
1403
241
1192
1479
4314
1371
257
1276
1584
4489
1371
257
1284
1584
4497
6%
5%
5%
5%
269
303
230
Estimate Total Current Asset
216
224
225
4713
4722
Step 14
RM
WIP
FG
Receivable
Step 15
% of
Inventory and
Receivable
OCA in Rs
Lacs
Step 16
Total Current
Asset
212
Consumption
HL
Receivable in
Rs lacs
Step 17
382
310
255
Estimate the Opening WIP
0
301
185
Estimate the Closing WIP
1350
1733
1284
Determine RM, WIP, FG and Receivable
1167
1313
1300
301
185
208
1031
1103
1043
1350
1733
1284
3848
4333
3835
Estimate OCA
7%
7%
4636
4065
4529
4117
Determination of Margin Money for Working Capital
71
Margin
Money for
working
capital
1029
1159
1016
1132
1178
1180
Step 2
Step 3
Total
Current
Asset
Total OCL
Total WCG
MMWC
BBWC
Purchase
8167
10646
11988
14128
14929
14960
Consumptio
n
7000
10500
12000
14025
14960
14960
Closing stock
of RM
1167
1313
1300
1403
1371
1371
Opening
1167
stock of RM
0
HL
1
0.5
Creditor
681
444
Calculation of Working Capital
1313
0.5
499
1300
0.4
471
1403
0.35
435
1371
0.35
436
4065
499
3565
1016
2549
4529
471
4058
1132
2926
4713
435
4278
1178
3100
4722
436
4285
1180
3105
4117
681
3437
1029
2407
4636
444
4193
1159
3034
2753
2202
1652
1101
551
551
551
551
551
551
2202
1652
1101
551
2478
1927
1376
826
275
12%
12%
12%
12%
12%
99
33
2926
11%
322
3100
11%
341
297
231
165
Calculation of Interest of Working Capital Finance from Bank
2407
11%
265
72
3034
11%
334
2549
11%
280
3105
11%
342
Amount
Sales
4
17745
5
19013
Total
8100
13860
15405
17745
19013
Consumption
Power and
Fuel
Salary and
wages
OME
Depreciation
7000
10500
12000
14025
14960
65
97.5
137.28
145.86
160.446
55
12
382
65
15
310
75
15
255
80
18
212
100
20
178
Opening WIP
Closing WIP
Cost of
Production
Opening FG
Closing FG
Cost of Sales
Selling and
Distribution
Interest
Sub total
Misc Exp
write off
Sub total
Profit Before
Tax
Tax
0
301
301
185
185
208
208
241
241
257
7214
0
1031
6183
11103
1031
1103
11031
12460
1103
1043
12520
14448
1043
1192
14300
15403
1192
1276
15318
810
562
7555
1109
565
12705
1078
446
14044
1065
421
15786
951
374
16642
26
7581
26
12731
26
14070
26
15812
26
16668
519
156
1129
339
1335
401
1933
580
2344
703
Expenses
73
Profit After
Tax
363
791
935
Final
Fixed
Asset Depreciation
Cost Rate ( %)
594
0%
530
10%
1508
153
204
0
53
0
48
0
43
1353
0
39
0
35
1641
18.10%
37
30
25
20
17
PAT
Depreciation
Amortisation
Increase in TL
Increase in
Equity
Increase in
BBWC
Increase in
Creditor
260
10%
26
26
26
26
26
4
1353
212
26
5
1641
178
26
626
-485
377
173
-237
56
-29
-35
74
Total
1161
698
1565
1730
1851
551
551
551
551
551
146
-13
103
-31
-116
23
33
16
73
-60
148
85
383
-449
195
106
34
-73
-14
Increase in
Fixed Asset
Repayment of
Term Loan
Increase in RM
Increase in
WIP
Increase in FG
Increase in
Receivable
Increase in
OCA
Total
1070
-21
1015
735
559
Cash
surplus/deficit
91
719
549
995
1292
91
810
1360
2355
91
810
1360
2355
3647
Opening Cash
&Bank Balance
Closing Cash
& Bank
Balance
Equity
Reserves
Term Loan
BBWC
Creditor
2753
2407
681
Balance Sheet
1
2
1525
1525
363
1154
2202
1652
3034
2549
444
499
Total
7366
7568
0
1525
7379
75
3
1525
2088
1101
2926
471
4
1525
3442
551
3100
435
5
1525
5083
0
3105
436
8112
9053
10149
Fixed Asset
Accumulated
Depreciation
Net Fixed
Asset
Misc Exp
RM
WIP
FG
Receivable
OCA
C&B
Total
2989
2989
2989
2989
2989
2989
382
693
948
1161
1339
2989
260
1167
301
1031
1350
269
2607
234
1313
185
1103
1733
303
91
2296
208
1300
208
1043
1284
230
810
2041
182
1403
241
1192
1479
216
1360
1828
156
1371
257
1276
1584
224
2355
1650
130
1371
257
1284
1584
225
3647
7366
7568
7379
8112
9053
10149
DSCR Calculation
1
363
382
26
DSCR Calculation
2
791
310
26
3
935
255
26
4
1353
212
26
5
1641
178
26
PAT
D
Amortisation
Interest on
TL
Subtotal
MMWC
Total
297
1069
130
939
231
1358
-143
1501
165
1381
116
1265
99
1691
46
1645
33
1878
2
1876
Term Loan
P
I
DSCR
848
551
297
1.11
782
551
231
1.92
716
551
165
1.77
650
551
99
2.53
584
551
33
3.21
0.75
-350
90%
1
-1178
86%
2
939
75%
IRR Calculation :
0
-550
100%
0.25
-500
96%
0.5
-1700
93%
76
3
1501
64%
4
1265
56%
5
1645
48%
6
1876
42%
-550
IRR
-482
15.77%
-1580
-314
-1018
700
967
704
8.40%
17%
0.64
0.36
5.40%
6.06%
11.47%
2753
1525
4278
12%
30%
77
791
779