Mr. Ali wants to establish a business of manufacturing plastic
PVC pipes. He estimates a
start-up cost of business with machinery of worth Rs. 20
million. He further projects that
the revenue (before tax and depreciation) from the business will
be Rs. 5 million for the first
year and it will keep on growing at a rate of 5% annually up to
year 6.
Some other information regarding the project is as
follows:
The machinery is fully depreciated under the straight line
method till the end of year
6.
Cost of capital is 10% while the tax rate is 30%.
As per an estimate, the machinery dismantling and the site
restoration would require
an outlay of Rs. 2 million; while the machinery would not be
able to fetch any sale
price.
Being a financial consultant of Mr. Ali, you have to conduct a
feasibility analysis for his
project. You have to suggest Mr. Ali about the viability of the
project after performing
different Capital Budgeting techniques.
Requirement:
Keeping your task into consideration, provide answers to the
following:
1. Calculate projected net cash flows for 6 years. (10
Marks)
2. Evaluate the project by using the following capital budgeting
techniques:
a. Net Present Value (5 Marks)
b. Profitability Index (3 Marks)
3. Would you recommend Mr. Ali to start his business based upon
your analysis?
(02 Marks)
- The Case Mr Ali Wants To Establish A Business Of Manufacturing Plastic Pvc Pipes He Estimates A Start Up Cost Of Busi 1 (187.6 KiB) Viewed 53 times