Answer Happy

Question No: 04 The Executive Assistant (EA) to the CFO of ABC Ltd. was given the task of analyzing the value of a renovation project for Plant A. The forecasts, as provided below, was presented to the EA by the plant manager. All values are in INR million. The corporate tax rate is 25%. Year 0 1 2 3 4 5 1. Initial Investment (CAPEX) 600 2. Revenues 325 350 350 350 250 3. Variable costs 81 88 88 90 63 4. Depreciation 120 120 120 120 120 5. Fixed costs 12 12 12 12 12 6. Interest expense 17 17 17 14 14 7. Net proceeds to debt 120 8. Principal on debt which is repaid 20 100

Question No: 04 3. Variable costs 81 88 88 90 63 4. Depreciation 120 120 120 120 120 5. Fixed costs 12 12 12 12 12 6. Interest expense 17 17 17 14 14 7. Net proceeds to debt 120 8. Principal on debt which is repaid 20 100 9. Change in Operating Net Working capital 60 280 -340 Project the Free cash flow to the equity holders with the above data for all years from Year 0 to Year 5. If the cost of equity capital is 16%, what is the value to the renovation project for Plant A? Should they go ahead with the renovation? Why or Why not? There are no preferred equity holders. [10]