The subject is Project management Consider Cement Project with the following inf

Question

The subject is Project management Consider Cement Project with the following information, UThe initial investment outlay on the project is birr 100 million which is consists of 80 million plant and machinery and the remaining 20million is on working capital UThe entire outlay will be made at the beginning of the project UThe project will be financed with 50 million of equity capital and the reaming 50 million of debt financing O The life of the project is expected to be 5 years 0 At the end of the fetch a net salvage value of birr 30 million where as working capital liquidated at its book value D The project is expected to increase the revenue of the firm by 120 m per year D The increase in cost on account of the project is expected to be 80 m per year (this includes all costs items other than depreciation and tax). 5th years a fixed asset will O Plant and machinery will be depreciated at the rate of 25% per year as dFirst year DSecond year UThird year DFourth birr DFifth year 20m 15m 11.25m 8.44m 6.33m « If the effective tax percent will be 30% and interest rate is 10% , given the above information calculate the yearly cash flow of the project shown below

Explanation / Answer

Calculation of Yearly cash flow of the project -

Two possibilities arise in this question first one assumes 10% interest rate is discounting factor -

The second possibility is assumed 10% interest rate on the debt will be paid each year -

Note - salvage value has been shown in answer after tax which has calculated as below -

total cost of machine = 80 million

less dep. claimed     = 60 million

cost to be recovered = 20 million

salvage value = 30 million so taxable amt. 30 - 20 = 10 million

Please check with your answer and let me know.

In case of further clarification required please comment.

Year 0 1 2 3 4 5 Initial investment in the machine -80 Initial working capital -20 Revenue 120 240 360 480 600 less Cost 80 160 240 320 400 less Depreciation 20 15 11.25 8.44 6.33 EBIT 20 65 108.75 151.56 193.67 less Tax @ 30% 6 19.5 32.625 45.468 58.101 EBT 14 45.5 76.125 106.092 135.569 add receovered working capital 20 add salvage value after tax 10*(1-0.30) 7 add Depreciation 20 15 11.25 8.44 6.33 Cash flow after tax -100 34 60.5 87.375 114.532 168.899 discounting @ 10% 1 0.909091 0.826446 0.751315 0.683013 0.620921 Yearly cash flow -100.0 30.9 50.0 65.6 78.2 104.9

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