How to calculate sacrifice in case of restructuring

This query is : Resolved

Chaitanyaa (Querist)
Follow

25 April 2019 Sir there is sick cash credit account in our Bank. We trying to convert that into WCTL .But I do not know how to calculate sacrifice in case of converting CC into WCTL. Sir my second doubt is that the pre-restructuring rate is 12% and post restructuring rate is 10%. So while calculating PV of CC and WCTL ,which rate will be used in both.
Regards.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

09 July 2024 Converting a Cash Credit (CC) account into Working Capital Term Loan (WCTL) involves understanding the concept of sacrifice and the treatment of interest rates. Here's how you can approach these calculations:

### Calculation of Sacrifice:

The sacrifice in the context of restructuring from CC to WCTL generally refers to the reduction in interest rate or the difference in interest costs between the existing CC and the new WCTL. It's essentially the financial benefit or loss to the bank or the borrower due to the restructuring.

To calculate the sacrifice:
1. **Identify the Interest Rate Differential**: Determine the difference between the interest rates of the CC and the WCTL. In your case, the pre-restructuring rate for CC is 12% and post-restructuring rate for WCTL is 10%.

Sacrifice = (Pre-restructuring interest rate of CC) - (Post-restructuring interest rate of WCTL)

Sacrifice = 12% - 10% = 2%

2. **Calculate the Present Value (PV) Impact**: You would typically calculate the present value of cash flows under both the CC and WCTL using the respective interest rates to determine the net present value impact of restructuring.

### Treatment of Interest Rates:

- **PV of CC**: Use the pre-restructuring interest rate of 12% to discount future cash flows related to the CC.
- **PV of WCTL**: Use the post-restructuring interest rate of 10% to discount future cash flows related to the WCTL.

This approach ensures that you're accounting for the present value of cash flows under both scenarios at their respective interest rates.

### Steps to Calculate PV:

1. **Estimate Cash Flows**: Determine the expected cash flows (both inflows and outflows) under the CC and WCTL over the relevant period.

2. **Discounting**: Apply the appropriate interest rate to discount these cash flows back to their present values.

3. **Compare PVs**: Compare the present values of the cash flows under CC and WCTL to assess the impact of restructuring on the financial position.

### Conclusion:

Understanding the sacrifice and correctly applying the interest rates to calculate the present values of CC and WCTL are crucial steps in evaluating the restructuring decision. If you need detailed calculations or further assistance, feel free to provide more specifics, and I can guide you through the process.