CAN ANYONE HELP ME????????
Q) X Ltd. an existing profit-making company, is planning to introduce a new product with a projected life of 8 years. Initial equipment cost will be Rs. 120 lakhs and additional equipment costing Rs. 10 lakhs will be needed at the beginning of third year. At the end of the 8 years, the original equipment will have resale value equivalent to the cost of removal, but the additional equipment would be sold for Rs. 1 lakh. Working capital of Rs. 15 lakhs will be needed. The 100% capacity of the plant is of 4,00,000 units per annum, but the production and sales-volume expected are as under:
Year Capacity in percentage
1...........................20 %
2...........................30 %
3-5 .......................75 %
6-8........................50 %
A sale price of Rs. 100 per unit with a profit volume ratio of 60% is likely to be obtained. Fixed Operating Cash Cost are likely to be Rs. 16 lakhs per annum. In addition to this the advertisement expenditure will have to be incurred as under:
Year…………………………………………………..........1…………2………3-5………6-8
Expenditure in Rs. lakhs each year.........30………..15……..10………..4
The company is subjected to 50% tax, straight-line method of depreciation, (permissible for tax purposes also) and taking 12% as appropriate after tax cost of Capital, should the project
be accepted? (May 2002)
Answer (In this problem first of all we have to calculate year wise cash inflow statement, then NPV. My confusion is in the 1st year cash inflow statement)
Calculation of Cash Inflows:(As per IPCC FM practice manual, Page No 6.16)
Years .................................1.................2.................3-5.........................6-8
Sales(units)...................80,000..........1,20,000........3,00,000..........2,00,000
.........................................Rs..................Rs......................Rs...................Rs.
Contribution Rs. 60 pu.....48,00,000.....72,00,000....1,80,00,000........1,20,00,000
Fixed cost ….................(16,00,000)....(16,00,000)...(16,00,000.......(16,00,000)
Advertisement............(30,00,000)....(15,00,000).....(10,00,000).......(4,00,000)
Depreciation ..............(15,00,000)....(15,00, 000)....(16,50,000).....(16,50,000)
Profit I(loss) ..............(13,00,000)......26,00,000....1,37,50,000.........83,50,000
Tax @ 50% ........................Nil.............(13.00.000).....(68.75.000)......(41.75.000)
Profitl(Loss) after tax..(13,00,000).....13,00,000......68,75,000.........41,75,000
Add: Depreciation .......15,00,000......15,00,000......16,50,000.........16,50,000
Cash inflow...................2.00.000........28.00.000......85.25.000.........58.25.000
Calculation of Cash Inflows:(As per my solution)
Years ........................................1.....................2........................3-5.....................6-8
sales(units)........................80,000..............1,20,000.........3,00,000.............2,00,000 .................................................Rs................Rs...................Rs...........................Rs.
Contribution Rs. 60 pu........48,00,000.....72,00,000....1,80,00,000.......1,20,00,000
Fixed cost............................(16,00,000)....(16,00,000)...(16,00,000).......(16,00,000)
Advertisement....................(30,00,000)....(15,00,000)...(10,00,000).......(4,00,000)
Depreciation .....................(15,00,000)....(15,00, 000)...(16,50,000).....(16,50,000)
Profit I(loss) ......................(13,00,000)......26,00,000....1,37,50,000.......83,50,000
Tax @ 50% ...........................6,50,000.....(13.00.000)....(68.75.000)......(41.75.000)
Profitl(Loss) after tax .........(6,50,000)...13,00,000.........68,75,000.........41,75,000
Add: Depreciation ..............15,00,000......15,00,000......16,50,000.........16,50,000
Cash inflow............................8.50.000........28.00.000.....85.25.000.........58.25.000
I assume here that X Ltd has other taxable income. So n the year -1 as there is a negative EAT i consider tax saving of Rs 6,50,000 on negative EAT (Rs 13,00,000) which is considered as cash inflow.
OR
if there is no other income, as per income tax law X Ltd can carry forward 1st year loss of Rs. 13,00,000 to the next financial year. In that case there will be a Tax saving of Rs 6,50,000 in the 2nd year.
Am i right or wrong?? Which solution give me full marks in the Exam??? Can anyone help me ???
CAclubindia
