Question

Company ABC is considering purchasing of New Packaging Machine system to improve its existing packaging process. In order to analyze the feasibility of this project the company needs the help Investment analysist to evaluate this project. In order to evaluate this proposal the company has shared following information. The project requires an initial investment of Rs.1000000 in equipment and it will be depreciated to zero on Straight line basis over 5 years. This system will generate 80,000 units each year which will produce Revenue of Rs. 1500000 each year for next 5 years. However the variable cost charged to this project is estimated as Rs. 5 per unit and fixed cost is expected to be Rs. 30000 per year. The relevant Tax Rate is 38%. Calculate the Operating Cash Flows for this company. This project will require an additional Rs.35000 to invest in Networking Capital so that company can efficiently run its daily operations. You are also supposed to calculate projected cash flows for this company. After calculating these estimated cash flows what do you think; should the company proceed for this new product if the required rate of return of this company is 16%?Being an investment analysist you are also supposed to calculate the profitability index and discounted payback period for this project. It will help the management to check how long it will take to recover their initial cost and to how much efficiently they are utilizing their resources to create wealth for the owners of company. However the current packaging process of the company is obsolete and it is expected that if company spends money to upgrade existing plant it will not be beneficial in the future. Based on past experiences the company has estimated following figures for the current process if the management update the existing plant and do not replace it with new Packaging Machine. This up gradation requires initial cost of Rs. 30000, however for next 3 years it is expected to generate following cash flows from existing machine From given information you have to calculate the MIRR for Company ABC by applying Discounting Approach. This company uses 16% required rate of return to evaluate its projects. You are also supposed to highlight different MIRR Approaches and why there is need to calculate MIRR Instead of IRR?

Answer 1