QUESTION-1 Modern Transport Limited (MTL) is considering (BCS). As per the proposal, MTL would provide branded ca conditions: Pyar (BCS would pay rent of Rs. 1.8 million per annum per car 24-hour basis. The payment would be made at the end of year ; (ii) Cost of the drivers and maintenance cost of the ear would initially be paid by BCS but would be adjusted against car rentals payable to MTL at the end of each year (iii), MTL would provide a smart mobile to cach driver an investment proposal from Burraq Cab Services s to BCS under the following terms ang The cars would operate on a MT mated the following costs for deployment of a car with BCS: ___ De Rupees — Ea Kar purchase price F-3,000,000 fistimated useful life and residual val .: of the Rs. 0.75 million respectively [Car registration fee F-35900 Jone-time payment on registration of the car Mobile phone price per set “15,000 {To be charged-off in the year of purchase. | insurance premium - ~~50,000 {To be paid at the beginning of each year. It would reduce by Rs. 5,000 each year due to decrease in IWDV of the car. | |Annual salaries per driver 300,000 |Would work in 8-hour shifts. fpaneal maintenance cost 60,000 [Due to ageing of cars, cost would increase by 10% ach year. 1 Additional information: © The car would be depreciated at the rate of 25% under the reducing balance method. Tax depreciation is to be calculated on the same basis. * Applicable tax rate is 30% and tax is payable in the year in which the liability arises. * Inflation is estimated at 5% per annum. ¢ MTL's cost of capital is 12% per annum. Required: Advise whether MTL should accept BCS’s proposal. (16) (Spring 2017, 8) QUESTION-2 Tropical Juices (TJ) is planning to expand its production capacity by installing a plant in a building which is owned by TJ but has been rented out at Rs. 6 million per annum. The relevant details are as under: (i) The cost of the building is Rs. 40 million and itis depreciated at 5% per annum. (ii) The rent is expected to increase by 5% per annum. iii) Cost of the plant and its installation is estimated at Rs. 60 million. TJ depreciates plant and machinery at 25% per annum on a straight line basis. Residual value of the plant after four years is estimated at 10% of cost. (iv) Additional working capital of Rs. 25 million would be required on commencement of production. (©) _ Selling price of the juices would be Rs. 350 per litre. Sales quantity is projected as under: Year 1 | Year? | Year3 | Year4 | Litres 250,000_| 300,000 [320,000 |” 290,000 _| (vi) Variable cost would be Rs. 180 per litre, Fixed cost is estimated at Rs. 100 per litre based 0" normal capacity of 280,000 litres. Fixed cost includes yearly depreci million. Rate of inflation is estimated at 5% per annum and would affect the revenues as well as expenses- (viii) TJ's cost of capital is 15%. NPV = _ Scanned with CamScannerQUESTION-10 : : ‘A company is considering an investment in an item of equipment costing Rs. 150,000. The equipment A ad be used 10 make a product, The selling price of the product at today’s prices would be RS. 10 per Tit, and the variable cost per unit (all cash costs) would be Rs. 6. ‘The project would have a four-year life, and sales are expected to be: Year Units of sale 1 20,000 2 40,000 3 60,000 4 20,000 e sold at the end of Year 4 for Rs. 10,000. There At today’s prices, it is expected that the equipment will b h year as a result of the project, at today’s price will be additional fixed cash overheads of Rs. 50,000 eacl levels. ‘The company expects prices and costs to increase due to inflation at the following annual rates: Item Annual inflation rate Sales 5% Variable costs 8% Fixed costs 8% 6% Equipment disposal value The company’s money cost of capital is 12%. Required: Calculate the NPV of the project. Scanned with CamScannerSOLUTIONS Modern Transport Limited Evaluation of BRC’s proposal vero Yers. Yer? Yer3. Yearg es Cash inflows/(outflows)}- ------Ru) — Revenue 1,800,000x1.05) _ 1,800,000 1,890,000 1,984,500 2,083,725 nies of drivers anes 1.05) = (900,000) (945,000) (992,250) (1,041,863) Maintenance cost (60,000%1.05%1.10) = (60,000) (69,300) (80,042) (92,448) Insurance premium —_(50,000-5,000) (50,000) (45,000) (40,000) (35. 000) - Taxallowance (W-1) 1558,50)_ HSS) OMIT) _(UD19) Taxahle Profit 736,250 386,036 805,899 Taxation 30% - (70,875) aera) (175,811) (241,770) Car's cost (2,000,000) - a : - Registration charges (35,000) - a - : Initial investment A (2,035,000) - - - - Cost of thre> mobile phones(15,000%3) (45,000) - - - - Tax allowance add back 558,750 386,563 291,172 143,515 Residual value of car 750,000 Net cash flows (130,000) 724,125 700,959 701,397 ‘1,457,644 Discount factor @ 12% 1.0000 0.8929__—0.7972_——*0.7118 0.6355 Bea "G13,000) 646 STS, 805 499,254 96 Net present value 500,963 Conclusion: The net present value is positive; therefore, the proposal should be accepted. Year 1 Year 2 Year3 Year 4 = Rupees——————- ‘W-1: Adjustment for tax liability Accounting/tax depreciation (Ax25%) 508,750 381,563 286,172 108,515 Mobiles' cost charged off 45,000 - - - Insurance premium allowable for tax-next year 5,000 5,000 5,000 35,000 558,750 386,563 291,172 143,515 WL Rs. To 7 2,035,000 T, Depreciation (2,035,000 x 25%) _ (508,750) . 1,526,250 Tz Depreciation (1,526,000 x 25%) _ (381,563) _ 1,144,687 Ts Depreciation (1,144,687 x 25%) (286,172) 85: Ts Depreciation (Bal. fig) 10815) . 750,000 Scanned with CamScannerInvestment appraisal - Expansion of production facility Year 0 Year 1 Year2 Year 3 Year4 Cash inflow s/(outflows) Rs. Loss of opportunity (Bldg, rent) = (6,300,000) (6,615,000) (6,945,750) (7,293,038) Cost of plant and its installation (60,000,000) 6,000,000 Working capital (25,000,000) . : - 25,000,000 ae 91,875,000 115,762,500 129,654,000 123,373,884 Variable cost (47,250,000) (59,535,000) (66,679,200) (63,449,426) Fixed cost (12,600,000) _ (13,230,000) _(13,891,500)__ (14,586,075) Net cash flows (85,000,000) 25,725,000 36,382,500 42,137,550 69,045,345 Present value factor at 15% en 0.870 0.756 0.658 0.572 Present value at 15% (85,000,000) 22,380,750 27,505,170__ 27,726,508 39,493,937 ‘Net present value (NPY) at 15% 32,106,36! Conclusion: The expansion of production facility is generating positive NPV at TJs cost of capital o 15%, Therefore, itis feasible for TJ to expand the production facility. Scanned with CamScannerwerig “o" Sales Less: Variable Cost Less: Fixed Cost Initial investment Residual Value ‘Net Cash Flow Discount Factor @12% PV NPV Rs. 97,809 Project should be accepted, as NPV is Positive, 1 T2 73 1% 210,000 441,000 694,575 243,101 (129,600) (279,936) (453,496) (163,259) (54,000) (58,320) (62,986) (68,025) (150,000) 12,625 (150,000) 26,400 102,744 178,093 724,442 1 0.893, 0.797 0.712 0.636 (150,000) 23,575 81,887 126,802 15,545 Scanned with CamScanner