CASE STUDY

CASE STUDY

M/s Milk Pack Ltd. intends to develop a Milk Processing Plant at Islamabad. The management has requested the financial analysis to undertake evaluation of the project. The salient features of the project are as follows:-

1. Capital Cost

(Million Rs.)

Local

ForeignTotal

100

150

250

2.Annual Phasing of Capital Cost(Million Rs.)

Year-IYear-IITotal

-Local Currency 60

40

100

-Foreign Exchange 40

110

150

-Total

100

150

250

3.Debt Equity Ratio

70:30

4.Interest Rate on Loan

20%

5.Return on Equity

20%

6.Operating & Maintenance Cost

Rs.80 million

7.Capacity

20,000 litres per day

8.Working Days

320 days per annum

9.Capacity Utilization

100 % from 1st year

10.Life of the project

10 years.

11.Salvage Value (10% of capital cost)Rs.25 million.

12.Domestic Selling Price

Rs.25 per leter

13.Taxes & Duties

10% of capital & Operating cost

14.Imported Price of Milk

Rs.28

The management has requested you to advise on the financial & economic viability of the project. You may work out the following indicators:

FINANCIAL ANALYSIS:

1.Calculate weighted cost of capital

2. Net Present Value

3. Benefit Cost Ratio

4. Internal Financial Rate of Return.

5. Cost/Income per Litre.

ECONOMIC ANALYSIS (Opportunity Cost of Capital =20%)

1. Net Present Value

2. Benefit Cost Ratio

3. Internal Economic Rate of Return.

CASE STUDY

In an agricultural development scheme the project was first scheduled for 1 to 25 years and the cash flow is as follows:-

Years

Cash Flow

(Million Rs.)

1

-920

2

-569

3

-556

4

-492

5

-360

6

-164

7

+ 30

8

+372

9

+563

10

+650

11

+710

12

+571

13

+781

14-25

+884

Based on the above cash flow the IRR was calculated to be 13%.

If the project is extended to another 25 years with a cash flow from 26 to 50 years is calculated to Rs.884 million. Is there any change in the IRR?