Zesna Case

Topics: Depreciation, Generally Accepted Accounting Principles, Income statement Pages: 2 (504 words) Published: February 27, 2011
Zesna Auto Ltd

Zesna is considering the manufacture of a new bike, Gale, for which the following information has been gathered.

Gale is expected to have a product life cycle of five years after which it will be withdrawn from the market. The sales revenue from this product is expected to be as follows: Year 1 2 3 4 5

Sales (Rs. in million) 700 850 1100 1000 800

1. The capital equipment required for manufacturing Gale costs Rs.600 million and it will be depreciated at the rate of 25 percent per year as per the WDV method for tax purposes. The expected net salvage value after 5 years is Rs.100 million. 2. The working capital requirement for the project is expected to be 10% of sales. Working capital level will be adjusted at the beginning of the year in relation to the sales for the year. At the end of five years, working capital is expected to be liquidated at par, barring an estimated loss of Rs.5 million on account of bad debt, which of course, will be tax-deductible expense. 3. The initial outlay of 600 million will be financed with 400 million of equity, 50 million preferred capital and 150million debt capital. 4. The accountant of the firm has provided the following estimates for the cost of Gale. Raw material cost : 40 percent of sales

Variable manufacturing cost : 20 percent of sales Fixed annual operating and : Rs.2.5 million maintenance costs
Variable selling expenses :15 percent of sales • The tax rate for the firm is 30 percent.

a) Estimate the post-tax incremental cash flows for the project to manufacture Gale. b) What is the NPV of the project if the cost of capital is 18 percent?

Malabar Corp.

Malabar Corporation is determining the cash flow for a project involving replacement of an old machine by a new machine. The old machine bought a few years ago has a book value of Rs.1,200,000 and...
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