Page 184 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes Area. The borrowings (principal) have to be repaid in 4 equal annual installments beginning
from the end of the 4th year.
With the help of following information and by using DCF technique you are required to suggest
the proper location of the project. Assume straight-line depreciation with no residual value.

Profit (Loss) before Depreciation and Interest

( Lakh)
Present value factor
Year FA BA
@ 15%
1 -6 -50 0.87
2 34 -20 0.76
3 54 10 0.66
4 74 20 0.57
5 108 45 0.5
6 142 100 0.43
7 156 155 0.38
8 230 190 0.33
9 330 230 0.28
10 430 330 0.25

Solution: Forward Area:

Profit Profit Cash Discount
before after inflow Cash Net
Year Depre. Interest Tax PAT PV Value of
Int.& Depre. = PAT+ outflow cash
Depre. & Int. Depre cash flow
0 100 –100 1 –100
1 –6 30 24 –60 –60 –30 –30 .87 –26.1
2 34 30 24 –20 –20 10 10 .76 7.6
3 54 30 24 30 30 .66 19.8
4 74 30 24 20 20 50 50 .57
5 108 30 18 60 60 90 50 40 .50 20
6 142 30 12 100 50 50 80 50 30 .43 12.9
7 156 30 6 120 60 60 90 50 40 .38 15.2
8 230 30 200 100 100 130 130 .33 42.6
9 330 30 300 150 150 180 180 .28 50.4
10 430 30 400 200 200 230 230 .25 57.5
100

Notes: Year 1 and Year 2 loss of 60 and 20 respectively and Year 4 and 5 loss adjusted against the
years profit to the extent of 20– and 60 respectively.

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