Page 186 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes WDV for tax purposes. The company follows Accounting Standard AS - 11 for accounting changes
in Foreign Exchange Rate.
Required:
1. Compare the total outflow of cash under the above options.

2. Using discounted cash flow technique, evaluate the above offers.
3. Is there any risk, which the company should take care of?
4. In case TSL has large volume of exports would your advice be different.

The following discounting table may be adopted:
Years 0 1 2 3 4 5
Discounting factor 1 .921 .848 .781 .720 .663

Solution:
Option I: Loan in Rupees:
Year Repayment Interest Other Tax Net Discount Present
of Principal @ 15% expenses savings outflow factor value
0 5 1.75 3.25 1 3.25
1 100 75 26.25 148.75 0.921 137
2 100 60 21 139 0.848 117.872
3 100 45 15.75 129.25 0.781 100.944
4 100 30 10.5 119.5 0.720 86.040
5 100 15 5.25 109.75 0.663 72.764
500 225 5 80.5 649.5 517.87

Option II: As per AS 11, the foreign exchange difference arising out of loan repayment in
foreign currency is to be capitalized. Similarly, the outstanding loan balances at each year-end
have to be converted at foreign exchange rate prevailing at the end of the year and the difference
has to be capitalized.
Option III: Foreign Currency Loan

Repay. Interest Other Total Repay. Other Total
Exch. of of Int.
Year @ 6% charges amount charges payments
Rate Principal Principal
(US $ in Lakhs.) ( Lakhs)
36 0 0.140 0.140 5.04 5.04
38 1 2.8 0.840 3.640 106.4 31.92 138.32
40 2 2.8 0.672 3.472 112 26.88 138.88
42 3 2.8 0.504 3.304 117.6 21.168 138.768
44 4 2.8 0.336 3.136 123.2 14.784 137.984
46 5 2.8 0.168 2.968 128.8 7.728 136.528
14 2.520 0.140 16.660 588 102.48 5.04 695.52

Tax saving on additional depreciation on fixed assets on account of increase in loan amount at
the year-end due to foreign exchange fluctuation and repayment of loan.

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