Corporate Finance

198
Corporate Finance

The correct procedure is to calculate PVs of the EAs over the least common multiple of the project lives
as in the RC.

189 × PVIFA (8 percent, 6 years) = 875

and

197 × PVIFA (10 percent, 6 years) = 857

Back to Kochi International Airport

The Kochi airport has shown the maximum progress among all airport projects with private participation. In
2002, the project costs were estimated as:

First phase Rs 160 crore ($ 45.7 million)

Second phase Rs 300 crore ($ 87.5 million)

In the first phase equity will account for Rs 64 crore; of which 26 percent is held by the government of the
state of Kerala, and the rest is held by NRIs, banks, users (airline firms) and contractors. Term loans and
short-term borrowings for working capital from banks are expected to fund the rest. The airport was formally
inaugurated on May 25, 1999.

IN CONCLUSION

In this chapter, we learnt the descriptions of the process of arriving at cash flows and discount rate. More
specifically, only after tax, incremental cash flows attributable to the project need to be considered. This is
not a trivial exercise. Assume that a company is increasing its plant capacity from 125 tons to 250 tons. Cur-
rent sales are 75 tons. Sales for the first two years are expected to be 90 tons and 120 tons respectively. Since
the increase in sales can be handled with existing capacity, one should not attribute the investment made to
upgrade the capacity to the new project although the investment is made now. Further, in many situations,
the investment itself is not made in one year at the beginning of the project. That is, the investment is not
‘initial’. If the Capital Investment is spread over, say, 3 years, the same may be deducted in the year in which
it occurs from cash flow from operations. Alternatively, the present value of capital investment may be deducted
from present value of cash inflows to arrive at NPV.

REFERENCES AND SUGGESTED READING

Beedles, William L and Maurice Joy (1997). ‘Mutually Exclusive Projects with Unequal Lives, Reinvestment Plans and
Unequal Required Rates of Return’, Financial Practice and Education, Fall.
Dorfman, R (1981). ‘The Meaning of Internal Rates of Return’, Journal of Finance, Vol. 36, No. 5.