206 Corporate Finance
Table contd.
Expenses 645,000.(@ 430 per MT)
Depreciation 96,420
Overheads 100,000
Interest @18 percent^2 1,239,536
PBT 35,463.40
Working capital is calculated under the following assumptions:
7 days of raw material, 15 days of packing material, and 3 days of finished goods.
The level of current assets and current liabilities for the 125 gm and 250 gm categories is:125 g 250 gCurrent assets (in Rs) 2,4321,750 2,3854,100
Current liabilities (in Rs) 2855,500 1,2623,000
Net working capital (in Rs) 1,1466,250 1,1231,100
One might calculate the return on investment for the plant. It works out to 31 percent. As mentioned in an
earlier chapter, ROI is a single period measure. It does not allow the decision-maker to draw meaningful
inferences. Assuming that the revenue and expenses grow at some rate (or estimate explicitly at forecasted
prices), if we calculate working capital as a percentage of revenues (or assume that it remains constant) we
can calculate the NPV of the plant by finding the PV of free cash flows and subtracting the initial investment.
The infrastructure required for the manufacture of 1,500 MT and 2,000 MT are the same, which suggests
that DIL would have 500 MT of spare capacity. This spare capacity could be provided to HLL. HLL pays
DIL a processing charge of Rs 1,125 per MT. So the NPV calculated earlier would be understated, the NPV
of this investment should be added to it.
Revenue @ Rs 1,125 for 500 MT Rs 562,500
Less: Variable cost @ Rs 430 Rs 215,000
Less: Interest on additional working cap Rs 55,902.77
Profit Rs 3,499,166
Total profit = Profit from SWC operations + Profit from HLL operations
= Rs 425,560 + Rs 3,499,166 = Rs 3,924,726The return on investment goes up to 51 percent.B. 500 MT Powder Plant to Cater to a SWC Indent
SWC pays a processing charge of Rs 450 per MT. The powder plant was expected to be constructed in the
existing Ambattur works because of which additional land and building was not required. The executives of
DIL indeed did not consider the opportunity cost of using existing resources. This will obviously inflate
NPV. The break up of outlay is:
(^2) As mentioned earlier, different interest rates are applicable to different components depending on the source of finance.
One may explicitly calculate interest, as I have done, and calculate PBT/PAT.