0 1 2 3 4 5 6 7

IO
Plant 150
W/C 50

Revenue 250 250 250 250 250 250 250

Less: COGS 100 100 100 100 100 100 100
EBITDA 150 150 150 150 150 150 150
-Depreciation 37.50 28.13 21.09 15.82 11.87 8.90 6.67
EBIT 112.50 121.88 128.91 134.18 138.13 141.10 143.33
EBIT(1-t) 78.75 85.31 90.23 93.93 96.69 98.77 100.33
Add: Dep 37.50 28.13 21.09 15.82 11.87 8.90 6.67
Add: Fixed Assets Savaged 48.00
Add: Working Capital Salvaged 50.00
Less: Capital Gains on FA 2.80
CFAT -200 116.25 113.44 111.33 109.75 108.56 107.67 202.20
IRR 55%

Opening BV 150.00 112.50 84.38 63.28 47.46 35.60 26.70

Less: Depreciation 37.50 28.13 21.09 15.82 11.87 8.90 6.67
Closing BV 112.50 84.38 63.28 47.46 35.60 26.70 20.02
 0 1 2 3 4 5 6 7
Capital Equipment 120 120
Working Capital 20 20
Total Initial Investment 140
Sales 80.0 120.0 160.0 200.0 160.0 120.0 80.0
Raw Material 30% 24.0 36.0 48.0 60.0 48.0 36.0 24.0
Variable Mfg Cost 10% 8.0 12.0 16.0 20.0 16.0 12.0 8.0
Fxd A Op & Maint Cost 10.0 10.0 10.0 10.0 10.0 10.0 10.0
Variable Selling Expenses 10% 8.0 12.0 16.0 20.0 16.0 12.0 8.0
Incremental Overhead Allocation
5% 4.0 6.0 8.0 10.0 8.0 6.0 4.0
EBITDA 26.0 44.0 62.0 80.0 62.0 44.0 26.0
-Depreciation (see schedule below) 30.0 22.5 16.9 12.7 9.5 7.1 5.3
EBIT (4.0) 21.5 45.1 67.3 52.5 36.9 20.7
EBIT(1-t) 30% (2.8) 15.1 31.6 47.1 36.8 25.8 14.5
Add: Depreciation 30.0 22.5 16.9 12.7 9.5 7.1 5.3
Less: Incremental Investment in Non Cash W/C 10 10 10 -10 -10 -10 -16
Add: Fixed Assets Salvaged 25
Add: Tax Shield on Working Capital Loss 1.2
Less: Capital Gains Tax on Fixed Assets
10% 0.9
Less: Product Cannabilization 7 7 7 7 7 7 7
Cash Flow after tax -140 10.2 20.6 31.5 62.8 49.2 35.9 54.1
Future Value interest factor 1 1.150 1.3225 1.5209 1.7490 2.0114 2.3131 2.6600
Discounted Cash Flow -140 8.87 15.54 20.69 35.90 24.48 15.54 20.34
Net Present Value 1.36
Internal Rate of Return 15.26%
 1 2 3 4 5 6 7
Opening Book Value 120 90.0 67.5 50.6 38.0 28.5 21.4
Less: Depreciation 25% 30 22.5 16.9 12.7 9.5 7.1 5.3
Closing Book Value 90 67.5 50.6 38.0 28.5 21.4 16.0
0 1 2 3 4 5 6 7
Working Capital 25% 20 30 40 50 40 30 20
Incremental Investment in Working Capital 10 10 10 -10 -10 -10

Key Points:
Reinvestment in Working Capital
Salvage of Working Capital and Tax Shield
Sale of Equipment at a Profit and consequent Tax treatment
Product Cannabilization [Side Cost]
Initial Investment [Every Rupee that goes out because we said yes to this project]
 Cost
Long Equity { Equity 100
Term
Explicit Cost Funds { 100 Term Loan 15% 200
Total Funds { Funds { Current
300 Short Term Loan 18% 100
Liabilitie
400 Trade Credit 50
s{
450 450
1 2 3 4 5 6
Revenues 500.0 500.0 500.0 500.0 500.0 500.0
Less: Op C 320.0 320.0 320.0 320.0 320.0 320.0
EBITDA 180.0 180.0 180.0 180.0 180.0 180.0
Less: Dep 83.3 55.5 37.0 24.7 16.5 11.0
EBIT 96.8 124.5 143.0 155.3 163.5 169.0
Interest
Working Cap 18.0 18.0 18.0 18.0 18.0 18.0
Term Loan 30.0 28.5 22.5 16.5 10.5 4.5
EBT 48.8 78.0 102.5 120.8 135.0 146.5
Less: Tax 14.6 23.4 30.7 36.2 40.5 44.0
EAT 34.1 54.6 71.7 84.6 94.5 102.6

Cash Inflow 500.0 500.0 500.0 500.0 500.0 500.0

Salvage of Working Capital 200.0
Salvage Value of Assets 80.0
Total Cash Inflow 500.0 500.0 500.0 500.0 500.0 780.0
Cash Outflow
COGS 320.0 320.0 320.0 320.0 320.0 320.0
Interest 48.0 46.5 40.5 34.5 28.5 22.5
Tax 14.6 23.4 30.7 36.2 40.5 44.0
Principal Repaid - 40 40 40 40 40
Term Loan Repaid 100
Trade Credit Repaid 50.0
Total Cash Outflow 382.6 429.9 431.2 430.7 429.0 576.5
FCFE Surplus 117.4 70.1 68.8 69.3 71.0 203.5
Add: Opening Cash - 117.4 187.5 256.2 325.5 396.5
Closing Cash 117.4 187.5 256.2 325.5 396.5 600.0

EBIT(1-t) 67.73 87.13 100.07 108.71 114.47 118.31

Add: Dep 83.3 55.5 37.0 24.7 16.5 11.0
Less: WC
Leess: FA
FCFF 150.98 142.66 137.11 133.41 130.94 129.30

Balance Sheet 1 2 3 4 5 6
Equity 100 134 189 260 345 440 600
Term Loan 200 200 160 120 80 40 -
Short Term Loan 100 100 100 100 100 100 -
Trade Credit 50 50 50 50 50 50 -
Total Capital 450 484 499 530 575 630 600

Fixed Assets Gross 250 250 250 250 250 250 250
Less: Depreciation - 83 139 176 201 217 228
Net block of FA 250 167 111 74 49 33 -
Working Capital 200 200 200 200 200 200 -
Cash - 117 187 256 326 396 600
Net Assets 450 484 499 530 575 630 600
- - - - - - -

Opening BV 250.00 166.75 111.22 74.19 49.48 33.00

Less: Dep 83.25 55.53 37.04 24.70 16.48 10.99
Closing BV 166.75 111.22 74.19 49.48 33.00 22.01
80
Capital Gain 57.99
Term Loan 200
i 0.08
n 10
12
1 st year 2nd year repaid 3rd year repaid 4th year repaid
Instalment No 1 2 3 4 5
Time Month No 18 24 30 36 42
Semi Annual Installment 20 20 20 20 20

Balance O/S 200 180 160 140 120 100

Interest 15 13.5 12 10.5 9
30 28.5 22.5 16.5
Fixed Assets 250
Current Assets 200

450
4th year repaid 5th year repaid 6th year repaid
6 7 8 9 10
48 54 60 66 72
20 20 20 20 20

80 60 40 20 0
7.5 6 4.5 3 1.5
16.5 10.5 4.5
You are examining the optimum capital structure for your firm and have collected the following information.
Your firm currently does not employ and debt
Rf 7% Tax 34%
Rm 12%
Debt Ratio Bond Rating KD β ke kd WACC MVE MVD MVF
0% AAA 7.25% 1.2 200 0 200
10% AA 8.25% 180 20 200
20% A 9.25% 160 40 200
30% BBB 10.75% 140 60 200
40% BB 11.75% 120 80 200
50% B 12.75% 100 100 200
60% CCC 14% 80 120 200
70% CC 15% 60 140 200
80% C 16% 40 160 200
90% D 18% 20 180 200
 14% 24% 34% 32.71%
0 Initial Outflow -150
1 50 43.86 40.32 37.31 37.68
2 60 46.17 39.02 33.42 34.07
3 70 47.25 36.71 29.09 29.95
4 80 47.37 33.84 24.81 25.79
5 90 46.74 30.70 20.83 21.86
Sum of DCF 231.39 180.60 145.47 149.35
Less: 150 150.00 150.00 150.00
NPV 81.39 30.60 (4.53) (0.65)

Lower Higher
24% 34%
Sum of DCF 180.60 145.47
IO 150

IRR= Lower Rate plus Sum of the DCF at the Lower Rate-IO High-Low
Sum of DCF at Lower-Sum of DCF at Higher

24% plus 30.60 multiplied 10%

35.13

32.71% 24% plus 8.71%

-200 45% 65% 45% 65%

1 116 80.17 70.45 239.00 172.00
2 113 53.95 41.67 200
3 111 36.52 24.78
4 110 24.83 14.81
5 109 16.94 8.88 45% plus 39.00 multiplied 20%
6 108 11.58 5.34 67.00
7 202 15.00 6.07
239.00 172.00 45% 11.64%
200 200.00
39.00 (28.00) 56.64%