Question

Information for a proposed greenfield project is provided in the table. The discounted cash flow for the fourth year is Rs \(\underline{\hspace{1cm}}\) crores (rounded off to one decimal place).

Hint:

Double-declining depreciation increases early depreciation, reducing taxes, which increases discounted cash flow in early operating years.

Answer 1

Correct Answer: 52 - 54

"fourth year" means the fourth year from project initiation (Year 4).

This would be operational year 2 (since plant starts in year 2).

For Year 4 (operational year 2):

• Depreciation: $d_2 = 51.02$ crores

$$\text{EBIT} = 120 - 30 - 51.02 = 38.98 \text{ crores}$$ $$\text{Tax} = 0.30 \times 38.98 = 11.69 \text{ crores}$$ $$\text{Net Income} = 38.98 - 11.69 = 27.29 \text{ crores}$$ $$\text{Cash Flow} = 27.29 + 51.02 = 78.31 \text{ crores}$$

$$\text{Discounted Cash Flow} = \frac{78.31}{(1.10)^4} = \frac{78.31}{1.4641} = 53.5 \text{ crores}$$

Answer

The discounted cash flow for the fourth year is 53.5 crores (rounded to one decimal place).