Financial Analysis

Chapter 18 Financial Analysis

(Mahajani and Mokashi, 2005)

(All the amounts are lakhs of rupees unless specified) Total fixed capital in estment $e%t& '(uity Term loan '(uity .romoter/s contri%ution (5),) 1nstitutional participation ()0,) .u%lic issue (-!,) 2orro3ed 3orkin4 capital 2!"0#5 2&) )!"* + )2, interest pa !!-#5 500#* !!#-5 -"*#5 )"00 + )", interest pa

Term loan repayment period 5 )0 years paid half yearly in e(ual installments Moratorium period 5 2 years 6orkin4 capital repayment period 5 7 years

'(ual installment for term loan 5 )!"*8)0 5 )27#2

Also, '(ual installment for %orro3ed 3orkin4 capital 5 )"0087 5 700#5

9ear Term loan 6orkin4 capital Financial st nd ) installment 2 installment .rincipal 1nterest .rincipal 1nterest .rincipal 1nterest expenses ) 2 )!"* )!"* )"02#2 2-"#77 2-"#77 22-#5 )!"* )!"* )*-"#" 2-"#77 2-"#77 20"#0 )"00 )-!!#5 !---5#"" 25)#! )0*#!7

:oan repayed

(interests) ")2#*0 700#5 *2"#" 5!0#* 000 *)7#!

)05

Financial Analysis 7 5 0 * " ! )0 Total )0)7 )-05#" )))*#0 "0!#7 02) -*2#0 )27#2 )!-#* )0-#! )-7#)) )07#*7#52 77#* )7#! )7!0#7 )272 !!-#0 *75#2 7!0#" 27"#7 )*"#" )7! ))!#2"!#72 5!#0 2!#") 700#5 "-#!* 750#5 -)2#! 25-#-7 )!-#* )-7#) *7#5 )7#! -5")#5 *)7#! 27"#7 27"#7 27"#7 27"#7 27"#7 )27#2 -"5-#2

Depreciation schedule:
To estimate the depreciation, the preoperati e expenses and contin4encies are distri%uted amon4 other components, in their correspondin4 proportions# The initial and re ised project cost components are as follo3s#

;ost component :and and site de elopment .lant and machinery cost = >no3 ?o3 = 'n4ineerin4 2uildin4 and ci il 3orks Miscellaneous fixed assets (@eneral = ehicles) These are depreciated o er arious time periods as ;ost component ,

1nitial cost 2-"#77 )57!#" 2!"#) "!#72

<e ised cost 20!#7)*5)#--0#" )0) Aseful :ife in years

depreciation each year :and and site de elopment (A) B .lant and machinery cost = >no3 ?o3 = 70 'n4ineerin4 (2) 2uildin4 and ci il 3orks (;) Miscellaneous fixed assets (@eneral = ehicles) ($) )0 20

2#5 )0 5

)00

Financial Analysis Ctrai4ht line depreciation& (C:M) As per this method, the component is depreciated at e(ual rate o er the life of component Modified accelerated cost reco ery method& (MAM) As per this method, the component is depreciated at hi4her rates durin4 initial years and at lo3er rates durin4 later years# At any year, the depreciation rate is 4i en as
rate = 2 Ecos t accumulateddepreciationD life

The depreciation schedule is as sho3n A Year 1 2 3 4 5 6 7 8 9 10 SLM 700.5 700.5 350.3 MAM 1401 280.2 56 11.24 2.29 0.81 0.23 B SLM 33.68 33.68 33.68 33.68 33.68 33.68 33.68 33.68 33.68 33.68 MAM 67.36 53.89 43.11 34.49 25.97 22.39 17.92 14.33 11.47 9.18 C SLM 20.2 20.2 20.2 20.2 20.2 MAM 40.4 24.24 14.54 8.72 5.24 3.14 Total SLM 754.4 754.4 404.2 53.88 53.88 33.68 33.68 33.68 33.68 33.68 Total MAM 1508.8 358.34 113.65 54.45 33.5 26.34 18.15 14.33 11.47 9.18

Sales realization:
The product is cost is <s )7)08 >4 of Tocopherol Acetate The annual capacity is --00 T.A of Tocopherol Acetate Assumin4 )00, sales, Cales 5 <s 705-0 lakhs

Break Even analysis:

The follo3in4 e(uation is used to estimate %reak e en capacity

)0*

Financial Analysis CF 5 GF = F 6here, C 5 price per ton of product 5 <s )7#) lakhs F 5 %reak e en capacity G 5 aria%le cost of production per ton 5 <s )2#22 lakhs F 5 fixed cost of production 3hich includes o erheads, administrati e expenses, a era4e financial expenses 5 <s 2!"0#5 lakhs8 year Co,
X = F S V

F 5 )5"5#7 T.A 3hich is 7", of installed capacity 2reak e en capacity 5 7", installed capacity

Estimates of orkin! results:

A di idend of 20, is assumed per year Garious formulae used to calculate arious terms are as follo3s @ross profit 5 Cales H @ross cost of production Iperatin4 profit 5 @ross profit H Financial expenses H C: depreciation .rofit for tax 5 @ross profit H Financial expensesB MA depreciation ;orporate tax 5 -"#5, taxa%le profit .rofit after tax 5 @ross profit H Financial expenses H corporate tax .rofit for di idend 5 .rofit after tax H C: depreciation .rofit after di idend 5 .rofit for di idend H di idend

)0"

Financial Analysis Jet cash accruals 5 .rofit after di idend = depreciation The results for first )0 years are as follo3s

Year % capacity tili!atio" Capacity #T$A% Sale& #la'(% )ro&& co&t o* pro+ ctio" )ro&& pro*it ,i"a"cial e-pe"&e& .epreciatio" SLM .epreciatio" MAM /perati"0 pro*it $ro*it *or taCorporate ta$ro*it a*ter ta$ro*it *or +i1i+e"+ .i1i+e"+ $ro*it a*ter +i1i+e"+ 2et ca&( accr al& Year % capacity tili!atio" Capacity #T$A% Sale& #la'(% )ro&& co&t o* pro+ ctio" )ro&& pro*it ,i"a"cial e-pe"&e& .epreciatio" SLM .epreciatio" MAM /perati"0 pro*it $ro*it *or taCorporate ta$ro*it a*ter ta$ro*it *or +i1i+e"+ .i1i+e"+ $ro*it a*ter +i1i+e"+ 2et ca&( accr al&

1 2 3 4 5 75 80 85 85 90 2475 2640 2805 2805 2970 34897.5 37224 39550.5 39550.5 41877 30249.5 32266.1 34282.7 34282.7 36299.4 4648 4957.9 5267.8 5267.8 5577.6 812.8 728.8 600 456.5 312.9 754.4 754.4 404.2 53.88 53.88 1508.8 358.34 113.65 54.45 33.5 3080.8 3474.7 4263.6 4757.4 5210.8 2326.4 3870.7 4554.2 4756.9 5231.2 865.7 1490.2 1753.4 1831.4 2014 2969.5 2738.9 2914.4 2979.9 3250.7 2215.1 1984.5 2510.2 2926 3196.8 443 396.9 502 585.8 639.4 1784.1 1587.6 2008.2 2340.2 2557.4 1030 833.2 1604 2286.3 2503.5 6 7 8 9 10 90 95 95 95 95 2970 3135 3135 3135 3135 41877 44203.5 44203.5 44203.5 44203.5 36299.3 38315.9 38315.9 38315.9 38315.9 5577.7 5887.6 5887.6 5887.6 5887.6 25-#-7 )!-#* *7#5 134.1 14.9 33.68 33.68 33.68 33.68 33.68 26.34 18.15 14.33 11.47 9.18 5290.7 5660.2 5719.8 5779.4 5839 5298 5675.7 5739.2 5801.6 5863.5 2039.7 2185.2 2209.6 2233.6 2257.4 3284.7 3508.7 3543.9 3579.5 3615.3 3251 3475 3420.3 3545.8 3581.6 650.2 695 684.1 709.2 716.3 2600.8 2780 2736.2 2836.6 2856.3 2634.5 2813.7 2769.9 2870.3 2889.9

"atio Analysis:

)0!

Financial Analysis 1# $erformance ratios: a) .ay %ack period& Assumin4 )00, capacity utiliKation, Cales 5 <s 705-0 lakhs

@ross cost of production 5 <s 70--2#0 lakhs @ross profit per year 5 <s 0)!*#7 lakhs

Total capital in estment 5 deprecia%le project cost = %orro3ed 3orkin4 capital 5 (.;B land site de elopment = 26;) 5 2!"0#5 H 2-"#77 = )"00 5 <s 700"#) lakhs
= total capital investment Gross profit 8 year

.ay %ack period

.ay %ack period 5 0#*7 years 5 ! months

%) <eturn on in estment (<I1)&

= Gross profit 8 year )00 total capital investment

<I1

<I1 5 )-7#7,

c) .rofit mar4in& .rofit mar4in 5 @ross profit8 Cales .rofit mar4in 5 )-#-),

d) Jet assets turn o er&

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Financial Analysis Jet assets turn o er 5 Cales8 .roject ;ost Jet assets turn o er 5 )5#0)

%# Financial ratios: a) $e%t to e(uity ratio 5 2&) %) 1nterest co er& Assumin4 )00, capacity utiliKation, interest co er for the first year is 1nterest co er 5 @ross profit 8 interest 1nterest co er 5 *#0-

18&' $ro(ect Evaluation: )"#0#) $iscounted .rofit Flo3 Techni(ue

(Mahajani and Mokashi, 2005)

To e aluate profita%ility of the project in the project ser ice life, profita%ility projections are re(uired# @ross profit of this project for )0 years of its ser ice life has %een calculated in pre ious section# 1t 3ill %e used to e aluate the project# )ear ) 2 7 5 0 * " ! )0 ,otal *ross $rofit $ +"s& in lakhs# 707" 7!5*#! 520*#" 520*#" 55**#0 55**#0 5""*#0 5""*#0 5""*#0 5""*#0 -.8./&1

0ei!hted Avera!e Cost of Capital +0ACC# and 1urdle "ate of "eturn +2#

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Financial Analysis
( D iT + E rE ) (D + E)

6A;; 6here,

D & E is $e%t & '(uity <atio (2 & ))

iT

is interest rate on term loan# ()2 ,) is desired return on e(uity# (70 ,)

rE

Co,

6A;;

( 2 0#)2 +) 0#7) (2 +))

5 0#2)-0ACC 3 %1&44 5

As hurdle rate of return should %e 4reater than 3ei4hted a era4e cost of capital# Take it to %e 25,# Co, 2 3 %- 5& (As > L 6A;;)

$ro(ect 6nvestment at the ,ime of Evaluation 5 <s# 2!"0#5 lakhs#

?ere, Total .roject ;ost

Assume period of construction 3as t3o years# $urin4 the construction, <s# )*50 3ere spent in the first year and <s# )2-0#5 lakhs in the second year# Jo3, .roject in estment at the time of e aluation (Io) is 4i en %y&
Io

= I 2 + () + K ) I )

5 )2-0#5 = () =0#25))*50 5 <s# -7)" lakhs# $resent 7alue of the $rofit +$7#

A cumulati e discounted 4ross profit for the present is 4i en %y&

))2

Financial Analysis
= Pn n n =) () + K )
)0

PV

In calculations, .resent Galue of .rofit is o%tained to %e <s# 20-207#7 lakhs# Co, PV 3 "s& %84%8.&. lakhs&

9et $resent 7alue +9$7#

The Jet .resent Galue of .rofit is then @i en %y& )0 Pn = Io n n =) () + K ) NPV NPV 3 "s& 1::/8'&. lakhs&

$rofita;ility 6nde< +$6#

1t is defined as ratio of present alue of profit to present alue of in estment# The projects 3ith hi4her .1 are o% ious choice# )0 Pn = Io n n =) () + K )
20-207#7 5 -7)"

PI

$6

3 -:&.-

As the .rofita%ility 1ndex is 4reater than unity, it sho3s that the project is profita%le# 6nternal "ate of "eturn

1nternal <ate of <eturn is the alue of hurdle rate of return, at 3hich J.G is Kero# Therefore, 1<< is 4i en %y& )0 Pn = Io n n =) () + IRR) In sol in4 this e(uation iterati ely, 1<< can %e o%tained#

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Financial Analysis 1f, 1<< L 6A;;, then the project can %e said to %e attracti e# In sol in4 iterati ely, 1nternal <ate of <eturn is o%tained to %e 0#-"5 (-"#5,)# 6"" 3 48&- 5&

As 1<< L 6A;; and also 1<< L >, the project is recommended#

))7