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The document presents a financial analysis of a project, detailing the base case NPV, adjusted present value, cash flows, and financing effects. It highlights that the project itself is not lucrative with a negative base case NPV, but financing benefits make it viable. Key figures include an adjusted present value of 29,436 and total issue costs of 25,134.

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4 views

APV notes new

The document presents a financial analysis of a project, detailing the base case NPV, adjusted present value, cash flows, and financing effects. It highlights that the project itself is not lucrative with a negative base case NPV, but financing benefits make it viable. Key figures include an adjusted present value of 29,436 and total issue costs of 25,134.

Uploaded by

masco3293
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Base case NPV 44,274

Adjust: effects of financing


Issue costs of equity and debt (25,134)
PV of TS on issue costs 5,490
PV of TS on interest costs 4,806
Adjusted present value 29,436
0 1 2 3

Initial outlay (600,000) - - -


Cash inflows - 250,000 250,000 250,000
Net cash flows (600,000) 250,000 250,000 250,000
PV @ 8% (600,000) 231,481 214,335 198,458
Base case NPV 44,274

Total issue costs (21,053 + 4,081) 25,134


Tax @ 23% 5,781 at year end 1
PV of tax benefit 5,490

Debt payment schedule: 1 2 3

Opening balance 204,081 139,535 71,569


Interest 10,816 7,395 3,793
Repayment (75,362) (75,362) (75,362)
Closing balance 139,535 71,569 (0)

TS on interest @ 23% 2,488 1,701 872


PV @ 5.3% 2,363 1,615 829
Total 4,806
Base case NPV 0 1 2 3 4 5

Gross progress billings - 150.00 375.00 525.00 450.00 -


Direct material - (280.00) (140.00) (140.00) (140.00) -
Sub-contracting - - (50.00) (50.00) (50.00) -
Other costs - (103.00) (103.00) (103.00) (103.00) -
Depreciation - (137.50) (11.25) (10.13) (9.11) -
Profit before tax - (370.50) 70.75 221.88 147.89 -
Income tax @ 30% - - - - (21.00) -
Add back depreciation - 137.50 11.25 10.13 9.11 -
Mobilisation advance 375.00 (37.50) (93.75) (131.25) (112.50) -
Retention money @ 5% - (7.50) (18.75) (26.25) (22.50) 75.00
Initial outlay - Plant (250.00) - - - - -
Residual value of the plant - - - - 82.01 -
Net cash flows 125.00 (278.00) (30.50) 74.50 83.01 75.00
PV @ 125.00 (245.58) (23.80) 51.36 50.55 40.35
Base case NPV (2.12)

Rf 9%
Risk premium 6%
Ungeared Be 0.70
Ke 13.2%

Depreciation 1 2 3 4
Opening NBV 250.00 112.50 101.25 91.13
Initial allowance (125.00) - - -
Depreciation (12.50) (11.25) (10.13) (9.11)
Closing NBV 112.50 101.25 91.13 82.01

Profit before tax (370.50) 70.75 221.88 147.89


Carry forward 370.50 (70.75) (221.88) (77.88)
Taxable income - - - 70.01

Base case NPV (2.12)


Adjust: Effects of financing

Issue cost of debt (250/0.99 x 1%) (2.53)


PV of TS on issue cost [2.53x30%x(1+10%)^-1] 0.69
PV of TS on plant loan 24.01
Adjusted present value 20.05

The project itself is not lucrative as the base case NPV is negative.
Only the financing portion and benefits of interest is making this project viable.

1 2 3 4
Loan for the plant 252.53 252.53 252.53 252.53
Interest @ 10% 25.25 25.25 25.25 25.25
Tax benefit @ 30% 7.58 7.58 7.58 7.58
PV of TS on plant loan 6.89 6.26 5.69 5.17
PV of TS on plant loan 24.01

Running finance - cash shortfall 1 2 3 4


Opening balance 375.00 79.32 31.15 87.97
Net cash flows (278.00) (30.50) 74.50 83.01
Net of tax interest on plant loan (17.68) (17.68) (17.68) (17.68)
Closing balance 79.32 31.15 87.97 153.30

No running finance is needed.


Base Case NPV 0 1 2 3
Operating cash flows before mark - 2,000.00 14,500.00 15,225.00
Marketing costs - (9,000.00) (2,000.00) (2,000.00)
Depreciation/Bal charge - (7,650.00) (5,737.50) (4,303.13)
Amount subject to tax - (14,650.00) 6,762.50 8,921.88
Tax @ 30% - in arrears - - - -
Add back depreciation - 7,650.00 5,737.50 4,303.13
Initial outlay + Res value (30,600.00) - - -
Working capital (3,000.00) (240.00) (194.40) (171.72)
Net cash flows (33,600.00) (7,240.00) 12,305.60 13,053.28
PV @ 9% (33,600.00) (6,642.20) 10,357.38 10,079.53
Base case NPV (918.87)

Working capital
Inflation rate 8.00% 6.00% 5.00%
Working Capital (3,000.00) (3,240.00) (3,434.40) (3,606.12)
Additional working capital (3,000.00) (240.00) (194.40) (171.72)

Depreciation 1 2 3
Opening NBV 30,600.00 22,950.00 17,212.50
Initial allowance - - -
Depreciation (7,650.00) (5,737.50) (4,303.13)
Closing NBV 22,950.00 17,212.50 12,909.38

Amount subject to tax (14,650.00) 6,762.50 8,921.88


Carry forward 14,650.00 (6,762.50) (7,887.50)
Taxable income - - 1,034.38

Calculation of APV
Base case NPV (918.87)
Issue costs (30,600/96 x 4) (1,275.00)
Tax shield on sub. Loan 716.13
Subsidy benefit - net of tax 2,127
Adjusted Present Value 648.94

Tax shield on sub. Loan


Loan amount 30,600 since issue costs are paid out of cash, not to gross up.
Interest rate 2.20%
Tax rate 30%
Discount factor (AF for 4 years @ Kd = 5%) 3.5459
Tax shield on sub. Loan 716

Subsidy benefit - net of tax


Loan amount 30,600
Benefit of interest (5% - 2.2%) 2.80%
Net of tax effect (1 - 30%) 70%
Discount factor (AF for 4 years @ Kd = 5%) 3.5459
Tax shield on sub. Loan 2,127

Ungeared Ke
Keg = Keu + (D(1-t)/E)(Keu - Kd)

MV Debt = 225 x 107/100 = 240.75


MV Equity = 125 x 3.2 = 400.00
4 5
15,834.00 -
(2,000.00) -
590.63 -
14,424.63 -
(310.31) (4,327.39)
(590.63)
13,500.00
3,606.12
30,629.81 (4,327.39)
21,698.93 (2,812.50)

4.00%
3,606.12
3,606.12

4
12,909.38
-
590.63
13,500.00

14,424.63
-
14,424.63

out of cash, not to gross up.

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