Hind Petrochemicals Company is considering a capital investment project to build a refinery and purchase machinery. The total capital investment is Rs 7,500 million with an additional Rs 300 million in working capital, for a total cash outlay of Rs 7,800 million. The project is expected to generate positive cash flows starting in year 1 and increasing each year until year 5. The net present value of the project is Rs 1,365 million with an internal rate of return of 22% and a payback period of 3.25 years.

1. Case 10.1: Hind Petrochemicals Company
(Rs mn.)
Cost of refinery 1,550
Cost of machinery 5,950
Total capital investment 7,500
Working capital 300
Total cash outlay 7,800
Discount rate 15%
Cash flows (Rs mn.)
0 1 2 3 4 5
Sales 5,730 5,930 5,870 3,790 4,500
Less: Wages and salaries 1,450 1,500 1,850 1,030 1,210
Selling and distribution costs 760 770 1,080 530 650
Materials and consumables 180 270 290 200 230
Depreciation (WDV) 1,875 1,406 1,055 791 593
Corporate office costs 100 100 100 100 100
Survey costs 15 - - - -
Total expenses 4,380 4,046 4,375 2,651 2,783
Profit (loss) before tax 1,350 1,884 1,495 1,139 1,717
Less: tax @ 35% 473 659 523 399 601
Profit after tax 878 1,224 972 740 1,116
Plus: depreciation 1,875 1,406 1,055 791 593
CFO 2,753 2,631 2,027 1,531 1,709
Cash outlay -7,800
Working capital released 300
Salvage value 3,600
Book value 1,780
Lost DTS on (SV -BV) -430
Net cash flows -7,800 2,753 2,631 2,027 1,531 5,179
NPV at 15% 1,365
IRR 22%
Cumulative casf flows -7,800 -5,048 -2,417 -390 1,141 6,320
Payback (years) 3.25
Note: (1) Only Rs 15 million of survey cost is relevant. (2) All corporate office costs are not relevant for the
project; Rs 100 million costs relate to the project. (3) Interest is a financing cost. Free cash flows are calculated,
ignoring the interest charges.