Answered: Maram & Company are manufacturers of…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter2: Financial Statements, Cash Flow,and Taxes

Section: Chapter Questions

Problem 21SP: Begin with the partial model in the file Ch02 P21 Build a Model.xlsx on the textbooks Web site. a....

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Maram and Company should proceed with the project.

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Transcribed Image Text:Corporate Finance Professor Ashok Thampy IIMB IIMBX Graded Question Week Five तेजस्वि नावधीतमस्तु The table given below shows the different components associated with the calculation of Free Cash Flow for this company. MARAM & COMPANY 2016 2017 2018 2019 | 2020 2021 Investment -20.00 0.00 Revenue 10.00 13.00 | 16.90 13.52 10.82 2.00| 2.00 2.00 2.00 7.80 10.14 4.00 4.00 4.00 -2.00 -0.80 0.76 Fixed cost 2.00 Variable cost 6.00 ? 6.49 Depreciation 4.00 4.00 Profit before Interest and Taxes -0.59 -1.67 Corporate Tax (33%) -0.66 -0.26 0.25 -0.20 -0.55 Unlevered Profit after Tax -1.34 -0.54 ? -0.40 -1.12 2.60 3.38 2.70 -0.78 0.68 0.54 Net Working Capital 2.00 2.16 0.00 Investment in Net Working Capital -2.00 -0.60 2.16 Free Cash Flow -22.00 2.06 2.68 5.19 4.14 All Rights Reserved. This document has been authored by Professor Ashok Thampy and is permitted for use only within the course "Corporate Finance" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any firms or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.

Transcribed Image Text:Corporate Finance Professor Ashok Thampy IIMB तेजस्वि नावधीतमस्तु IIMBX Graded Question Week Five Maram & Company Case: Maram & Company are manufacturers of furniture. They are contemplating the introduction of a new line which will require investment of Rs. 20 million in plant and machinery, which would have to be incurred by the end of December 2016. Production, and the resultant revenue and costs will start immediately. In the first year, revenue is expected to be Rs. 10 million followed by an increase of 30% each year for the next 2 years, and then decline by 20% each year for the next 2 years, after which the line will be discontinued. There is a fixed cost of Rs. 2 million each year and the variable cost of production comes to 60% of sales revenue. Depreciation is straight line over the 5 year period. The value of plant and machinery at the end of 5 years can be assumed to be zero. Maram will have to invest in working capital equal to 20% of sales revenue at the beginning of each year. You may assume that the entire working capital investment is recovered at the end of the project. The applicable tax rate for Maram is 33%. Maram has a Weighted Average Cost of Capital of 10%. (Assume that all cash flows occur at the end of each year for convenience.) All Rights Reserved. This document has been authored by Professor Ashok Thampy and is permitted for use only within the course "Corporate Finance" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any firms or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the author.

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