Evaluate the proposal based on its NPV

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• Strategic Financial Management
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• 1. Bajaj Limited expects to see a growth of 20
  every year in free cash flow to equity (FCFE)
  over the next 3 years. The growth is likely to
  decline to 10 over the subsequent two years.
  After that, it is expected to be at a stable
  level of 6 per year. The FCFE in the current
  year is Rs 20 per equity share. Compute the fair
  value per share based on the FCFE approach.
  Assume 20 cost of equity. (10 Marks)
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•  2. Companies X and Y are into the same business
  with different capital structures.
• Calculate the weighted average cost of
  capital of X and Y. Assume income tax rate of
  30. (10 Marks)

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• 3. A manufacturer is exploring a proposed
  production of premium quality widgets. The
  required machine would cost Rs 2 lakhs and has a
  useful life of 5 years. For the purpose of tax,
  relevant depreciation allowed on the machine is
  20 percent on written down value basis. The
  salvage value is realizable at the end of 5
  years. Initial working capital required is Rs
  100,000 and is expected to remain constant year
  on year.
• Widgets can be sold at Rs 8 each. Around
  75,000 widgets can be sold per year. A cash fixed
  cost of Rs 50,000 is expected to be incurred
  every year. Variable cost is estimated to be Rs 4
  per widget. The tax rate is 30. Assume 20 cost
  of capital.

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• (a) Evaluate the proposal based on its NPV. (5
  Marks)
• (b) Would the investment decision be the same
  based on IRR approach? Explain. (5 Marks)

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