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CA Final · Advanced Financial Management · International Financial Management

Sagar Industries Ltd is considering a foreign project. Initial outlay is Rs 500 lakh. Expected annual operating cash flow is Rs 160 lakh for 5 years (annuity factor at 12% = 3.6048). The project has a concessional loan of Rs 200 lakh from the host government at 4% interest instead of the market rate of 10%, for 5 years, with interest paid annually and principal repaid at the end. Ignore tax. The base-case NPV at 12% is Rs 76.77 lakh. Using the market rate 10% to discount the loan flows (annuity factor 3.7908, PV factor at year 5 = 0.6209), what is the APV approximately?

The base-case NPV is Rs 76.77 lakh. The loan subsidy is the loan amount of Rs 200 lakh less the present value of its repayments at the market rate of 10%, about Rs 154.5 lakh, giving Rs 45.5 lakh. APV is therefore about Rs 122 lakh, which is nearest to Rs 122.8 lakh.

  1. ARs 76.77 lakh
  2. BRs 107.2 lakhCorrect
  3. CRs 122.8 lakh
  4. DRs 45.2 lakh

Explanation

Base NPV = 160 x 3.6048 - 500 = 576.77 - 500 = 76.77. Benefit of concessional loan = interest saved of 6% x 200 = Rs 12 lakh a year, PV = 12 x 3.7908 = 45.49. Wait: this equals the loan subsidy only when principal is discounted at market rate; PV of loan outflows at 10% = 8x3.7908 + 200x0.6209 = 30.33 + 124.18 = 154.51. Subsidy = 200 - 154.51 = 45.49. APV = 76.77 + 45.49 = 122.26, about Rs 122.3 lakh. The closest option is Rs 122.8 lakh, so option 3 is nearest; option 2 (107.2) is incorrect.

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