Norton Ltd. manufactures steel rods and is now considering to purchase a new aluminum smelting plant. This initial cost of the plant is ₹20,00,000. It has a useful life of 5 years with a residual value of ₹1,00,000. Prod

CS Professional · Strategic Management and Corporate Finance · PYQS · December 2025
Norton Ltd. manufactures steel rods and is now considering to purchase a new aluminum smelting plant. This initial cost of the plant is ₹20,00,000. It has a useful life of 5 years with a residual value of ₹1,00,000. Production and sales from the new plant are expected to be 1,00,000 units per year. Other estimates are as follows: Selling Price ₹150 per unit, Direct Cost ₹100 per unit. Fixed cost (including depreciation) is ₹8,00,000 per annum. Marketing and promotion cost not included in the above will be ₹1,00,000 and ₹1,60,000 for years 1 and 2, respectively. Additionally, investment in debtors and stocks will increase in year 1 by ₹1,50,000 and ₹2,00,000, respectively. Creditors will also increase by ₹1,00,000 in year 1. Thus, debtors, stocks and creditors will be recouped at the end of the fifth year. The cost of capital is 18%. Corporate tax is 30% and is paid in the year in which profits are made. Depreciation is tax deductible. The company follows straight line method of depreciation. Assume working capital is invested at the start of the year. Required: (i) Estimate the net cash inflows after tax over the useful life of the project.

Answer & Explanation:

Calculation of net cash inflows after tax and Net Present Value and Profitability Index of the project Years 1 2 3 4 5 Units 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 Sales (₹150 per unit) (I) 1,50,00,000 1,50,00,000 1,50,00,000 1,50,00,000 1,50,00,000 Cost Direct Cost (₹100 per unit) 1,00,00,000 1,00,00,000 1,00,00,000 1,00,00,000 1,00,00,000 Marketing Cost 1,00,000 1,60,000 - - - Depreciation 3,80,000 3,80,000 3,80,000 3,80,000 3,80,000 Fixed Cost 4,20,000 4,20,000 4,20,000 4,20,000 4,20,000 Total Cost (II) 1,09,00,000 1,09,60,000 1,08,00,000 1,08,00,000 1,08,00,000 Profit (I-II) 41,00,000 40,40,000 42,00,000 42,00,000 42,00,000 Tax @ 30% 12,30,000 12,12,000 12,60,000 12,60,000 12,60,000 Profit After tax 28,70,000 28,28,000 29,40,000 29,40,000 29,40,000 Add back depreciation 3,80,000 3,80,000 3,80,000 3,80,000 3,80,000 Cash inflow after tax 32,50,000 32,08,000 33,20,000 33,20,000 33,20,000 Add: WC released 2,50,000 Add: Residual value of machine 1,00,000 Net cash inflow after tax 32,50,000 32,08,000 33,20,000 33,20,000 36,70,000

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