Aasman Ordnance Factory

Capital Budgeting project

AOF: The company

Arms & Ammo Manufacturer Deal with Ministry of Defense for 5 years Customers

Indian Defense forces Para-Military Private firms

Will manufacture bullets for AK-47, AK-56 INSAS Rifle SLR

The Deal: Ministry of Defense

The order size is fixed for the span of 5 years

The selling price is fixed by the Govt Some output for private players Government would buy back the

project after 5 years Terms fixed like salvage value of

machinery building etc

Setting up the Project

Factory to be set up in Dehradoon Manufacturing process to begin and

start delivering within a year Demand for 5 years already estimated Initially to manufacture only bullets for various rifles like AK-47,56.

Future Prospects

AOF plans to expand slowly to cater for all the following fields of defense Ammunition & Explosives Weapons, Vehicles and Equipment Materials and Components Armoured Vehicles Ordnance Equipment Group of

Factories

Capital Structure

Breakup of the requirement capital Raised through Equity, Debentures & Loan

Break-up of the capital  Amt in INR

Capital Structure  

Requirement 50000000

Equity 30000000

13% Debentures 15000000

18% Bank Loan 5000000

Total 50000000

Financial Details: RequirementsProjectRequirements    Depreciation Method

Terminalvalue

Land 20000000    20000000

Building 6500000

lifetime 10 years : written down depreciation at 15% 3000000

Machines 15000000lifetime 5 years : straight line

depreciation 0

Vehicles 5000000lifetime 5 years : written

down at 15% 3000000

OfficeEquipments 1000000

lifetime 5 years : written down at 20% 400000

Working capital 2500000    

Total 50000000    

WACC Weighted Average Cost of Capital Cost of equity by CAPM model

Capital Structure

Capital Structure     weights Rate(K)Effective rate

(w*k)

Requirement   50000000      

Equity   30000000 0.6 13.4 8.04

13% Debentures   15000000 0.3 8.45 2.535

18% Bank Loan   5000000 0.1 11.7 1.17

Total   50000000      

WACC         11.745 %

Calculations: Depreciation

Years 1 2 3 4 5

Depreciation          

Machines(straight line) 3000000 3000000 3000000 3000000 3000000

Vehicles (wd@ 15%) 750000 637500 541875 460593.75 391504.6875

Building (wd @15%) 975000 828750 704437.5 598771.875 508956.0938

Officeequipments (wd @ 20%) 200000 160000 128000 102400 81920

TotalDepreciation 4925000 4626250 4374312.5 4161765.625 3982380.781

Calculations: Capital Gains Tax Capital Gain/loss

  Building Vehicles LandOffice

Equipmenmt Total

Book Value after 5yrs 2884084.5 2218526.6 20000000 327680 25430291

Sales Value 3000000 3000000 20000000 400000 26400000

Capital Gain/loss 115915.46 781473.44 0 72320 969708.90

           

Net Capital Gain 969708.90        

Capital Gain Tax 339398.11        

Net Inflow         26060601.8

Calculations: Interest

Interest given on bank loan and debentures

Year 1 2 3 4 5

bank 18% 900000 900000 900000 900000 900000

Debenture @ 13% 1950000 1950000 1950000 1950000 1950000

TotalInterest 2850000 2850000 2850000 2850000 2850000

Operating Variables The sale price has been fixed by the ministry

of defense in the deal. The variable cost is calculated as 60% of the

sales price. Fixed price includes all expenses which tend to

rise at the rate of 15% yearly.

Particulars INR

Sale price per Bullet (Rs/unit) 50

Variable cost per Bullet (Rs/unit) 30

Fixed Cost (increase at 15% yearly) 2000000

Discount rate 12%

Income statementIncome statement

Years 1 2 3 4 5

Bullets produced 1100000 1210000 1331000 1464100 1610510

Bullets sold 1070000 1210000 1331000 1464100 1610510

Sales 53500000 60500000 66550000 73205000 80525500

less variable 33000000 36300000 39930000 43923000 48315300

Contribution 20500000 24200000 26620000 29282000 32210200

less fixed cost 2000000 2300000 2645000 3041750 3498012.5

EBITDA 18500000 21900000 23975000 26240250 28712187.5

less depreciation 4925000 4626250 4374312.5 4161765.625 3982380.781

EBIT 13575000 17273750 19600688 22078484.38 24729806.72

less interest 2850000 2850000 2850000 2850000 2850000

EBT 10725000 14423750 16750688 19228484.38 21879806.72

less tax 3753750 5048312.5 5862740.6 6729969.531 7657932.352

Net Income 6971250 9375437.5 10887947 12498514.84 14221874.37

Cash Flows & CalculationsCASH FLOW

Years 0 1 2 3 4 5

Net Income   6971250 9375437.5 10887946.8 12498514.8 14221874.3

add Terminal Value   0 0 0 0 26060601.8

add Working Capital   0 0 0 0 2,500,000

add depreciation   4925000 4626250 4374312.5 4161765.62 3982380.78

Cash inflow (50000000) 11896250 14001687.5 15262259.3 16660280.4 46764857.0

  PV@12% 10621652 11162059.5 10863374.7 10587909.4 26535635.7

  Total PV 69770631        

  NPV 19770631        

  IRR 24%        

PI 1.3954126        

Project Analysis

Results of evaluation carried out

Initial Investment 50000000.0

Total PV @ 12% 69770631

NPV 19770631

IRR 24%

Profitability Index (PI) 1.3954126

WACC 11.75%

Decision making

Indicator Value Evaluation Decision

NPV 19770631 Positive Accept It

IRR 24% IRR > WACC Accept It

Profitability Index (PI)

1.39 PI > 1 Accept It

Thank You!