Prepare an analysis on how the borrowing cost is sensitizing the profitability and cash flow

Assignment 1:

Mr. Prasanna Krishnan graduated as a Chemical engineer. With a view to be employed and be useful to the society, he decided to commission a desalination plant which was the growing need in his state of residence. The operating details of the project are produced below for your reference: Investment : 130 lakhs- Machinery 100 lakhs Bldgs 10 lakhs Trucks 10 lakhs Other assets 10 lakhs Sources of capital- personal equity 10 lakhs venture capital from Mr.Srivatsava for 120 lakhs @23% per annum Sales The desalined water would be sold in units of kilolitres priced @Rs 600/kilo litre. The sales volume per day would be 28 KL/day over 30 days for 12 months The volume would be 29 klper day in the second year of operation and 30 kl /day in the third year of operation Expenses The details of operating expenses/month will be as follows: Wages 0.80 L office expenses 0.25 lakhs fuel 1.00 lakhs salaries 0.25 misc exp 0.25 Assume that there are no changes in unit selling price and level of expenses Depreciation Rs 15 lakhs per annum You are called upon to do the following: Phase I 1. Construct the profitability statement for first three years 2. Construct the cash flow statement Phase II: Assume that after 3 years with a increase of 2 kl /day/year the capital structure can be revised to 50% equity and 50% debt @ 14% cost of borrowed capital Assume 5% increase in operating expenses ever year fro 4th year onwards

1. Prepare a revised profitability statement for next 3 years

2. Prepare a cash flow statement on similar lines

3. Prepare an analysis on how the borrowing cost is sensitizing the profitability and cash flow