case study

1. Logo

2. MBA 1C13
FINANCIAL MANAGEMENT
CASE STUDY OF GSPC COMPANY
Presented by
Prince Kumar Maurya 16 MBAK -76
Aiman Khan 16 MBAK 27

3. • Situated in western part of India.
Company commissioning 35km pipeline between two
area to carry gas for SEB (state electricity board) and
LNG to other users of that area.
Sales expected to grow about:
2003-2004: 360 MILLION
2004-2005: 1100 MILLION (ALMOST 3 TIMES)
GSPC COMPANY

4. As Per Given Details
• Revenue from the supply of gas
to SEB:
• Revenue from the supply of gas
to LNG:
• the pipeline have a life time of:
• Estimate cash profit
• Project salvage value:
• Required rate of return:
• Tax Liability:
• 120 MILLION per annum
• 80 MILLION per annum
• 20 years.
1. 20% of the total sales in the
period of 1-12 years
2. 20% of the total sales in the
period of 1-12 years
• NONE
• 15%
• NONE

5. Total Sales and Profit Calculation
• Sale to SEB =120 MILLION PER ANNUM
• SALE TO OTHER(LNG) = 80 MILLION PER ANNUM
• TOTAL SALE (120+80) =200 MILLION PER ANNUM
• NET PROFIT PER ANNUM IN 1ST 12 YEARS
=20% OF TOTAL SALES
=(20/100)*200
=40 MILLION
• NET PROFIT PER ANNUM AFTER 12 YEARS
=17% OF THE TOTAL SALES
=(17/100)*200
=34 MILLION

6. CALCULATION OF CUMULATIVE CASH FLOW
Particulars Year Total Revenue
(SEB+LNG)/year
Cash profit (in
Million Rs)
Cumulative cash
flow
COST 0 (250) (250)
Total
revenue/year
1 200 40 (210)
2 200 40 (170)
3 200 40 (130)
4 200 40 (90)
5 200 40 (50)
6 200 40 (10)
7 200 40 30
8 200 40 70
9 200 40 110

7. 10 200 40 150
11 200 40 190
12 200 40 230
13 200 34 264
14 200 34 298
15 200 34 332
16 200 34 366
17 200 34 400
18 200 34 432
19 200 34 468
20 200 34 500
CONT..

8. Questions
1. What is the project’s payback and return on investment (ROI)?
PAYBACK PERIOD= OUTFLOW
ANNUAL INFLOW
REUTRN ON INVESTMENT(ROI)= AVERAGE CASH PROFIT
AVERAGE INVESTMENT
FROM THE TABLE IT IS CLEAR THAT THE PAYBACK PERIOD OF THE INVESTMENT IS MORE THAN 6
YEARS BUT LESS THAN THAT OF 7 YEARS:
Therefore,
PAYBACK PERIOD = 6 years + 10 x 12 months = 6 years 3 months
40
RETURN ON INVESTMENT AVERAGE CASH PROFIT/YEAR = 40x12 + 34x8
20
= 37.6 MILLION/YEAR
AVERAGE INVESTMENT = Avg total revenue - Avg profit
= 200 – 37.6
= 124.4 MILLION/YEAR
ROI= 37.6
124.4
= 32.22%

9. 2. Compute project’s NPV and IRR.
It is given that RRR = r1 = 15%
NPV=[ PV1 (PVIFA)1 5 % , 1 2 y r +PV2 (PVIFA 1 5 % , 2 0 y r –
PVIFA1 5 % , 1 2 Y RS )– I0 ]
= 40x 5.421+34(6.259-5.421)-250
=-4.668

10. • To comp u te IR R , we can u se h it an d trial meth od :
Let r2 =1 4 %
NPV =[4 0 x PV IFA 1 4 % , 1 2 y r s +3 4 ( PV IFA 1 4 % , 2 0 y r s - PV IFA 1 4 % , 1 2 y r s ]
NPV =[4 0 x5 .6 6 + 3 4 ( 6 .6 23 – 5 .6 6 ) – 2 5 0
=9 .1 4 2
k=lowerrate+R ate Diff [ valu e with lowerrate -p rojec t cost ]
value with( lower rate - higher rate)
= 1 4 %+ ( 1 5 % -1 4 %) 2 5 9 .1 42 -25 0.00
2 5 9 .1 4 2 -24 5.33 2
=1 4 % + 0 .6 6 %
=1 4 . 6 6 %

11. 3. Should the project be accepted? Why?
Conditions:
If IRR<r, the project must be rejected
If IRR=r, the project may be rejected or accepted
If IRR>r, the project must be accepted
• No, the project must not be accepted. Since the
required rate of return is 15% but the internal
rate of return (k) is 14.66%. Therefore it will not
be beneficial for the company to invest in the
project.