This document summarizes the financial analysis of capacity expansion options for Divya Handtools Pvt. Ltd. It compares the net present value (NPV), annual payments, and total costs of borrowing from the State Bank of India (SBI) or a financial institution (FI), or leasing equipment. The analysis shows that borrowing from the FI has the lowest annual interest rate at 13.5% and a quarterly payment of Rs. 9.2 million. Borrowing is also cheaper than leasing, as the value of lease rentals of Rs. 314 million is higher than the borrowing amount of Rs. 300 million.

1. Case 2.1: Divya Handtools Pvt. Ltd.
Capacity expansion
Year NCF PVF PV, 14%
0 -250 1.000 -250.0
1 45 0.877 39.5
2 45 0.769 34.6
3 45 0.675 30.4
4 68 0.592 40.3
5 68 0.519 35.3
6 68 0.456 31.0
7 68 0.400 27.2
8 68 0.351 23.8
9 30 0.308 9.2
10 85 0.270 22.9
NPV 44.2
Year 10 cash flows include salvage value.
Minimum savings each year from replacement
Cash outlay (Rs million) 50
Life (years) 10
PVFA 14%, 10 5.2161
Annuity (annual savings, Rs mn) 9.6 capital recovery
Annual instalment of SBI loan
Amount (Rs million) 200
Interest rate 14%
Period (years) 10
PVFA 14%, 10 5.2161
Annual instalment (Rs mn) 38.3
Payment at maturity - SBI loan
Amount (Rs million) 200
Interest rate 14%
Period (years) 10
Future value factor 3.7072
Single payment (future value) 741.4
Quarterly instalment - FI loan
Amount (Rs million) 200
Annual interest rate 13.50%
Quarterly rate 3.375%
Quarterly periods 40
PVFA 3.375%, 40 21.7754
Quarterly instalment (Rs mn) 9.2
The company should borrow from FI since the the annual interest rate is lower. 1
2
Lease 3
Amount (Rs million) 300 4
Period (years) 10 5
Lease rental (beginning of the year) 52 6
PVFA of annuity due (13.5%) 6.038 7
Value of lease rentals 314.0 8
The value of lease rentals is higher than the amount of borrowing (Rs 300 million). Int. rate -half-yearly
Hence, borrowing is cheaper than leasing Period
20
20

2. 9% 12% 6%
120 0.917 110.09 0.893 107.14 0.943 113.21
120 0.842 101.00 0.797 95.66 0.890 106.80
120 0.772 92.66 0.712 85.41 0.840 100.75
120 0.708 85.01 0.636 76.26 0.792 95.05
120 0.650 77.99 0.567 68.09 0.747 89.67
120 0.596 71.55 0.507 60.80 0.705 84.60
120 0.547 65.64 0.452 54.28 0.665 79.81
1120 0.502 562.09 0.404 452.35 0.627 702.70
1166.04 1000.00 1372.59
Int. rate -half-yearly 3% 3% 4%
Cash flow PVF PV PVF PV PVF PV
60 15.589 935.35 14.877 892.65 13.590 815.42
1,000 0.610 610.27 0.567 567.43 0.476 476.11
1545.62 1460.08 1291.53