GATE 2022 CH – Question 61
Information for a proposed greenfield project is provided in the table. The discounted cash flow for the fourth year is Rs ________ crores (rounded off to one decimal place).
| Fixed capital investment (excluding land) | Rs 250 crores |
|---|---|
| Salvage value | Rs 0 |
| Yearly revenue from product sales | Rs 120 crores |
| Yearly manufacturing cost (excluding depreciation) | Rs 30 crores |
| Interest rate | 10% compounded annually |
| Annual taxation rate | 30% |
| Depreciation method | Double declining balance* over seven years |
| Plant start-up | 2 years after project initiation |
- $d_k = \frac{2}{7}BV_{k-1}$, k: years post start-up, d: Depreciation amount, BV: Book value
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Show answer and explanation
Correct answer: 53.23 to 53.77
Explanation
Operation starts 2 years after the project begins, so the fourth year of the project is the second year after start-up ($k = 2$). The depreciation is $d_1 = \frac{2}{7} \times 250 = 71.43$, which leaves a book value of 178.57, and $d_2 = \frac{2}{7} \times 178.57 = 51.02$. The cash flow before tax is $120 - 30 = 90$. The taxable income is $90 - 51.02 = 38.98$ and the tax is $0.3 \times 38.98 = 11.69$, so the after-tax cash flow is $90 - 11.69 = 78.31$ crores. Discounted to the start at 10% over 4 years: $\frac{78.31}{1.1^4} = 53.5$ crores.