Kaif invest Rs 40,000 in a project. EBDIT for the first 5 year are Rs. 10,000 12,000 14,000 16,000 20,000 respectively. He issue 100 equity share @10 Rs each. 50 preference share @30 each and 5% of debenture Rs 60000, tax rate 50%, depreciation charge at the end of the year and 10% preference dividend is payable in every year. cost of capital is 10% then calculate: NPV




To calculate the Net Present Value (NPV) of Kaif's investment, we need to follow these steps:

### 1. **Compute the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA):**
   - The EBDIT values are provided as Rs. 10,000, 12,000, 14,000, 16,000, and 20,000 respectively for the first 5 years.

### 2. **Subtract Depreciation:**
   - We subtract depreciation to get the Earnings Before Interest and Taxes (EBIT). Depreciation is charged at the end of each year, but its amount is not given directly. We might need to assume depreciation based on standard practices or details not provided.

### 3. **Compute Interest on Debentures:**
   - Interest on the debentures is calculated as 5% of Rs. 60,000.

### 4. **Calculate Tax:**
   - Tax is levied at 50% on the profits after interest but before dividends.

### 5. **Subtract Preference Dividend:**
   - Subtract 10% of Rs. 50 x 30 = Rs. 150 as the preference dividend.

### 6. **Calculate Cash Flows:**
   - Cash flow is calculated by adding back depreciation (a non-cash charge) to the net profit after tax.

### 7. **Calculate the NPV:**
   - Discount the cash flows using the cost of capital (10%) and subtract the initial investment to determine the NPV.

### Detailed Calculations:

#### **Depreciation:**
Let's assume straight-line depreciation. If not provided, we'll estimate based on typical methods.

#### **Interest on Debentures:**
\[
\text{Interest} = 5\% \times 60,000 = 3,000 \text{ per year}
\]

#### **Preference Dividend:**
\[
\text{Preference Dividend} = 10\% \times (50 \times 30) = 150
\]

#### **EBIT Calculation for Each Year:**

| Year | EBDIT (Rs.) | Depreciation (Rs.) | EBIT (Rs.) | Interest (Rs.) | Taxable Income (Rs.) | Tax (50%) | Net Income (Rs.) |
|------|-------------|--------------------|------------|----------------|----------------------|-----------|------------------|
| 1    | 10,000      | X                  | (10,000 - X)| 3,000          | (10,000 - X - 3,000) | 50%       | Net Income1      |
| 2    | 12,000      | X                  | (12,000 - X)| 3,000          | (12,000 - X - 3,000) | 50%       | Net Income2      |
| 3    | 14,000      | X                  | (14,000 - X)| 3,000          | (14,000 - X - 3,000) | 50%       | Net Income3      |
| 4    | 16,000      | X                  | (16,000 - X)| 3,000          | (16,000 - X - 3,000) | 50%       | Net Income4      |
| 5    | 20,000      | X                  | (20,000 - X)| 3,000          | (20,000 - X - 3,000) | 50%       | Net Income5      |

Where X represents depreciation.

#### **Net Cash Flow Calculation:**
\[
\text{Net Cash Flow} = \text{Net Income} + \text{Depreciation} - \text{Preference Dividend}
\]

#### **NPV Calculation:**
\[
\text{NPV} = \sum_{t=1}^{5} \frac{\text{Net Cash Flow}_t}{(1 + r)^t} - \text{Initial Investment}
\]
Where \( r = 10\% \).

Let's calculate this in detail. Could you please confirm the depreciation method or provide the depreciation value for accurate results? Or I can assume straight-line depreciation with some estimation.

Do you want a detailed breakdown, or should I proceed with assumptions?

---

### Questions for Deeper Understanding:
1. What is the straight-line depreciation method, and how does it affect NPV?
2. How does interest on debentures influence the taxable income in NPV calculations?
3. What happens if the cost of capital changes in the NPV calculation?
4. How do preference dividends impact net cash flow and NPV?
5. Can you explain the importance of discounting cash flows at a specific rate?
6. What role does the tax rate play in determining NPV?
7. How would a change in depreciation methods affect the NPV?
8. What if the project continues beyond 5 years? How would we adjust the NPV calculation?

**Tip:** Always review the depreciation method applied in investment calculations; it significantly affects the outcome of financial evaluations like NPV.

Learn how to calculate Net Present Value (NPV) for an investment scenario involving equity shares, preference shares, and debentures. Includes step-by-step financial analysis with depreciation, interest calculation, taxation, and discounted cash flow (DCF).

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