Effects of Organic fertilizers in humans, animals and environment

a. Free cash to the firm:

Year                                                                 1            2           3            4

Free Cash Flow to the firm ( MUR '000)  3,708     3,542    3,506    3,470

b. The payback period for this project, based on the free cash flow, is after year 4.

c. The net present value is (MUR 5,757,000)

d. No.  Based on the payback period and the net present value, the project should be rejected.

Explanation:

a) Data and Calculations:

Projected Income Statements

Year                                                                 1            2           3            4

Revenues ( MUR '000)                              10,000    11,000   12,000   13,000

Less Cost of Goods Sold ( MUR '000)       4,000    4,400     4,800    5,200

Less Depreciation ( MUR '000)                  4,000    3,000     2,000    1,000 Earnings b/4 Interest & Tax ( MUR '000)   2,000    3,600    5,200    6,800

Interest on capital (12%)  ( MUR '000)         1,800    2,040    2,040    2,040

Earnings before tax ( MUR '000)                  200     1,560     3,160    4,760

Income Tax (40%)                                            80        624     1,264    1,904

Net Income after tax ( MUR '000)                 120        936     1,896    2,856

Add Depreciation  ( MUR '000)                 4,000    3,000    2,000     1,000

Net cash from operations (MUR '000)      4,120     3,936    3,896    3,856

Working capital investment (MUR '000)      412        394       390       386

Free Cash Flow to the firm                       3,708     3,542    3,506    3,470  Net present value                                          

The payback period for this project, based on the free cash flow, is after year 4.

Interest on capital:

Initial investment = MUR 15 million * 12% = MUR 1,800,000 for year 1

Additional investment = MUR 2 million * 12$ =      240,000

Total interest expense from year 2 =         MUR 2,040,000

Net present value:

Year                                                 1            2           3            4     Total

Free Cash Flow to the firm     3,708     3,542    3,506    3,470  14,226

Discount factor                        0.893     0.797     0.712    0.636

Present value                            3,311     2,823    2,496   2,207   10,837

Cash outflows:                       15,000     1,594       0         0         16,594

Net present value =                                                                      (5,757)

Cash outflow for year 2 = 2,000,000 * 0.797 = 1,594,000