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Hind Petrochemicals Company

Hind Petrochemicals is considering expanding into western India by acquiring an existing government-owned refinery for Rs. 1,500 million. Additional investments of Rs. 6,000 million in fixed assets and Rs. 300 million in working capital would be required. Profits are projected for the first 3 years, but losses are expected in years 4 and 5 due to declining sales and ongoing high fixed costs like depreciation. The CEO must decide whether to accept the project given the later projected losses.

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Ammrita Sharma
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664 views1 page

Hind Petrochemicals Company

Hind Petrochemicals is considering expanding into western India by acquiring an existing government-owned refinery for Rs. 1,500 million. Additional investments of Rs. 6,000 million in fixed assets and Rs. 300 million in working capital would be required. Profits are projected for the first 3 years, but losses are expected in years 4 and 5 due to declining sales and ongoing high fixed costs like depreciation. The CEO must decide whether to accept the project given the later projected losses.

Uploaded by

Ammrita Sharma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Hind Petrochemicals Company(HPC) has plants in south and eastern parts of India, they

want to expand in the Western part of India. Government as a part of privatization policy is
ready to sell its own refinery situated in western India, for a price of Rs 1,500 million.
According to company appointed valuers who had studied the proposal, the refinery needs
an additional investment of Rs. 6,000 million in fixed assets and Rs. 300 million for
working capital before the start of the operations. At the end of the planning horizon of 5
years the fixed assets of the plant can be sold for Rs. 3,000 million. HPC has paid Rs. 25
million to the valuers and will pay further Rs. 15 million in case the HPC takes up the
project.
The corporate planning department of the company has estimated the profit from the
refinery operation as given in the table below

Profitability Projections Years (Rs mn.)


1 2 3 4 5
Sales 6,000 5,900 5,800 3,800 4,500
Less: Wages and salaries 1,450 1,500 1,850 1,000 1,200
Selling and distribution costs 750 730 725 500 600
Materials and consumables 180 270 300 200 200
Depreciation (Straight Line) 1,500 1,500 1,500 1,500 1,500
Corporate overhead costs 400 400 400 400 400
Survey costs 40 - - - -
Interest @12% on loan from FI 600 600 600 600 600
Total expenses 4,920 5,000 5,375 4,200 4,500
Profit (loss) before tax 1,080 900 425 -400 0
Less: tax @ 35% 378 315 149 -140 0
Profit after tax 702 585 276 -260 0
The company has a policy of charging depreciation on straight-line basis. However, for tax
purposes, the WDV depreciation on the block of assets applies. The depreciation rate is 25
percent. The corporate overhead costs include the three-fourth costs incurred by the
corporate office exclusively for the proposed project. Company is proposing to borrow Rs.
5,000 million at 12% interest rate. The hurdle rate of 15% is considered appropriate for this
kind of business and pattern of financing. The corporate tax rate is 35%. The CEO is
wondering whether take-up the project given the losses that are projected after 3rd year.
Please advise her on the selection of the project.

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