IVTL: ASSESSING PROJECT ECONOMIC VIABILITY
CASE STUDY SOLUTION
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SYNOPSIS
Indus Valley Telecom Ltd. (IVTL) wanted to set up an optical fibre cable (OFC) plant at its subsidiary,
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Cosmic Equipment Company Ltd. (CEC). The general manager of IVTL, Mohit Agarwal, had contracted
an outside consulting agency, which established that the project is technically viable. In January 2016,
Agarwal wanted to conduct a comprehensive economic viability study of the project before he presented
the proposal to IVTL management for approval. He asked Suneel Saxena, finance manager of IVTL, to
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forecast financial statements for the project from the basic data and then do a comprehensive economic
viability study. Agarwal was wondering whether the project would prove to be economically viable since
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the decision to proceed depended on this.
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OBJECTIVES
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• Prepare forecasted financial statements for the project from the basic data to assess its economic viability.
• Evaluate the project based on a comprehensive financial analysis.
• Carry out sensitivity analysis of the project based on key underlying input variables.
• Assess whether the company will be able to raise long-term debt for the project.
• Decide whether the project is economically viable.
The Case Solution Starts From page 5
,ASSIGNMENT QUESTIONS
1. Forecast an income statement and balance sheet for the project from the basic data provided in the case
to assess the project’s economic viability.
2. Conduct a primary evaluation of the project by calculating the net present value (NPV), internal rate of
return (IRR), and debt service coverage ratio (DSCR), and conduct a break-even analysis.
3. Evaluate the project through a complete ratio analysis.
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4. Carry out a sensitivity analysis of the project based on the key underlying variables.
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5. Comment on the financial feasibility of the project.
6. Will the company be able to raise long-term debt from a bank, as envisaged in the project?
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7. Is the project economically viable? Should IVTL go ahead with it?
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So
The Case Solution Starts From page 5
,ANALYSIS
1. Forecast an income statement and balance sheet for the project from the basic data provided
in the case to assess the project’s economic viability.
The income statement and the balance sheet have to be forecasted for the next five years, the economic life
of the project.
.
Schedule TN-I
The production quantity can be ascertained based on the installed capacity (see case Exhibit 3) and capacity
utilization. The closing quantity of stocks the company intends to keep can be calculated as follows:
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[(No. of Days of Finished Goods (FG) and Work in Progress (WIP)) ÷ 365] × Production Quantity
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The quantity available for sale (Production + Opening Stock of FG and WIP − Closing Stock of FG and WIP)
has to be multiplied by average price realization (see “The Project” in the case) to get the sales revenue.
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Schedule TN-II
Raw-material consumption is based on sales revenue (Schedule TN-I). All the other variable costs can be
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So
The Case Solution Starts From page 5
, EXHIBIT -1: RISK MITIGATION STRATEGIES
Key Risks Risk Mitigation Strategies
Time Overrun The plant would be setup in the existing building with some modifications, which
would save a great deal of time. The machinery is easily available from reputed
suppliers, both internationally and within India.
Cost Overrun A contingency of 5% has been considered on fixed assets as part of the project
cost to cover any cost escalation.
Threat of New
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pl
m
Sa
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So
The Case Solution Starts From page 5
CASE STUDY SOLUTION
e
pl
m
SYNOPSIS
Indus Valley Telecom Ltd. (IVTL) wanted to set up an optical fibre cable (OFC) plant at its subsidiary,
Sa
Cosmic Equipment Company Ltd. (CEC). The general manager of IVTL, Mohit Agarwal, had contracted
an outside consulting agency, which established that the project is technically viable. In January 2016,
Agarwal wanted to conduct a comprehensive economic viability study of the project before he presented
the proposal to IVTL management for approval. He asked Suneel Saxena, finance manager of IVTL, to
n
forecast financial statements for the project from the basic data and then do a comprehensive economic
viability study. Agarwal was wondering whether the project would prove to be economically viable since
tio
the decision to proceed depended on this.
lu
OBJECTIVES
So
• Prepare forecasted financial statements for the project from the basic data to assess its economic viability.
• Evaluate the project based on a comprehensive financial analysis.
• Carry out sensitivity analysis of the project based on key underlying input variables.
• Assess whether the company will be able to raise long-term debt for the project.
• Decide whether the project is economically viable.
The Case Solution Starts From page 5
,ASSIGNMENT QUESTIONS
1. Forecast an income statement and balance sheet for the project from the basic data provided in the case
to assess the project’s economic viability.
2. Conduct a primary evaluation of the project by calculating the net present value (NPV), internal rate of
return (IRR), and debt service coverage ratio (DSCR), and conduct a break-even analysis.
3. Evaluate the project through a complete ratio analysis.
e
4. Carry out a sensitivity analysis of the project based on the key underlying variables.
pl
5. Comment on the financial feasibility of the project.
6. Will the company be able to raise long-term debt from a bank, as envisaged in the project?
m
7. Is the project economically viable? Should IVTL go ahead with it?
Sa
n
tio
lu
So
The Case Solution Starts From page 5
,ANALYSIS
1. Forecast an income statement and balance sheet for the project from the basic data provided
in the case to assess the project’s economic viability.
The income statement and the balance sheet have to be forecasted for the next five years, the economic life
of the project.
.
Schedule TN-I
The production quantity can be ascertained based on the installed capacity (see case Exhibit 3) and capacity
utilization. The closing quantity of stocks the company intends to keep can be calculated as follows:
e
[(No. of Days of Finished Goods (FG) and Work in Progress (WIP)) ÷ 365] × Production Quantity
pl
The quantity available for sale (Production + Opening Stock of FG and WIP − Closing Stock of FG and WIP)
has to be multiplied by average price realization (see “The Project” in the case) to get the sales revenue.
m
Sa
Schedule TN-II
Raw-material consumption is based on sales revenue (Schedule TN-I). All the other variable costs can be
n
tio
lu
So
The Case Solution Starts From page 5
, EXHIBIT -1: RISK MITIGATION STRATEGIES
Key Risks Risk Mitigation Strategies
Time Overrun The plant would be setup in the existing building with some modifications, which
would save a great deal of time. The machinery is easily available from reputed
suppliers, both internationally and within India.
Cost Overrun A contingency of 5% has been considered on fixed assets as part of the project
cost to cover any cost escalation.
Threat of New
e
pl
m
Sa
n
tio
lu
So
The Case Solution Starts From page 5
