A

CASE STUDY ON

STUDY OF EVALUATION & SELECTION OF A

NEW SEAT MANUFACTURING PROJECT USING
CAPITAL BUDGETING TECHNIQUES AT LEAR
AUTOMOTIVE INDIA PVT. LTD.

SUBMITTED TO

BALAJI INSTITUTE OF INTERNATIONAL

BUSINESS (BIIB), PUNE

BY

KRISHNA PRAJAPAT
IB1614317 I FINANCE

SRI BALAJI SOCIETY’S

BALAJI INSTITUTE OF INTERNATIONAL BUSINESS (BIIB)
S No – 5/2-7, TATHAWADE, WAKAD, PUNE - 411033

Page 1 of 22
A STUDY OF EVALUATION & SELECTION OF
A NEW SEAT MANUFACTURING PROJECT
USING CAPITAL BUDGETING TECHNIQUES AT
LEAR AUTOMOTIVE INDIA PVT LTD

KRISHNA PRAJAPAT - IB1614317

BIIB BATCH 2016-18
FINANCE

Page 2 of 22
 A STUDY OF EVALUATION & SELECTION
OF A NEW SEAT MANUFACTURING
PROJECT USING CAPITAL BUDGETING
TECHNIQUES AT LEAR AUTOMOTIVE
INDIA PVT. LTD.

Submitted By

KRISHNA PRAJAPAT

ROLL NO: IB1614317

PGDM (FINANCE)

IN

BALAJI INSTITUTE OF INTERNATIONAL BUSINESS

(BIIB)
ORMAT OF CERTIFICATE FROM COMPANY / ORGANISATION

This is to certify that Mr. Krishna Prajapat, student of Two Year Full Time
Post Graduate Programme in Management – PGDM (FINANCE) of Balaji
Institute of International Business (BIIB), Pune – 411033 has completed A
NEW

Page 3 of 22
SR.NO. PARTICULARS PG. NO.

I Abbreviations 8

II Executive Summary 9

1 Introduction 10

1.2 Literature Review 11

1.3 Company Profile 11

1.5 Objectives of The Study 15

2 Research Methodology 18

3 Data Analysis, Interpretation and Findings 23

3.2 NPV, IRR, PBP, DPBP calculations 23

3.3 Interpretation and Findings 26

3.4 Conclusion and Recommendation 26

3.9 Bibliography 28

3.10 Key Terms 29

3.13 Excel Worksheets 33

34

TABLE OF CONTENTS

Page 4 of 22
 EXECUTIVE SUMMARY

Once projects have been identified, management then begins the financial process of
determining whether or not the project should be pursued. The three common capital
budgeting decision tools are the payback period, net present value (NPV) method and
the internal rate of return (IRR) method.

The objective of this study is to evaluate the viability of a new manufacturing project
proposal and to understand the Nitty-gritty of estimating the CapEx requirement for
the same, and the optimizations which will lead to generate better cash flows.

Two new seat manufacturing proposals were taken into consideration in making of
business cases during the project as to see how capital budgeting techniques impacts
the decision in undertaking the new project. NPV, IRR, PBP, DPBP methods were
used to evaluate the project.

Key assumptions were made as to simplify the CapEx estimation. Real CapEx figures
were not available due to privacy policy of the company.

The company uses NPV method for selection of the projects. We also seen in various
studies that majority of companies uses payback and NPV as their tools of capital
budgeting.

The two cases resulted in negative and positive NPV figures respectively, of which
business case 2 was selected as per its positive NPV figures. Other methods viz. IRR,
PBP, DPBP also supports the results of NPV method and streamlines decision
making.

Company takes capital budgeting decisions using NPV method, other techniques
could have been also considered, specially MIRR which is known to be more precise.

Page 5 of 22
 CHAPTER 1: INTRODUCTION

1.1. This project was undertaken at “Finance Department” of “Lear Automotive India
Pvt. Ltd., Pune”.

1.1.1. Lear Corporation is ranked #154 on the Fortune 500 with world-class products
designed, engineered and manufactured by a diverse team of talented employees.
As a leading supplier of automotive seating and electrical, Lear serves its
customers with global capabilities while maintaining individual commitment.
With headquarters in Southfield, Michigan, Lear maintains 243 locations in 37
countries around the globe and employs approximately 150,000 employees. Lear
is traded under the symbol [LEA] on the New York Stock Exchange. In india
Lear corporation have its operations in 5 locations viz. pune, halol, Gujrat,
haridwar and Chennai engaged in automotive seating and vertically integrated
products like recliners, adjusters and metal frames for seats. Mahindra, Nissan,
Ford, General Motors, Daimler, Suzuki, Renault Volkswagen, TATA are some
of key clients of Lear corporation in india.

1.1.2. The project undertaken Is “Study of Evaluation & Selection of A New Seat
Manufacturing Project Using Capital Budgeting Techniques at Lear
Automotive India Pvt. Ltd”
Capital budgeting plays a pivotal role in any organization’s financial
management strategy. It is the “process of evaluating and selecting long term
investments that are consistent with the business’s goal of maximizing owner
wealth”. Typically, every Organization that embarks on this process must take
all necessary steps to ensure that their decision-making criteria supports the
business’s strategy and enhances its competitive advantage over its rivalries.
The realization that a business leverages its competitive advantage on its
resources and on how it undertakes decisions relating to the use of its
resources, such as financial resources call for managers to make informed
decisions.

Page 6 of 22
 2.

CHAPTER 3: COMPANY PROFILE

2.1. LEADING GLOBAL TIER 1.

Lear Corporation is ranked #151 on the Fortune 500 with world-class products
designed, engineered and manufactured by a diverse team of talented
employees. As a leading supplier of automotive seating and electrical, Lear
serves its customers with global capabilities while maintaining individual
commitment. With headquarters in Southfield, Michigan, Lear maintains 243
locations in 37 countries around the globe and employs approximately
150,000 employees. Lear is traded under the symbol [LEA] on the New York
Stock Exchange.

 A FORTUNE #154 company which focuses on automotive interiors and

electronics and is the world’s 5th largest automotive supplier.
 Founded in 1917 as American Metal Products.
 Headquarters is in Southfield, Michigan.
 Leading Tier 1 global automotive supplier with 2016 sales of
$18.6 billion
 A leader in product technology and innovation for Automotive Seating &
Electrical Power Management System.
 150,000 employees at 243 locations in 37 countries
 Strong Engineering Centers in China, India, Philippines, Germany & USA.

3.

4.

5.

6.

7.

Page 7 of 22
8.

9. CHAPTER 4: OBJECTIVES OF THE STUDY

4.1. PROBLEM IDENTIFICATION
1. Lear has received a new seat system manufacturing project proposal from
XXXX company.
2. The team has to evaluate the project and accept/reject it based on the
returns they yield from the project.
3. They need to estimate the cost for the project and expected profits from
it.

4.2. RESEARCH PROBLEM

1. To evaluate and select the project by estimating future costs, profits and
future cash flows to see if the project would be viable or not, using
capital budgeting techniques like NPV, IRR, discounted Payback period
and Payback period method.

4.3. OBJECTIVES OF THE STUDY

1. To study the viability of a new seat manufacturing project proposal under

JIT.
2. To understand undertaking of new project under JIT (just in time
manufacturing).

Page 8 of 22
CHAPTER 5: RESEARCH METHODOLOGY

10.1. SCOPE OF THE STUDY

 To understand the process of selecting a new project in just in time seating
with use of capital budgeting techniques.

10.2. DATA COLLECTION: PRIMARY OR SECONDARY

 The data used in this project is of secondary nature. The formats and data used
are provided by the company.

10.3. TOOLS OF ANALYSIS

 Calculation and Analysis using MS-Excel.
 Capital budgeting techniques
o NPV
o IRR
o Payback Period method
o Discounted Payback method

10.4. LIMITATIONS OF THE STUDY

 The data taken for calculation is distorted and provided by the organization,
the actual figures were not provided due to the privacy policy of the
organization.
 The area of study was limited to the derivation of business cases in order to
arrive at favorable results.

Page 9 of 22
 CHAPTER 6: DATA ANALYSIS, INTERPRETATION
AND FINDINGS

11.1.1. There are two business cases used for the evaluation.

11.1.2. Company is working based on “just in time manufacturing model”

11.1.3. Target price is provided by the client and its non-negotiable.

11.1.4. We will evaluate the business cases and choose whether company will
yield profits at the end of the project.
11.1.5. Company uses NPV as a benchmark method to select a particular
project.
11.1.6. Other capital budgeting methods are used to find any variations in the
final decision making.

11.2. BUSINESS CASE 1: CALCULATIONS

11.2.1. Assumptions
 Land of existing Plant is considered for this business case. New Building is to
be constructed.
 Life of the project will be of 6 years.
 DL & IDL HC will increase in proportion to Volume on year to year basis.
 Inflation of 5% is considered and this is to be offset by Operations cost saving
on year to year basis, thus no impact of inflation net off cost saving.
 All Investments is to be depreciated on program life, i.e., on 6 years. SLM
basis is used for Depreciation.
 Cost of Capital is assumed as 10%
 Onetime expense-to be expensed off on 2017
 Tooling Cost is to be incurred as 70% in 2017 and 30% in 2018. Cost is to be
recovered from customer through piece price recovery on program life
Volume.
 Engineering Cost is to be incurred as 100% in 2016. Cost is to be recovered
from customer through piece price recovery on program life Volume.

Page 10 of 22
  Income Tax rate @ 35%
 Insurance cost will be 0.1% of Capex.

11.2.2. PROJECT INPUTS

CUSTOMER NAME XXXXX

PROGRAM LIFE 6 years

SOP Jan-18

PRODUCT Car Seat

TARGET SELLING PRICE FROM CUSTOMER(INR/CS) _BASE COST 12,500

MAT COST (INR/CS) _BASE COST 10,000

INBOUND FREIGHT ON RM 3.5% of RM

OUTBOUND FREIGHT (INR/CS) 400

DIRECT LABOR (HEAD COUNT) 60

INDIRECT LABOR (HEAD COUNT) 25

SALARIED (HEAD COUNT) 10

OTHER OH COST (INR/CS) 850

CUSTOMER PAYMENT TERMS (DAYS) 60

SUPPLIER PAYMENT TERMS (DAYS) 60

INVENTORY HOLDING DAYS (DAYS) 7

SGA EXPENSE 3.5% of Sales

CAPEX (INR_CRORES)  

M&E CAPEX 11.25

IT CAPEX 4.25

BUILDING CAPEX 6.35

TOTAL CAPEX 21.85

INITIAL COST (TRAVELLING, ETC) (INR CRORES) 0.85

TOOLING COST (INR CRORES) 3.25

ENGINEERING COST (INR CRORES) 2.00

UNITS TO BE
MANUFACTURED

Page 11 of 22
 YEARS 2017 2018 2019 2020 2021 2022 2023
VOLUME
(CAR NA 85,000 90,000 100,000 110,000 130,000 140,000
SET)

11.2.3. COMPUTATION OF EARNING AFTER TAX (in INR crores)

EARING AFTER TAX COMPUTATION 2017 2018 2019 2020 2021 2022 2023 TOTAL
VOLUME 85,000 90,000 100,000 110,000 130,000 140,000 655,000

SALES REVENUE 12,500 - 106.25 112.50 125.00 137.50 162.50 175.00 818.75
MATERIAL COST:
RAW MATERIAL COST (BASE) 10,000 85.00 90.00 100.00 110.00 130.00 140.00 655.00
INBOUND FREIGHT 350 2.98 3.15 3.50 3.85 4.55 4.90 22.93
(1) RAW MATERIAL COST (TOTAL) 10,350 87.98 93.15 103.50 113.85 134.55 144.90 677.93
% RAW MATERIAL COST (TOTAL) 0.0% 82.8% 82.8% 82.8% 82.8% 82.8% 82.8% 82.8%

DIRECT LABOR (HEAD COUNT) 60 60 64 71 78 92 99

INDIRECT LABOR (HEAD COUNT) 25 25 27 30 33 39 42
SALARIED (HEAD COUNT) 10 10 10 10 10 10 10

CONVERSION COST:
DIRECT LABOR 27,000 1.94 2.07 2.30 2.53 2.98 3.21 15.03
INDIRECT LABOR 17,000 0.51 0.55 0.61 0.67 0.80 0.86 4.00
SALARIED 52,500 0.63 0.63 0.63 0.63 0.63 0.63 3.78
INSURANCE COST 0.1% 0.02 0.02 0.02 0.02 0.02 0.02 0.13
OTHER OVERHEADS EXCEPT 850 7.23 7.65 8.50 9.35 11.05 11.90 55.68
DEPRECIATION AND INITIAL COST

DEPRECIATION (6 YEARS FULLY, SLM) 3.64 3.64 3.64 3.64 3.64 3.64 21.85
INITIAL COST 0.85 0.85 0.85
(2) TOTAL CONVERSION COST 0.85 13.97 14.57 15.71 16.84 19.12 20.26 101.32
% TOTAL CONVERSION COST 0.0% 13.2% 12.9% 12.6% 12.3% 11.8% 11.6% 12.4%
PROGRAM SPECIFIC COST / RECOVERY:
TOOLING COST 3.25 2.28 0.98 3.25
TOOLING RECOVERY (0.42) (0.45) (0.50) (0.55) (0.65) (0.69) (3.25)
ENGINEERING COST 2.00 2.00 2.00
ENGINEERING RECOVERY (0.26) (0.27) (0.31) (0.34) (0.40) (0.43) (2.00)
(3) NET OFF TOOLING & ENGINEERING 4.28 0.29 (0.72) (0.80) (0.88) (1.04) (1.12) -
COST & RECOVERY
% NET OFF TOOLING & ENGINEERING 0.0% 0.3% -0.6% -0.6% -0.6% -0.6% -0.6% 0.0%
COST & RECOVERY

COST OF GOODS SOLD 5.13 102.24 107.00 118.40 129.81 152.63 164.04 779.24
% COST OF GOODS SOLD 0.0% 96.2% 95.1% 94.7% 94.4% 93.9% 93.7% 95.2%

OPERATING INCOME (5.13) 4.01 5.50 6.60 7.69 9.87 10.96 39.51
% OPERATING INCOME 0.0% 3.8% 4.9% 5.3% 5.6% 6.1% 6.3% 4.8%

SELLING, GENERAL & ADMINISTRATION 3.5% - 3.72 3.94 4.38 4.81 5.69 6.13 28.66
EXPENSES
EARNING BEFORE TAX (5.13) 0.29 1.57 2.22 2.88 4.18 4.84 10.85

Page 12 of 22
 % EARNING BEFORE TAX 0.0% 0.3% 1.4% 1.8% 2.1% 2.6% 2.8% 1.3%

CORPORATE INCOME TAX 35% (1.79) 0.10 0.55 0.78 1.01 1.46 1.69 3.80
EARNING AFTER TAX (3.33) 0.19 1.02 1.44 1.87 2.72 3.15 7.05
% EARNING AFTER TAX 0.0% 0.2% 0.9% 1.2% 1.4% 1.7% 1.8% 0.9%

11.2.4. COMPUTATION OF FUTURE CASH FLOWS (in INR crores)

2017 2018 2019 2020 2021 2022 2023 Total

EARING AFTER TAX (3.33) 0.19 1.02 1.44 1.87 2.72 3.15 7.05

CAPITAL CASH OUTLAY: ↓

11.2
M&E CAPEX (11.25) (11.25)
5
IT CAPEX 4.25 (4.25) (4.25)
BUILDING CAPEX 6.35 (6.35) (6.35)

DEPRECIATION ADDBACK - 3.64 3.64 3.64 3.64 3.64 3.64 21.85

CHANGE IN WORKING CAPITAL ↓

(17.47 (2.05 (2.05
A/C RECEIVABLE (INCR.) / DECR. - (1.03) (4.11) 26.71 -
) ) )
(0.22 (0.22
NET INVENTORIES (INCR.) / DECR. (0.10) (1.86) (0.09) (0.44) 2.93 -
) )
(22.12
A/C PAYABLE INCR. / (DECR.) - 14.46 0.85 1.70 1.70 3.40 -
)

NET CASH INFLOW / (OUTFLOW) (25.28) (1.04) 4.39 4.51 4.94 5.22 14.31 7.05

6.2.4.1 Now we have Future cash flows with us, we will find NPV, IRR, PBP, DPBP:

IRR – internal rate of return 5.4%

NPV: Net present value (crores) (4.10)

PBP: Payback period (years) 5 years, 6 months, 3 days

Investment cannot be recovered in
DPBP: Discounted Payback period (@10%) (years)
project life of 6 years

11.2.5. Comments
 In respect of the above calculations we do not find any favorable results
yield from the project.

Page 13 of 22
  As IRR is below the COC, NPV is negative also PBP is close to 6 years
and DPBP not recovering the investment in 6 years.
 As we are not able to recover the investment costs, would try to
formulate another business case.

11.3. BUSINESS CASE 2: CALCULATIONS

 Company is working based on “just in time manufacturing model”

 Target price is provided by the client and its non-negotiable.
Company uses NPV as a benchmark method to select a particular project.
Other capital budgeting methods are used to find any variations in the final
decision making.

11.3.1. Assumptions

 Land of existing Plant is considered for this business case. New Building is to
be constructed.
 life of project will be of 6 years.
 DL & IDL HC will increase in proportion to Volume on year to year basis.
 Inflation of 5% is considered and this is to be offset by Operations cost saving
on year to basis, thus no impact of inflation net off cost saving.
 All Investment is to be depreciated on program life, i.e., on 6 years. SLM basis
is used for Depreciation.
 Cost of Capital is assumed as 10%
 Onetime expense-to be expensed off on 2017
 Tooling Cost is to be incurred as 70% in 2017 and 30% in 2018. Cost is to be
recovered from customer thru piece price recovery on program life Volume.
 Engineering Cost is to be incurred as 100% in 2017. Cost is to be recovered
from customer thru piece price recovery on program life Volume.
 Income Tax rate @ 35%

Page 14 of 22
  Insurance cost will be 0.1% of Capex.

11.3.2. PROJECT INPUTS

CUSTOMER NAME XXXXX

PROGRAM LIFE 6 years

SOP Jan-18

PRODUCT Car Seat

TARGET SELLING PRICE FROM CUSTOMER(INR/CS) _BASE COST 12,500

MAT COST (INR/CS) _BASE COST 10,000

INBOUND FREIGHT ON RM 3% of RM

OUTBOUND FREIGHT (INR/CS) 400

DIRECT LABOR (HEAD COUNT) 60

INDIRECT LABOR (HEAD COUNT) 25

SALARIED (HEAD COUNT) 10

OTHER OH COST (INR/CS) 600

CUSTOMER PAYMENT TERMS (DAYS) 60

SUPPLIER PAYMENT TERMS (DAYS) 60

INVENTORY HOLDING DAYS (DAYS) 7

SGA EXPENSE 3.5% of Sales

CAPEX (INR_CRORES)  

M&E CAPEX 10.50

IT CAPEX 3.75
BUILDING CAPEX 5.65
TOTAL CAPEX 19.90
INITIAL COST (TRAVELLING, ETC) (INR CRORES) 0.85

TOOLING COST (INR CRORES) 3.25

ENGINEERING COST (INR CRORES) 2.00

Page 15 of 22
 UNITS TO BE
MANUFACTURED
YEARS 2017 2018 2019 2020 2021 2022 2023
VOLUME
(CAR NA 85,000 90,000 100,000 110,000 130,000 140,000
SET)

11.3.3. CHANGES MADE TO CAPEX IN BUSINESS CASE 2

 Inbound freight reduced to 3% of Raw material from 3.5% by integrating

and centralizing the inbound shipping of raw material with other
manufacturing units.

 other overhead costs brought down to 600 INR/Cs from 850 INR/Cs by
optimizing and reducing,
o Cleaning costs of equipment.
o Material handling like forklifts
o Maintenance of the equipment.

 M&E CAPEX reduced to 10.50 Cr from 11.25 Cr by transferring the side

job of cut and sew of seat trim covers to existing plant, saving on new
equipment for cut and sew.

 IT CAPEX reduced to 3.75 Cr from 4.25 Cr. by use of 3 rd party cloud

data servers for the project life, omitting the need of new physical data
servers.

 Building CAPEX reduced to 5.65 Cr from 6.35 Cr. by negotiating with

the contractor and using locally manufactured components and materials.

 Labor costs reduced by lowering the time required to produce an average

unit by providing specialized training that allows employees to work at a
faster pace and cross trained salaried staff for various processes.

Page 16 of 22
o Cost of per HC/month of direct labor reduced to INR 25,000 from
INR27,000.
o Cost of per HC/month of Indirect Labor reduced to INR 15,000
from INR 17,000.
o Cost of per HC/month of Salaried staff reduced to INR 50,000
from INR 52,500.

Page 17 of 22
 11.3.4. COMPUTATION OF EARNING AFTER TAX (in INR crores)
EARING AFTER TAX COMPUTATION 2017 2018 2019 2020 2021 2022 2023 TOTAL
VOLUME 85,000 90,000 100,000 110,000 130,000 140,000 655,000

SALES REVENUE 12,500 - 106.25 112.50 125.00 137.50 162.50 175.00 818.75
MATERIAL COST:
RAW MATERIAL COST (BASE) 10,000 85.00 90.00 100.00 110.00 130.00 140.00 655.00
INBOUND FREIGHT 300 2.55 2.70 3.00 3.30 3.90 4.20 19.65
(1) RAW MATERIAL COST (TOTAL) 10,300 87.55 92.70 103.00 113.30 133.90 144.20 674.65
% RAW MATERIAL COST (TOTAL) 0.0% 82.4% 82.4% 82.4% 82.4% 82.4% 82.4% 82.4%

DIRECT LABOR (HEAD COUNT) 60 60 64 71 78 92 99

INDIRECT LABOR (HEAD COUNT) 25 25 27 30 33 39 42
SALARIED (HEAD COUNT) 10 10 10 10 10 10 10

CONVERSION COST:
DIRECT LABOR 25,000 1.80 1.92 2.13 2.34 2.76 2.97 13.92
INDIRECT LABOR 15,000 0.45 0.49 0.54 0.59 0.70 0.76 3.53
SALARIED 50,000 0.60 0.60 0.60 0.60 0.60 0.60 3.60
INSURANCE COST 0.1% 0.02 0.02 0.02 0.02 0.02 0.02 0.12
OTHER OVERHEADS EXCEPT
600 5.10 5.40 6.00 6.60 7.80 8.40 39.30
DEPRECIATION AND INITIAL COST

DEPRECIATION (6 YEARS FULLY, SLM) 3.32 3.32 3.32 3.32 3.32 3.32 19.90
INITIAL COST 0.85 0.85 0.85
(2) TOTAL CONVERSION COST 0.85 11.29 11.74 12.61 13.47 15.20 16.06 81.22
% TOTAL CONVERSION COST 0.0% 10.6% 10.4% 10.1% 9.8% 9.4% 9.2% 9.9%
PROGRAM SPECIFIC COST / RECOVERY:
TOOLING COST 3.25 2.28 0.98 3.25
TOOLING RECOVERY (0.42) (0.45) (0.50) (0.55) (0.65) (0.69) (3.25)
ENGINEERING COST 2.00 2.00 2.00
ENGINEERING RECOVERY (0.26) (0.27) (0.31) (0.34) (0.40) (0.43) (2.00)
(3) NET OFF TOOLING & ENGINEERING
4.28 0.29 (0.72) (0.80) (0.88) (1.04) (1.12) -
COST & RECOVERY
% NET OFF TOOLING & ENGINEERING
0.0% 0.3% -0.6% -0.6% -0.6% -0.6% -0.6% 0.0%
COST & RECOVERY

COST OF GOODS SOLD 5.13 99.13 103.72 114.81 125.89 148.06 159.14 755.87
% COST OF GOODS SOLD 0.0% 93.3% 92.2% 91.8% 91.6% 91.1% 90.9% 92.3%

OPERATING INCOME (5.13) 7.12 8.78 10.19 11.61 14.44 15.86 62.88
% OPERATING INCOME 0.0% 6.7% 7.8% 8.2% 8.4% 8.9% 9.1% 7.7%

SELLING, GENERAL & ADMINISTRATION

3.5% - 3.72 3.94 4.38 4.81 5.69 6.13 28.66
EXPENSES
EARNING BEFORE TAX (5.13) 3.40 4.84 5.82 6.80 8.76 9.73 34.23
% EARNING BEFORE TAX 0.0% 3.2% 4.3% 4.7% 4.9% 5.4% 5.6% 4.2%

CORPORATE INCOME TAX 35% (1.79) 1.19 1.69 2.04 2.38 3.06 3.41 11.98
EARNING AFTER TAX (3.33) 2.21 3.15 3.78 4.42 5.69 6.33 22.25
% EARNING AFTER TAX 0.0% 2.1% 2.8% 3.0% 3.2% 3.5% 3.6% 2.7%

Page 18 of 22
11.3.5. COMPUTATION OF FUTURE CASH FLOWS (in INR crores)

2017 2018 2019 2020 2021 2022 2023 Total

EARING AFTER TAX (3.33) 2.21 3.15 3.78 4.42 5.69 6.33 22.25

CAPITAL CASH OUTLAY: ↓

10.5
M&E CAPEX (10.50) (10.50)
0
IT CAPEX 3.75 (3.75) (3.75)
BUILDING CAPEX 5.65 (5.65) (5.65)

DEPRECIATION ADDBACK - 3.32 3.32 3.32 3.32 3.32 3.32 19.90

CHANGE IN WORKING CAPITAL ↓

(17.47 (1.03
A/C RECEIVABLE (INCR.) / DECR. - (2.05) (2.05) (4.11) 26.71 -
) )
(0.09
NET INVENTORIES (INCR.) / DECR. (0.10) (1.80) (0.21) (0.21) (0.43) 2.84 -
)
(22.01
A/C PAYABLE INCR. / (DECR.) - 14.36 0.85 1.69 1.69 3.39 -
)
NET CASH INFLOW / (OUTFLOW) (23.33) 0.65 6.19 6.53 7.16 7.86 17.18 22.25

6.3.5.1 Now we have Future cash flows with us, we will find NPV, IRR, PBP, DPBP:

IRR – internal rate of return 16.9%

NPV: Net present value (crores) 6.14

PBP: Payback period (years) 4 years, 4 months, 8 days

DPBP: Discounted Payback period (@10%) (years) 5 years, 3 months, 19 days

11.3.6. Comments
 I see that in this business case we have favorable results in each
technique.
 IRR is now more than COC and NPV is resulted into positive.
 PBP is close to four and a half which can be termed as good.

Page 19 of 22
11.4. INTERPRETATION AND FINDINGS

1. IRR was less than COC (10%) in business case:1 which is not acceptable,
while in business case:2 it was more than COC. (page__
2. NPV was negative in business case:1, while in case:2 it came positive, which
is a deciding factor. (page__
3. PBP was acceptable in both cases as it recovered the cost in less than 6 years,
but PBP of case 2 was better in recovering costs. (page___
4. According to DPBP method, in case 1 it is not possible to recover the
investments in project life of 6 years but was acceptable in case 2. (page__
5. Projects can be made profitable by making optimizations to processes and
negotiations and reducing CAPEX. (page__
6. According to company practices, project with better NPV will be accepted.
7. Business case 2 has better yields than that of case 1.

 COMPARATIVE ANALYSIS BUSINESS CASE

1 2
NPV (INR CRORES) -4.1 6.14
IRR (%) 5.40% 16.90%
5 years, 6 months, 3 4 years, 4 months, 8
PBP (YEARS)
days days
Investment cannot be 5 years, 3 months, 19
DPBP (YEARS) @10% DCF recovered in project life days
of 6 years

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 CHAPTER 7: CONCLUSION AND
RECOMMENDATION

1. Business case 2 is to be accepted as per findings obtained.

2. NPV is the choice of method when it comes to capital budgeting techniques in
Lear corp.
3. Use of NPV also supports the various studies done in past as stated in literature
review.
4. Other methods viz. IRR, PBP, DPBP also supports the results of NPV method and
helps in decision making.
5. MIRR can also be used in evaluating projects as it is more accurately reflects the
cost and profitability of a project compared to IRR. (7% and 15% for case 1 and 2
respectively)

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