General Studies · Capital Budgeting
A manufacturing company is considering a technology upgrade requiring 200 lakhs. The project is expected to generate an annual EBITDA of 60 lakhs for 5 years. The company takes a term loan of 140 lakhs at 10 percent interest, repayable in 5 equal annual installments of 28 lakhs plus interest. Depreciation is 40 lakhs per year and the tax rate is 30 percent. Is the project viable based on the first year's cash flow for debt servicing?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Yes, as the cash flow for debt servicing is 54 lakhs and the total debt obligation is 42 lakhs.✓
- 2No, because the Net Profit is only 14 lakhs.
- 3Yes, because the EBITDA is much higher than the loan installment.
- 4No, because the Interest Coverage Ratio is below 1.5.
Correct answer
Yes, as the cash flow for debt servicing is 54 lakhs and the total debt obligation is 42 lakhs.
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