Granite Materials: Two Projects, One Budget
Granite Materials, a building materials company in India, has two capital projects competing for approval and only ₹253 Cr of approved capital this year.
Project A — Automation upgrade. Requires ₹72 Cr upfront and is expected to generate ₹19 Cr of incremental after-tax cash flow per year for 8 years.
Project B — New production line. Requires ₹350 Cr upfront and is expected to generate ₹82 Cr per year for 7 years.
The company's hurdle rate is 13%.
Two complications. First, the finance team has already spent ₹15 Cr on engineering studies for Project B, and the COO argues this money "shouldn't be wasted". Second, Project B's cash flows depend on a customer contract that is signed but renews annually.
project a
- life years
- 8
- investment cr
- 72
- annual cash flow cr
- 19
project b
- life years
- 7
- investment cr
- 350
- annual cash flow cr
- 82
constraints
- hurdle rate pct
- 13
- capital budget cr
- 253
- already spent on b studies cr
- 15
Recommend how to allocate the capital budget. Provide:
- Analysis — NPV, IRR and payback for each project.
- Risks — including how you treat the engineering spend and the contract renewal risk.
- Recommendation — which project (or projects) to fund.
100 points, 60% to pass.
- assumptions20
- recommendation30
- risk assessment20
- financial analysis30
Reveal suggested structure
- NPV of each project using the annuity form: NPV = CF × [(1 − (1+r)^−n) ÷ r] − I₀
- IRR — the rate at which NPV = 0. Note that IRR alone misranks projects of different scale.
- Payback as a liquidity check, not a decision rule.
- Sunk cost — the ₹15 Cr is spent and irrecoverable. It must not enter the decision.
- Profitability index (NPV ÷ investment) when capital is rationed.
- Risk-adjust Project B for the annual renewal.