Egret Printing and Publishing Company

Egret Printing and publishing company
Financial report
Financial Management
Submitted by
Nishan Rajbhandari
Sudhir Bogati
Suprava shrama
Sujata Pathak
Siddhartha Chhetri
Master of Business Administration (MBA)
Global College International (GCI)
Submitted in
partial fulfillment of the requirement for the Master of Business
Administration
(MBA) degree
Submitted to
Prof.Dr. Radhe Shyam Pardhan
Global College International (GCI)
In Affiliation with Shinawatra University
Kathmandu, Nepal
Submitted on
Sept 18, 2015
Theory and Case Background:

The term capital budgeting refers to the process of decision making by which firms
evaluate the purchase of major fixed assets, including building, machineries, and
equipment. Capital budgeting describes the firms formal planning process for the
acquisition and investment of capital and results in capital budget that is the firms
formal plan for the expenditure of money to purchase new fixed asset for
expansion or replacement of business. Egret printing and publishing company is a
family owned company established by Jhon and Keith in 1956. Patrick Hill joined
the firm in 1979 in accounting department. As being in this department he has
responsibility for both internal and external financial decision. Egret is an all
equity capital structured company. It was a success company specially, in printing
business. It has also made a investment in a diversified business named local video
text service. Over one half of the systems subscribers pay for the video text
service. Belford had identified four major investment proposals for his firms
internal fund 3 million. The four projects are as follows:
Project A: It has been designed to alleviate the capacity problem by constructing a
new wing of the main plant.
Project B: The project can be finish more quickly and will allow to take several
major printing jobs.
Project C: The project would alleviate the capacity by acquiring the latest
equipment designed for such printing functions.
Project D: Upgrade of Egrets Video Text Service
This project is an extra charge features on the local cable television system. It is
targeted at updating information presented on screen more quickly and will
increase reliability of their service.
Question 1
Payback period
Payback period is the time in which the initial cash outflow of an investment is
expected to be recovered from the cash inflows generated by the investment. It is
one of the simplest investment appraisal techniques. Payback period as a tool of
analysis is often used because it is easy to apply and easy to understand for most
individuals, regardless of academic training or field of endeavor. When used
carefully or to compare similar investments, it can be quite useful. As a stand-alone
tool to compare an investment to "doing nothing," payback period has no explicit
criteria for decision-making.
The payback method should not be used as the sole criterion for approval of a
capital investment. Instead, consider using the net present value and internal rate of
return methods to incorporate the time value of money and more complex cash
flows, and use throughput to see if the investment will actually boost overall
corporate profitability. There are also other considerations in a capital investment
decision, such as whether the same asset model should be purchased in volume to
reduce maintenance costs, and whether lower-cost and lower-capacity units would
make more sense than an expensive "monument" asset.
Calculation of Payback period

Using 15% discount factor
For project A
(In thousand US dollar)
Year
Cash flow
1
2
3
4
300
350
500
600
Discount
factor
(15%)
0.8696
0.7561
0.6575
0.5718
Discounted Cumulative
Cash flow Discounted cash
flow
260.88
260.88
264.64
525.52
328.75
854.27
343.08
1197
Amount to recover
Cash flow during the year
= Minimum year +
Payback
period
(1000 854.27)
343.08
=
3 years +
= 3.425 years
Project B
Year
Cash flow
1
2
3
4
800
400
200
100
Payback
period
Discount
factor
(15%)
0.8696
0.7561
0.6575
0.5718
flow
695.68
695.68
302.44
998.12
131.50
1129.62
57.18
1186.80
Amount to recover
= Minimum year +
(1000 998.12)
131.50
=
2 years + = 2.014 years
Project C
Year
Cash flow
1
2
3
4
5
6
7
8
9
10
650
650
650
650
650
650
650
650
650
650
Discount
factor
(15%)
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
0.3759
0.3269
0.2843
0.2472
flow
565.24
565.24
491.47
1,056.71
427.38
1,484.08
371.67
1,855.75
323.18
2,178.93
281.00
2,459.93
244.34
2,704.26
212.49
2,916.75
184.80
3,101.54
160.68
3,262.22
Amount to recover
Payback
period
= Minimum year +
=
4 years +
(2000 1855.75)
323.18
=4.446years
Project D
Year
Cash flow
1
2
3
4
5
350
350
350
350
350
Discount
factor
(15%)
0.8696
0.7561
0.6575
0.5718
0.4972
flow
304.36
304.36
264.64
569.00
230.13
799.12
200.13
999.25
174.02
1,173.27
Amount to recover
= Minimum year +
Payback
period
(1000 999.25)
174.02
=
4 years
+
= 4.00 years
Using 21% discount factor

Project A
Year
Cash flow
1
2
3
4
300
350
500
600
Discount
factor
(21%)
0.8264
0.6830
0.5645
0.4665
flow
247.92
247.92
239.05
486.97
282.25
769.22
279.90
1049.12
Amount to recover
Payback period
= Minimum year +
(1000 769.22)
279.90
=
3 years +
= 3.826 years
Project B
Year
Cash flow
1
2
3
4
800
400
200
100
Discount
factor
(21%)
0.8264
0.6830
0.5645
0.4665
flow
661.12
661.12
273.20
934.32
112.90
1047.22
46.65
1093.86
Amount to recover
Payback
period
=
2 years +

= Minimum year +
(1000 934.32)
112.90
= 2.582 years
Project C
Year
Cash flow
1
2
3
4
5
6
7
8
9
10
650
650
650
650
650
650
650
650
650
650
Discount
factor
(15%)
0.8264
0.6830
0.5645
0.4665
0.3855
0.3186
0.2633
0.2176
0.1799
0.1486
flow
537.16
537.16
443.95
981.11
366.93
1,348.04
303.23
1,651.26
250.58
1,901.84
207.09
2,108.93
171.15
2,280.07
141.44
2,421.51
116.94
2,538.45
96.59
2,635.04
Amount to recover
Payback
period
= Minimum year +
(2000 1901.84)
207.09
=
5 years +
= 5.274 years
Project D
Year
Cash flow

Discount
factor
(21%)
flow
1
2
3
4
5
350
350
350
350
350
0.8264
0.6830
0.5645
0.4665
0.3855
289.24
239.05
197.58
163.28
134.93
289.24
528.29
725.87
889.14
1,024.07
Amount to recover
Payback period
=
4 years +
= Minimum year +
(1000 889.14)
134.93
= 4.822 years
From the given calculation Payback period of project are:

Project
A
Cost of project
1000
Discount
rate 3.787
(15%)
years
Discount
rate 3.826
(21%)
years
Life of project
4 years
Project B
Project C
Project D
1000
2.014 years
2000
4.446 years
1000
4 years
2.582 years
5.274 years
4 years
10 years
4.822
years
5 years
With limited capital budget $3.0 million project B and Project C should be
accepted, hence Project A and Project B are mutually exclusive. Project B has
2.014 years at 15% discount factor and 2.582 years 21% discount factor and
project C has 4.446 years payback period at 15 % and 5.274 years payback period
at 21% discount factor. Project D has higher payback period compare project B and
life of project also higher then Project B and if project B and project C accepted
capital budget also fulfill that is 3.0 million.
Net Present value

Net present value is difference between the present value of cash inflows and the
present value of cash outflows, NPV is used in capital budgeting to analyze the
profitability of a project investment or project. Net present value is a calculation
that compares the amount invested today to the present value of the future cash
receipts from the investment. In other words, the amount invested is compared to
the future cash amounts after they are discounted by a specified rate of return.
A positive net present value indicates that the projected earnings generated by a
project or investment (in present dollars) exceed the anticipated costs (also in
present dollars). Generally, an investment with a positive NPV will be a profitable
one and one with a negative NPV will result in a net loss. This concept is the basis
for the Net present value rule. This dictates that the only investments that should be
made are those with positive NPV values. When the investment in question is
an acquisition or a merger, one might also use the discounted cash flow metric.
Apart from the formula itself, net present value can often be calculated using
tables, spreadsheets such as Microsoft Excel own NPC calculator.
Calculation of Net Present Value

At 15% and 21 % discount rate
Project A
Year
Cash Flow PV Factor 15%
Present
value
PV
Factor Present
21%
Value
(1000)
(1000)
(1000)
300
0.8696
260.88
0.8264
247.92
350
0.7561
264.64
0.6830
239.05
3
4
500
600
0.6575
0.5718
328.75
343.08
0.5645
0.4665
282.25
279.90
Net
value
present 197.35
49.12
Project A have 197.35 Net present value at 15 % discount factor and 49.12 Net
present value at 21% discount factor.
Project B
Year
Present
value
PV
Factor Present
21%
Value
(1000)
(1000)
(1000)
800
0.8696
695.68
0.8264
661.12
400
0.7561
302.44
0.6830
273.20
3
4
200
100
0.6575
0.5718
131.50
57.18
0.5645
0.4665
112.90
46.65
present 186.8
Net
value
93.87
Project B have 186.8 Net present value at 15 % discount factor and 93.87 Net
Project C
Year
0
1-10
Cash flow PV
(15%)
(2000)
1
650
5.0188
635.165
factor Present
value
(2000)
3262.2
2
NPV
PV factor Present
(21%)
value
1
(2000)
2635.165
4.0541
1262.22
Project C have 1262.22 Net present value at 15% discount factor and 63.165 Net
Project D
Year
Cash flow PV
(15%)
0
1-5
(1000)
350
factor Present
value
1
3.3522
(1000)
1173.2
7
NPV
PV factor Prese
(21%)
nt
value
1
(1000)
1024.1
2.9260
173.27
24.1
Project C have 173.27 Net present value at 15% discount factor and 24.1 Net
From the above calculation Net present value of project A, B, C and D are as
follows:
Project
A
Cost of project
1000
Net Present value 197.35
(15%)
Net Present Value 49.12
(21%)
Life of project
4 years
Project B
Project C
Project D
1000
186.8
2000
1262.22
1000
173.27
93.87
635.165
24.1
4 years
10 years
5 years
At 15% discount factor project A and project C has higher Net present value ie
197.35 and 1262.22 respectively comparison with project B and project D with
186.8 and 173.27 Net present value respectively so according to NPV at 15%
discount factor project A and project C should be accepted.
At 21% discount factor project B and project C has higher Net present value ie
93.87 and 635.165 respectively comparison with project A and project D with
49.12 and 24.1 Net present value respectively so according to NPV at 21%
discount factor project B and project C should be accepted.
Internal rate of return

Internal rate of return (IRR) is the interest rate at which the net present value of
all the cash flows (both positive and negative) from a project or investment equal
zero. Internal rate of return is used to evaluate the attractiveness of a project
or investment. If the IRR of a new project exceeds a companys required rate of
return, that project is desirable. If IRR falls below the required rate of return, the
project should be rejected.
IRR allows managers to rank projects by their overall rate of return rather than
their net present values, and the investment with the highest IRR is usually
preferred. Ease of comparison makes IRR attractive, but there are limits to its
usefulness. For example, IRR works only for investments that have an
initial cash outflow (the purchase of the investment) followed by one or more cash
inflows.
Calculation of internal rate of return
Project A
Year
Present
value
PV
Factor Present
24%
Value
(1000)
(1000)
(1000)
300
0.8130
242.9
0.8065
241.95
350
0.6610
231.31
0.6504
227.64
3
4
500
600
0.5374
0.4369
268.7
262.14
0.5245
0.4230
262.25
253.8
Net
value
NPVLR
NPVLR - NPVHR
present 6.09
-14.36
IRR = LR + (Different in rates)

6.09
6.09 + 14.36
= 23 + (24% -23%)
= 23.30%
Internal rate of return of project A is 23.30 % which the net present value of all
the cash flow from a project equal zero.
Project B
Year
Present
value
PV Factor Present Value

29%
(1000)
(1000)
(1000)
800
0.7913
633.04
0.7752
620.16
400
0.6104
244.16
0.6009
240.36
3
4
200
100
0.4768
0.3725
95.36
37.25
0.4658
0.3611
93.16
36.11
Net
value
present 9.81
-10.21
NPVLR
NPVLR - NPVHR
IRR = LR + (Different in rates)
9.81
9.81 + 10.21
= 28 +
(29% - 28%)
= 28.49%
Internal rate of return of project B is 28.49 % which the net present value of all
Project C
Project C have equal cash flows, so first calculate the factor
=
Initial investment
Factor
= cash flow
Annual
2000
650
=3.0769
Referring PVIFA table in 10 years the factor 3.0769 lies between 30% and 31%
whose corresponding values are 3.0915 and 3.0091.
Factor LR Factor true
Factor LR Factor HR
IRR = LR + (HR-LR)
3.0915 - 3.0769
3.0915 - 3.0091
= 30% + (31 -30)
0.0146
0.0824
= 30% +
= 30.18%
Internal rate of return of project C is 30.18% which the net present value of all
Project D
Project D have equal cash flows, so first calculate the factor,
Initial investment
Annual cash flow
=
350
1000
Factor =
=2.8571
Factor LR Factor HR
IRR = LR + (HR-LR)
2.8636 2.8571
2.86362.8035
= 22% + (23 -22)
0.0065
0.0601
= 22% +
= 22.11%
Internal rate of return of project D is 22.11% which the net present value of all
From the above calculation Internal rate of return of project A, B, C and D are as
follows:
Project
A
Cost of project
1000
Internal rate of 23.30%
return (IRR)
Life of project
5 years
Project B
Project C
Project D
1000
28.49%
2000
30.18%
1000
22.11%
5 years
10 years
6 years
According to internal rate of return Project A and Project B have higher IRR
compare with project A and Project. So according to IRR project B and Project B
should be accepted.
Ranking of individual projects based on different Criteria

Payback Period
Net Present Value
Internal Rate of Return
B
A
D
C
15 %
C
B
A
D
C
B
A
D
21 %
C
B
A
D
Question 2
Equivalent annual annuity (EAA)
Equivalent annual annuity (EAA) is an approach used in capital budgeting to
choose between mutually exclusive projects with unequal useful lives. It assumes
that the projects are annuities, calculates net present value for each project, and
then finds annual cash flows that when discounted at the relevant discount rate for
the life of the relevant project, would equal the net present value. When used to
compare projects with unequal, the one with the higher EAA should be selected.
The equivalent annual annuity formula uses the annuity payment formula for when
present value is given. Net present value replaces present value to give relevance to
the use of the equivalent annual annuity formula. A simple net present value
analysis of the two alternatives will miss the point that the investment. The
equivalent annual annuity is the appropriate tool for this problem.
Egret printing and Publication Company has four different projects, project A and
B have same life of the project and project C and D have unequal project life to
equal comparisons of the project EAA is useful measure with unequal project life.
IRR and NPV are not effective measure to compare for different life of the project
company should have to calculate EAA for effective calculation.
Calculation of EAA
For project A
A 15 % Discount factor
=
PVIFA (15%, 4 yrs.)
197.35
2.8550
NPV of project A
EAA =
= 69.12
At 21% Discount factor
NPV of project A
EAA=
PVIFA (21%, 4 yrs.)
=
2.5404
= 19.34
For Project B
NPV of project B
2.8550
PVIFA (15%, 4 yrs.)
=
EAA=
186.8
49.12
= 65.43
NPV of project B
2.5404
PVIFA (15%, 4 yrs.)
=
93.87
EAA=
= 36.95
For project C
NPV of project C
5.0188
PVIFA (15%, 10 yrs.)
=
EAA=
NP
V
= 251.50
of
pro
At
ject21% Discount factor
C
PV
IFA
(21
%,
10
yrs.
)
1262.22
635.
165
=
4.0541
EAA=
= 156.67
For Project D
173
N
.27
=
EAA=
PV
3.3522
of
pr
oje
ct =51.69
D
AtP21% Discount rate
VI
FA
24.
N (1
1
=
5
EAA=
PV
2.9260
of %,
pr 5 =8.24
ojeyrs
.) the above calculation EAA of projects A, B, C and D are as follows:
ct
From
D
P
Project A Project B
Project C
Project D
VI
FA of project
Cost
1000
1000
2000
1000
(2
Equivalent annual 69.12
65.43
251.50
51.69
1
annuity
(15%)
%,
Equivalent
annual 19.34
36.95
156.67
8.24
5
annuity
(21%)
yrs
Life
4 years
4 years
10 years
5 years
.) of project
According to EAA project C and project B should be accepted. At project B and
project have higher EAA compare with project A and project D.
Question 3
New Cash flow of Project D
Year
Cash flow
1
2
3
4
5
380
380
380
380
380
First Calculation of Payback period

Year
Cash flow
380
Discount
factor
(15%)
0.8696
380
0.7561
380
0.6575
380
0.5718
380
0.4972
Payback
period
flow
330.4
5
330.45
287.3
2
617.77
249.8
5
867.62
217.2
8
1,084.90
188.9
4
1,273.84
Amount to recover
= Minimum year +
(1000 867.62)
217.28
=
3 years
+ = 3.61 years

Year
Cash flow
380
Discount
factor
(21%)
0.8264
380
0.6830
380
0.5645
380
0.4665
380
0.3855
flow
314.0
3
314.03
259.5
4
573.57
214.5
1
788.08
177.2
7
965.35
146.4
9
1,111.84
Amount to recover
Payback
period

= Minimum year +
(1000 965.35)
146.49
=
4 years + = 4.237 years
Now calculation of NPV

At 15% and 21% Discount factor
Year
Cash flow PV
(15%)
0
1-5
(1000)
380
factor Present
value
1
3.3522
NPV
111.88
(1000)
1273.8
36
PV factor Prese
(21%)
nt
value
1
(1000)
1111.8
2.9260
8
273.836
Now Calculation of IRR of Project D

Project D have equal cash flows, so first calculate the factor,
Initial investment
380
Annual cash flow
1000
Factor =
= 2.6316
Factor LR Factor HR
IRR = LR + (HR-LR)
2.6351 2.6316
2.6351 2.5827
= 26% + (27 -26)
0.0035
0.0524
= 26% +
= 26.07%
Internal rate of return of project D is 22.11% which the net present value of all
Calculation of EAA for project D

27
NP
3.8
EAA=
=
V
36
of
3.3522
pro = 81.69
ject
AtD21% Discount rate
PV
IFA
11
NP
(15
1.
V
=
EAA=
%,
88
of5
2.9260
pryrs. = 38.24
oje
)
ct
From the above calculation Detail of Project D
A
PV
Project D
Before change in cash
IF
flow
A
15%
21%
(2
1
Payback period
4 years
4.822 year
%,
5
yrs
173.27 24.1
Net Present value
.)
EAA
Internal rate of return
51.69
8.24
21.11%
After change in cash

flow
15%
21%
Remarks
3.61 years 4.237 years
Improve in
PBP
273.836 111.88
Improve in
NPV
81.69
Improve in
EAA
38.24
26.07%
Improve in
EAA
This situation also bears decision on mutually exclusive because after change in
cash flow project provide higher payback period, NPV, IRR and also higher EAA.
Question 4
Assuming that return on Project A is representative of investment opportunities
generally found on the printing industry:
particular
Project A
(industry average)
Project B
Remarks
Payback
period(PBP)
3.425 year
2.014 year
Project B (good)
Net present
value(NPV)
Internal rate of
return(IRR)
197.35
186.8
Project A (good)
23.30
28.49
Project B (good)
Payback period and IRR of project B has higher than industry average but at NPV
project B has less than industry average. If we consider payback period and IRR
project B is good project but according to NPV Project is not higher return than
industry average. So, Hill claim is no sufficient to prove that Project B will
generate a return higher than industry average because NPV is the best measure of
return of project.
Question 5
Patrick hill join the company in 1986 as a vice president of finance in his father in
laws company. He was responsible for managing the internal as well as external
financial operation of the company and has been trying to change the company
policy of not using any debt financing. At the moment the company has an internal
fund of approximately 3 million available for investment. With this amount
company will only be able to invest in either project A and C or projects B and C
i.e. without using debt financing company is losing the opportunity to invest in
project D.
As NPV of all projects are positive it would be highly profitable for the company,
if it could invest in all the projects. But for this they would have to acquire 1
million as long term debt. Acquiring the long term debt would change the capital
structure and cost of capital reducing it from 15% to 12% only.
Investing in project D is important as it upgrades the service provided by the
company.
Egret purchases a local video text services that had been operating locally for
several years. It is included as an extra-charge feature on the local cable television
system, and over one half of the systems subscriber pay for the video text service.
The upgrade would make it possible to update the information presented on the
screen much more quickly and would increase the reliability significantly.
Although the NPV of project D is positive, So in this case, project D will also
profitable if Belford brothers invest from debt financing..
Question 6
Source
Weight
After tax cost Product
term 1 M
0.25
of capital
7.2
1.8
debt
Common
3M
0.75
15
11.25
equity
Total
4M
capital
Long
of Amount
Weighted
capital
average
cost
of 13.05 %
For Project A
Year
Cash Flow PV
Factor Present
13.05%
value
(1000)
(1000)
300
0.8846
265.38
350
0.7825
273.88
3
4
500
600
0.6921
0.6122
346.05
367.32
Net
value
present 252.625
For Project B
Year
Cash Flow PV
Factor Present
13.05%
value
(1000)
(1000)
800
0.8846
707.68
400
0.7825
313
3
4
200
100
0.6921
0.6122
138.42
61.22
Net
value
present 220.32
Project C
Net Present Value = 650 x PVIFA 13.05%, 10 years 2000
= 650 x 5.42 2000
= 1523
Project D
Net Present Value = 350 x PVIFA 13.05%, 10years 1000
= 350 x 3.51 -1000
= 228.5
COST
CAPITAL
OF
15%
NET PRESENT VALUES OF PROJECT

A
B
C
197.35
186.8
1262.22
D
173.27
21%
13.5%
49.12
252.625
24.1
228.5
93.87
220.32
635.165
1523
If the Belford agrees to Hills proposal to use a modest amount of debt finance the
project this year then Capital structure will change to 25% debt and 75% equity.
This will overall decrease the cost of capital to 13.5%. Now, using this capital
structure, the Belford family has to bear a comparatively a lower cost of capital
which in turn will increase the net value of the projects. As per this capital
structure, proposed by hill, projects A, C and D stands best to invest in.
Question no. 7
EBIT
Less: Interest(12%)
EBT
Less: tax @40%
EAT
Less : dividends
Retained Earnings
Times interested earned ratio = EBIT/ Interest
$6120000
$120000
$6000000
$2400000
$3600000
$600000
$3000000
= 6120000/120000
= 51 times
Question 8.
Project C is best according to the NPV analysis
Based on the NPV analysis we came to know :
1. project with higher NPV is better
2. In case of independent project, having Higher positive NPV project should
be selected
3. In case of mutually exclusive, project with highest NPV is selected.
Profitability index of A&C and B&C ranked first and second respectively
Project C handled in the case earlier is valid because project C cannot be chosen
without choosing either Projects A or B.
Question 9
Capital budgeting is extremely important section for any project because the
decisions made here, involves the future cash flows. In the evaluation stage, the
capital budgeting evaluations are made to measure the payback period or the time
it requires to recoup. Only the quantitative data is likely to result in overlooking
important aspects of decisions. Such as: issues related to financing the project and
availability of capital to the project.
No, using only quantitative factors for capital making decisions is not enough to
make efficient decisions. Although using quantitative factors for decision making
is important, qualitative factors may outweigh the quantitative factors in making a
decision. For example, a large manufacturer of medical devices recently invested
several million dollars in a small start-up medical device firm. When asked about
the NPV analysis, the manager responsible for the investment indicated that a
certain project was deemed unprofitable looking at its NPV. However, the
technology they were using for manufacturing was of great strategic importance.
This is an example of qualitative factors (strategic importance to the company)
outweighing quantitative factors (negative NPV). The following qualitative factors
should be considered while making capital budgeting decisions:
It doesnt represent the annual decline in value of asset.
It doesnt measure the value of asset.
It doesnt generate sufficient cash flow to measure payback period.
So, In theory we should be more concerned with measuring the risk subjectively or
judgmentally rather than quantitatively. Therefore, the Quantitative measures alone
are not sufficient for evaluating firms performance.
Quantitative factors can only be measured in numeric terms. Whereas, Qualitative
measures is judgment based. It involves:
Some preliminary quantitative analysis and judgments.
It plays an important role in the overall capital budgeting.
It is used in project evaluation.

Not the only factor is effective for evaluation. So, both the factors are required for
the capital budgeting evaluation.
Lesson learn
From this lesson, we learnt that both quantitative and qualitative techniques helps
manager for good decision. Quantitative factors review the past whereas qualitative
factors forecast the future. SWOT analysis, PEST analysis, competitors analysis,
alignment with mission, vision, corporate strategies and Effects on capital structure
and working capital, these all are necessary to identify and analysis for better
decision making. Management must be able to adopt and adjust with those changes
created by external or internal factors. These all analysis and further best decision
making is only possible when the both quantitative and qualitative techniques are
adopted.
MAJOR LESSON LEARNT
Debt financing is important for any company.
A positive NPV is a best criteria.
Profitability index helps in deciding the combinations of projects to be undertaken.
Equity holders have ultimate authority over investment decisions.

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Theory and Case Background:

Calculation of Payback period

Using 21% discount factor

Cash flow during the year

Cash flow during the year

(In thousand US dollar)

(In thousand US dollar)

From the given calculation Payback period of project are:

Net Present value

Calculation of Net Present Value

(In thousand US dollar)

Cash Flow PV Factor 15%

(In thousand US dollar)

Cash Flow PV Factor 15%

(In thousand US dollar)

(In thousand US dollar)

Internal rate of return

(In thousand US dollar)

Cash Flow PV Factor 23%

IRR = LR + (Different in rates)

(In thousand US dollar)

Cash Flow PV Factor 28%

PV Factor Present Value

Ranking of individual projects based on different Criteria

Net Present Value

Internal Rate of Return

First Calculation of Payback period

At 21% Discount factor

Cash flow during the year

Now calculation of NPV

Now Calculation of IRR of Project D

Calculation of EAA for project D

After change in cash

3.61 years 4.237 years

After tax cost Product

NET PRESENT VALUES OF PROJECT

It is used in project evaluation.

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