 Bashundhara Multi Paper Industries Ltd

Launched paper production in 1996-97.It is

situated in Sonargaon, Narayangonj.
 Major Product : Newspaper, White Writing &
Printing Paper.
 Bashundhara has nine units in operation with a
combined annual capacity of 100,000 Tonnes.
 Cost of the Project Tk 3,088.51 million
 In the backdrop of growing demand for
KEY PROFITABILITY INDICATORS AND FINANCIAL
RATIOS
Operating Year 1st Year 2st Year 3st Year 4st Year 5st Year
Capacity 65% 70% 75% 80% 85%
Utilization

Revenue 67299.38 72476.25 77653.13 82830 88006.88

Earnings

Gross Profit 12867.03 13911.83 14954.56 16219.79 17482.63

Operating Profit 10523.62 11385.17 12242.19 13319 14390.47

Net Profit after 5175.65 5687.79 6197.11 6843.79 7487.14

Tax
 FINANCIAL RATIOS
Operating Year 2012 2013 2014 2015 2016

Gross profit to Revenue 19.12% 19.20% 19.26% 19.58% 19.87%

Operating profit to 15.64% 15.71% 15.77% 16.08% 16.35%
Revenue

Net profit to Revenue 12.30% 12.56% 12.77% 13.22% 13.61%

Return on Equity (ROE) 37.82% 41.56% 45.28% 50.01% 54.71%

Return on Investment 16.76% 18.42% 20.07% 22.16% 24.24%
(ROI)

Pay Back Period (PBP) 3.98 Years or 4.0 Years (Approx)

Internal Rate of Return 24.76%
(IRR)
 COST OF CAPITAL

 A firm raises its new funds as debt, Preference

Shares , new issue of common shares and
Retained earnings. Firms try to keep the share
of the above sources in optimal proportions:
 Cost of Debt

 Cost of Common Share

 Cost of Preference Share

 Cost of Retained Earnings

 COST OF CAPITAL
 Cost of Equity Capital is the minimum rate of return that a firm
must earn on the equity financed portion of an investment
project in order to leave unchanged the market price of the
share. Formula are given below:
𝐷1
 𝐾𝐶 = +g
𝑃0 (1−F)
1
 = + 0.05
10 (1−0.10)
1
 = + 0.05
9
 =0.11+0.05
 =16.11%
 COST OF DEBT
 Cost of debt is the after tax cost of long-term funds through
borrowing.
 Cost of Debt (𝐾𝐷 )=𝐾𝑑 (1-T)
 =13%(1-25%)
 =13%(1-0.25)
 =0.0975
 =9.75%.
 COST OF RETAINED EARNINGS
 Retained earnings is one of the sources of finance for
investment proposal. This is an internally generated fund of the
firm for the purpose of reinvestment or creation of other
different types of funds. Formula are given below:
𝐷1
 𝐾𝑆 = +g
𝑃0
 WEIGHTED AVERAGE COST OF CAPITAL (WACC)
Source of Fund Amount (a) Weight (b) Component Weighted Cost
Cost © (b*c)=d
Cost of 136,85,12771.35 0.4430 0.16611 0.07136
Common Share

Cost of Debt 172,00,00000.00 0.5570 0.0975 0.05430

308,85,12,771.35 1.00 0.12566

Weighted Average Cost of Capital 12.56%

 CAPITAL BUDGETING

 Capital budgeting is the allocation of funds to long-

lived capital projects.
 A capital project is a long-term investment in
tangible assets.
 The principles and tools of capital budgeting are
applied in many different aspects of a business
entity’s decision making and in security valuation
and portfolio management.
 A company’s capital budgeting process and
prowess are important in valuing a company.
2. THE CAPITAL BUDGETING PROCESS

 Step 1 Generating Ideas from inside or outside of

the company Analyzing Individual Proposals
 Step 2 Collect information and analyze the
profitability of alternative projects Planning the
Capital Budget
 Step 3 Analyze the fit of the proposed projects with
the company’s strategy Monitoring and Post
Auditing
 Step 4 Compare expected and realized results and
explain any deviations
CLASSIFYING PROJECTS

 Replacement Projects
 Expansion Projects

 New Products and Services

 Regulatory, Safety, and Environmental Projects

 Other
3. BASIC PRINCIPLES OF CAPITAL BUDGETING

 Decisions are based on cash flows.

 The timing of cash flows is crucial.

 Cash flows are incremental.

 Cash flows are on an after-tax basis.

 Financing costs are ignored.

COSTS: INCLUDE OR EXCLUDE?

 • A sunk cost is a cost that has already occurred, so it

cannot be part of the incremental cash flows of a capital
budgeting analysis.
 • An opportunity cost is what would be earned on the next-
best use of the assets.
 • An incremental cash flow is the difference in a company’s
cash flows with and without the project.
 • An externality is an effect that the investment project has
on something else, whether inside or outside of the
company. - Cannibalization is an externality in which the
investment reduces cash flows elsewhere in the company
(e.g., takes sales from an existing company project).
INDEPENDENT VS. MUTUALLY EXCLUSIVE
PROJECTS

 • When evaluating more than one project at a

time, it is important to identify whether the
projects are independent or mutually exclusive -
This makes a difference when selecting the tools
to evaluate the projects.
 • Independent projects are projects in which the
acceptance of one project does not preclude the
acceptance of the other(s).
 • Mutually exclusive projects are projects in which
the acceptance of one project precludes the
acceptance of another or others.
CAPITAL RATIONING

 Capital rationing is when the amount of expenditure for

capital projects in a given period is limited.
 • If the company has so many profitable projects that
the initial expenditures in total would exceed the budget
for capital projects for the period, the company’s
management must determine which of the projects to
select.
 • The objective is to maximize owners’ wealth, subject
to the constraint on the capital budget. - Capital
rationing may result in the rejection of profitable
projects
 COST OF THE PROJECT
Head of Expenditures Amount in Tk
Land & Land Development 250,000,000.00
Factory Building & other Civil Works 253,500,000.00
Paper Manufacturing Plant 1501,433,310.00
Machinery & Equipment 745,963,000.00
Duty , Insurance, Clearing 112,607,498.25
Erection & Installation 159,500,000.00
Consultation Fees 5,000,000.00
Furniture & Fixture 25,00,000.00
Motor Vehicle 30,000,000.00
Preliminary Expenses/Deferred Rev. Exp 3,000,000.00
Contingency 250,080,963.00
Cost of the Project 3,088,512,771.35
 MEANS OF FINANCE
Head of Expenditures Amount in Tk
Land & Land 2500.00
Development
Factory Building & other 1443.78 1091.22 2535.00
Civil Works
Paper Manufacturing 1501.43 13512.89 15014.33
Plant
Machinery & Equipment 4863.7500 2595.88 7459.63
Duty , Insurance, Clearing 1126.07
Erection & Installation 1595.00
Consultation Fees 50.00
Furniture & Fixture 25.00
Motor Vehicle 300.00
Preliminary 30.00
Expenses/Deferred Rev.
Exp
Contingency 250.09
Sponsors Investment 1368512771.35

Loan Financing 1720000000.00

Total Investment 3088512771.35

Debt Equity Ratio 56:44

4. INVESTMENT DECISION CRITERIA

 Net Present Value (NPV)

 Internal Rate of Return (IRR)

 Payback Period

 Discounted Payback Period

 Average Accounting Rate of Return (AAR)

 Profitability Index (PI)

NET PRESENT VALUE
 The net present value is the present value of all
incremental cash flows, discounted to the present,
less the initial outlay:
 NPV = t=1 n CFt (1+r)t − Outlay
 where CFt = After-tax cash flow at time t r =
Required rate of return for the investment Outlay =
Investment cash flow at time zero
 If NPV > 0: • Invest: Capital project adds value If
NPV < 0: • Do not invest: Capital project destroys
value
CALCULATION OF NET CASH OUTLAY(NCO)
 1. Cost for Acquisition of Fixed Assets 30855.00
 2. Preliexpenses/Deffered Revenue Exp. 30.00
 3. Working Capital 14,946.03

 Net Cash Outlay (NCO) 45,831.03

 PAY BACK PERIOD
Year Net Profit Interest Depreciation Net Cash Cumulative
after Tax Expenses Flow (CFAT) Cash Flows
1 5175.65 2236.58 3253.52 10665.75 10665.75
2 5687.79 2278.70 3253.52 11220.01 21885.76
3 6197.11 2320.82 3253.52 11771.45 33657.21
4 6843.79 2362.94 3253.52 12460.25 46117.46
5 7487.14 2405.05 3253.52 13145.71 59263.17
6 7487.14 2405.05 3253.52 13145.71 72408.87
7 7487.14 2405.05 3253.52 13145.71 85554.58
8 7487.14 2405.05 3253.52 13145.71 98700.29
9 7487.14 2405.05 3253.52 13145.71 111846
10 7487.14 2405.05 3253.52 13145.71 124991.70
CALCULATION OF PAYBACK PERIOD

𝑁𝐶𝑂−𝐶
 PBP=A +
𝐷
45,831.17−33,657.21
 = 3+
12,460.25
 = 3.98 Years or 4.0 Years (Approx)
 Here,
 PBP= Pay Back Period
 A= The year in Which the Cum cash flows stands nearer to
NCO = 3rd Year.
 NCO = Net Cash Outlay = 45,831.17 Lac
 C= Cumulative cash flow of the year C= 33,657.21 Lac
 D= Cash flow of the Year following the year D = 12,460.25 Lac.
CALCULATION OF NET PRESENT VALUE (NPV)
FIG. IN LAC
Year Net Cash Inflows Present Value Present Value of
(CFAT) Factor at 13% Cash Inflows
1 10,665.75 0.885 9439.19
2 11,220.01 0.783 8785.27
3 11,771.45 0.693 8157.61
4 12,460.25 0.613 7638.13
5 13,145.71 0.543 7138.12
6 13,145.71 0.480 6309.94
7 13,145.71 0.425 5586.93
8 13,145.71 0.376 4942.79
9 13,145.71 0.333 4377.52
10 13,145.71 0.295 3877.98
PV 66,253.48
 DATA (CONT’D)
 Net Present Value = Present Value- Net Cash Outlay
 =66,253.48-45,831.17
 =20,422.31.

 Pay Back Reciprocal (PBR) is Calculated below:

NCB
 PBR= ∗ 100
NCO
66,253.4/10
 = ∗ 100
45,831.17
 = 14.46%
INTERNAL RATE OF RETURN

 The internal rate of return is the rate of return on a project. -

The internal rate of return is the rate of return that results in
NPV = 0.
 t=1 n CFt (1 + IRR)
 t − Outlay = 0 (2-3)
 Or, reflecting the outlay as CF0,
 t=0 n CFt (1 + IRR)
 t = 0 (2-4)
 If IRR > r (required rate of return): • Invest: Capital project
adds value If IRR < r: • Do not invest: Capital project
destroys value
 Copyright © 2013 CFA Institute 16
 CALCULATION OF INTERNAL RATE OF RETURN (IRR) :
Year Cash Inflows PV Factor at Present PV Factor Present
CFAT 13% Value ( Tk. In At 30% Value (TK in
Lac) Lac)
1 10665.75 0.885 9439.19 0.769 8201.96
2 11220.01 0.783 8785.27 0.592 6642.25
3 11771.45 0.693 8157.61 0.455 5356.01
4 12460.25 0.613 7638.13 0.350 4361.09
5 13145.71 0.543 7138.12 0.269 3536.20
6 13145.71 0.480 6309.94 0.207 2721.16
7 13145.71 0.425 5586.93 0.159 2090.17
8 13145.71 0.376 4942.79 0.123 1616.92
9 13145.71 0.333 4377.52 0.094 1235.70
10 13145.71 0.295 3877.98 0.73 959.64
PV 66,253.48 36,721.08
NCO 45,831.17 45,831.17
NPV 20,422.31 (9,110.09)
 DATA(CONT’D)
𝐶
 IRR=A + *(B-A)
𝐶−𝐷
20,422.31
 = 13% + *(30%-13%)
20,422.31−(−9,110.09)
20,422.31
 = 13%+ *17%
29,532.39
 = 24.76%.
 Here, A= Discount factor of the low trial = 13%
 B= Discount factor of the high trial = 30%
 C = NPV of cash flow of low trial = 20,422.31
 D =NPV of cash flow of High trial = (9,110.09).
AVERAGE ACCOUNTING RATE OF RETURN

 • The average accounting rate of return (AAR)

is the ratio of the average net income from the
project to the average book value of assets in
the project:
 AAR =

 Average net income Average book value

PROFITABILITY INDEX

 The profitability index (PI) is the ratio of the

present value of future cash flows to the initial
outlay:
 PI =
 Present value of future cash flows Initial
investment = 1 +
 NPV Initial investment (2-5)
 If PI > 1.0: • Invest • Capital project adds value
 If PI < 0: • Do not invest • Capital project destroys
value