Monday, September 3, 2012

Capital Budgeting

Rules of Capital Budgeting
1.      PBP ( Fake)=
2.      PI=
3.      PBP reciprocal =
4.      NPI= PI-1
5.      PBP=
6.      PBP=PY+
7.      ARR=                     Average investment=  
 OR  WC+SV+
   Average EAT=  
8.      ROI=
9.      NPV= TPV-Investment
10.     IRR=LDR+
11.     MIRR=LR-
12.     DPBP= PY+ GLv‡b CFAT  mg~n‡K present value K‡i †mB Kjvg Ges cumulative PV Kjvg wb‡q AsK Ki‡Z n‡e|
hLb k~Y¨ (0) eQ‡i †Kvb FbvZœK A_ev () GiKg eªv‡KU †`qv _vK‡e GUv‡K ZLb wewb‡qvM A_ev  Outflow g‡b Ki‡e | AePq wbb©q Ki‡Z Working Capital  Gi Dci †Kvb cÖfve ci‡e bv| †h NPV Gi cwigvb Negative  n‡j IRR wbb©q Gi nvi Kgv‡Z n‡e  NPV Gi cwigvb †ewk/ Positive n‡j evUªvi cwigvb eov‡Z n‡e|
13.     Fake PBP=
EX: 1 Koby Manufacturing Ltd. is examining the profitable of investing in a new project. The following information is available in respect of the project.
Investment                                        Tk. 3,60000
Life of the project                                   10 years
Residual value at the end                 tk.20,000
Tax rate                                                     50%
Annual cash flow after tax(CFAT)    tk.72,000
Required :
  1. Payback period (PBP)
  2. Return on original  investment ( ROI)
  3. Return on average investment(ARR)
  4. Net present value at 10% discounting rate
  5. Internal rate of return (IRR)
EX:2  An LTC company is considering investment proposal to install new equipment facility. The project will cost tk.50,000. The facility has a life expectancy of 5 years and no salvage value. The company's tax rate is 40 percent. The working capital is tk.10,000. The firm uses straight line method of depreciation. The gross cash inflow/CFBT/NPBD/estimated earnings/ cash inflow/ cash save are as follows.
Year       1             2             3           4           5
          5,000      15,000      14,000   15,000  20,000
You are required to compute the following :
a)      Pay back period
b)      Average rate of return
c)      Return on investment
d)      Net present value at 8% discounting rate
e)      Profitable index at 8% discounting rate(PI)
f)        Internal Rate of return
EX: 3 Cash flows of Gama Co. Ltd. are as follows:
            Year                                CFAT
0                                                                        -40,000
1                                                                        1,80,000
2                                                                        -1,60,000
Calculate the multiple IRR.
‡hnZz IRR ev Avš—tcÖwZ`v‡bi nvi w`‡q bM` cÖevn‡K evUªv Ki‡j NPV k~b¨ n‡e A_©r fwel¨r bM` cÖev‡ni  PV wewb‡qv‡Mi mgvb n‡e| ZvB G RvZxq AsK ¸‡jv‡K mgxKi‡bi gva¨‡g mgvab Kiv hvq|
DËi t 228% Ges 21.9%
EX:4 Anna Company is thinking of investing in a new project. A machine costing tk.1,00,000.The estimate life would  5 years having no salvage value at the end of the life. The tax rate of the company is 50%. The company charge depreciation on straight line basis.Cash in flow after tax would be as follows.
At the end of the year
years
CFAT
1
18,000
2
25,000
3
24,000
4
25,000
5
25,000
You are required to calculate:
  1. Pay back period.
  2. Payback reciprocal
  3. Return of original investment
  4. Return of average investment
  5. Net present value at 10% discount rate
  6. Profitability index
  7. Internal rate of return
  8. DPBP
EX:5 Bashar and company is thinking to purchase a machine.                                                                    Tk.
Purchase rate                                                        1,00,000
Installation charge                                                   15,000
Import duty at the rate of 20% of purchase rate
Fright and Insurance                                                5,000
Dock charge                                                              5,000
Working capital                                                      30,000
Salvage value                                                          20,000
Expected life                                                         4 years
Annual CFBT are as follows:
YEAR                                                          CFBT
1                                                                                                                  50,000
2                                                                                                                  45,000
3                                                                                                                  40,000
4                                                                                                                  40,000
The company charge depreciation on straight line method. Tax rate is 40%. Cost of capital 10% Calculate
  1. ARR
  2. NPV
  3. IRR
  4. DPBP
  5. PBP
  6. ARR
  7. IRR
  8. PI
  9. Payback reciprocal
  10. NPI
Dc‡ii mgm¨vq purchase price Gi mv‡_   installation charge, import duty, fright and insurance, dock charge cÖf„wZ LiP mg~n †hvM K‡i  Total cost wbb©q Ki‡Z n‡e|  Total cost Gi Dci  Depreciation wbb©q Ki‡Z n‡e|  Depreciation wbb©‡q  working capital Avm‡e bv| total cost Gi mv‡_ working capital ‡hvM K‡i  Net cash outflow ‡ei Ki‡Z n‡e|1. 6.67%:2.-17,212:3.5.92%
 EX:6 Uniliver Bangladesh is considering a new product line to increase its range line. It is assume that the new product line will involve cash investment of tk.70,000 at time Zero and tk.1,00,000  in year 1. Cash inflow after tax (CFAT) of tk 25,000 are expected in year 2, Tk.30,000 in year3, Tk.35,000 in year 4, 40,000 each year from 5 through 9 and tk.1,40,000 in 10th year.
a)      Net present value(NPV) at 10%
b)      Discounted payback period(DPBP)
G As‡K Investment eQ‡ii cÖ_‡g tk.70,000 Ges 1 eQi ci 1,00,000 UvKv ejv n‡q‡Q| A_©vr Ab¨vb¨ As‡K Investment ev  Outflow wQj 1 evi , GLv‡b 2evi | 0 year ev GLb †h UvKv wewb‡qvM Kiv n‡q‡Q ‡mUv eZ©gv‡bi UvKv wKš‘ 1 eQi ci †h AviI 1,00,000 UvKv wewb‡qvM Kiv n‡q‡Q †mUv‡K evUªv K‡i PV ev eZ©gvb g~j¨ wbb©q Ki‡Z n‡e|    
Total investment (70,000+86,957)=156957
Ans: 12,923& 9.63years.
EX:7 From the following data calculate (1) Net present value
(2) Internal rate of return (3) Payback period for the following project. Assume a required rate of return of 10% and tax 50%. The firm has a policy of charging depreciation on straight line method.
A(TK)
B (TK.)
Initial cash outlay
Salvage Value
Earing before depreciation and tax
    1 Year
    2 year
    3 year
   4 year
   5 year
Expected life
1,05,000


30,000
25,000
20,000
20,000
25,000
5 years
1,45,000
20,000

45,000
40,000
40,000
40,000
35,000
5 years
On the basis of NPV and IRR, PBP. Which project should be accepted ?
EX: 8 The cash flow of two mutual exclusive projects of Fas Trance Ltd.Are.
Year
A
B
0
-13,555
(15,777)
1
4,444
7,777
2
3,333
6,666
3
9,999
5,555
4
5,555
8,190
5
9,789
6,156
          Suggest fast Trance whether either of the project are acceptable using (1) PBP (2) IRR (3) NPV Profitable index techniques of capital budgeting . The required rate of return is 12%.
‡h †Kvb FbvZœK UvKv gv‡b n‡jv wewb‡qvM GLv‡b 0 eQ‡i †h UvKv Av‡Q Zv n‡jv wewb‡qvM|
EX 9: Rashed company expect to  save tk.56,000 a year in cash operation expenses for the next 10 years if it buys a new machine at a cost of tk.2,20,000 no salvage value is expected at the end of ten years.The company is satisfied with a 14% rate of return . Ignore Tax .
           The present value of tk.1.00 required for the purposes of this example is given below.
year               14%                        20%                          22%
1st                0 .877                       .833                           .820
5th                3.433                     2.991                           2.864
10th              5.216                       4.192                          3.923
You are required to compute:

a) Pay back period Ans. 3.93 years
b) Accounting rate of return Ans.30.91%
c) Net present value  Ans.72,096
d) DCF rate of return and to comment . Ans.21.97%
EX:10 A company can make either of two investment at the beginning of 1996. Evalute the proposal under (a) Traditional PBP (b) Discounted PBP (c) Profitable Index . The  details of the investment proposals are given below.

Project 1
Project 2
Initial outlay

20,000
28,000
Expected life

5years
5years
Scrap Value

nil
nil
Net cash flow

TK
TK
End of
1996
5,000
8,000

1997
5,000
8,000

1998
6,000
8,000

1999
6,000
8,000

2000
6,000
8,000

The cost of capital may be taken at 10% and the present value of tk.1.00 to be received at the end of each year at 10% is given below.
Year
1
2
3
4
5
PV
.91
.83
.75
.68
.62

Prepared by,
md.mursalin Sardar
Cell; 01925-425876
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