Capital Budegeting Class
Capital Budegeting Class
What is the project’s expected NPV, its standard deviation, and its coefficient of
variation? Interpret your answers. Explain the risks involved in this project
What is the probability of NPV less than zero
2. Case Study: Investment Feasibility Analysis for Jumbo Food Processing Company
The Finance Manager of Jumbo Food Processing Company is evaluating the installation of a new
processing plant costing Rs 14 million to enhance the company's production capacity. The project is
expected to operate for 7 years with no salvage value. Key financial details are as follows:
Project Financial Data
Parameter Value
Scenario Analysis
Given the potential volatility of the economic environment, the Finance Manager wants to assess the
project's financial feasibility under three different scenarios:
Required Analysis
1. Project Feasibility Assessment
o Calculate Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period
under the given scenarios.
o Evaluate the project's viability based on these financial metrics.
2. DCF Break-Even Analysis
o Determine the break-even sales volume at the expected unit selling price of Rs 20 using
Discounted Cash Flow (DCF) methodology.
Based on the findings, the Finance Manager will make an informed decision regarding the investment in
the new processing plant.
3. Ajanta Limited is considering a new project that requires an initial investment of Rs. 200 million.
This investment consists of Rs. 150 million allocated to plant and machinery and Rs. 50 million
for net working capital, both of which will be fully incurred at the beginning of the project. To
finance this, the company plans to use a mix of Rs. 120 million in equity and Rs. 80 million in
debt, with the debt carrying an interest rate of 15%. The debt will be repaid over a period of
five years in equal principal installments, along with accrued interest each year. Given the
company's capital structure, the cost of equity is estimated at 20%, while the corporate tax rate
is assumed to be 30%. The project is expected to operate for five years, generating annual
revenue of Rs. 250 million. However, operational expenses (excluding depreciation, interest, and
tax) will amount to Rs. 150 million per year, of which Rs. 125 million is variable cost—
accounting for 50% of sales—and Rs. 25 million is fixed cost. The plant and machinery will be
depreciated at a 15% written-down value (WDV) basis over the project’s lifespan. At the end of
five years, the fixed assets are expected to have a salvage value of Rs. 50 million, while the net
working capital will be recovered at book value.
To assess the viability of the project, Ajanta Limited seeks to determine its Break-Even Sales (BEP) and
Margin of Safety to understand the minimum revenue required to cover its costs. Additionally, a
Sensitivity Analysis will be conducted to evaluate the impact of variations in key parameters such as
sales volume, selling price, variable costs, and fixed costs. By analyzing different scenarios, the
company aims to identify potential risks and ensure the project's financial sustainability before making a
final investment decision.