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Capital Budegeting Class

The document outlines several investment feasibility analyses for different companies considering new projects, including Gamma Limited's leather manufacturing, Jumbo Food Processing's processing plant, Ajanta Limited's project with a significant investment, and Vision Ltd's slipper manufacturing machine. Each case includes financial metrics such as NPV, IRR, and payback period, along with scenario analyses to assess risks and project viability. The analyses aim to guide management decisions on whether to proceed with the respective investments.

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0% found this document useful (0 votes)
6 views3 pages

Capital Budegeting Class

The document outlines several investment feasibility analyses for different companies considering new projects, including Gamma Limited's leather manufacturing, Jumbo Food Processing's processing plant, Ajanta Limited's project with a significant investment, and Vision Ltd's slipper manufacturing machine. Each case includes financial metrics such as NPV, IRR, and payback period, along with scenario analyses to assess risks and project viability. The analyses aim to guide management decisions on whether to proceed with the respective investments.

Uploaded by

aryan.tiwari.26l
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Q. 1 )Gamma Limited currently manufactures leather shoes.

In its capital budget, the


management of Gamma Limited has under consideration a project to manufacture leather
which is the main raw material for leather shoes. The project will require an initial
investment of Rs. 50 billion. The company estimates that the project’s NPV (Net Present
Value) is Rs. 800 million. This estimate assumes that the economy and market conditions
will be average over the next few years. Mr. Kartik, the CFO of Gamma Limited,
however, forecasts that there is only a 55% chance that the performance of the economy
will be average. Recognizing the uncertainty, he has also performed the following
scenario analysis.

Economic Scenario Probability of Outcome NPV (Rs. Million)

Recession 0.03 (80)

Below Average 0.05 (10)

Average 0.55 800

Above Average 0.30 1500

Boom 0.07 3500

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

Initial Investment (Rs ‘000) 14,000

Sales Volume (Units ‘000) 1,000

Unit Selling Price (Rs) 20


Unit Variable Cost (Rs) 10

Annual Fixed Cost (Rs ‘000) 5,000

Depreciation (Straight Line, Rs 2,000


‘000)

Tax Rate 30%

Cost of Capital 12%

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:

Variable Pessimistic Expected Optimisti


c

Sales Volume (Units ‘000) 850 1,000 1,150

Unit Selling Price (Rs) 17 20 23

Unit Variable Cost (Rs) 11.50 10.00 8.50

Annual Fixed Cost (Rs ‘000) 5,750 5,000 4,250

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.

4. Financial Feasibility Analysis for Vision Ltd


Vision Ltd, a small MSME unit, is considering an investment in a slipper manufacturing machine
costing Rs. 30,000 with an expected lifespan of 10 years. The company anticipates an initial sales volume
of 1,000 slippers, with a 4% annual growth rate. Each slipper is expected to sell for Rs. 30, while the
variable cost per unit is estimated at Rs. 18. Additionally, the business will incur an annual fixed cost
of Rs. 5,000.
The machine will be depreciated using the written-down value (WDV) method at 15% per year.
Inflation is projected at 7% annually, affecting the selling price, variable cost, and fixed costs. The
company's cost of capital is 20%, and it operates under a 30% tax rate. At the end of 10 years, the
machine is expected to have a salvage value of Rs. 2,000.
Project Evaluation & Required Analysis
To determine the feasibility of this investment, the following analyses will be conducted:
1. Financial Viability Assessment
o Compute key financial metrics such as Net Present Value (NPV), Internal Rate of
Return (IRR), and Payback Period to evaluate project profitability.
2. Sensitivity Analysis
o Estimate the Break-Even Selling Price, Break-Even Volume, and Break-Even
Growth Rate to understand critical thresholds for profitability.
o Assess the impact of changes in growth rate and selling price on project outcomes.
3. Simulation Analysis
o Conduct 500 simulation trials by varying the growth rate between -10% and 25% to
evaluate the project's risk and uncertainty under different market conditions.
Through these assessments, Vision Ltd aims to make an informed decision on whether to proceed with the
investment in the slipper manufacturing machine.

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