corporate finance case final1
TRANSCRIPT
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TERM PAPERON
CASE
RELATED TO CAPITAL BUDGETING AND
PROBABILTY DISTRIBUTION
CASE ANALYSIS
OF
UNIVERSITY CITY LOUNGE
United International University
School of Business
Spring, 2011
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Submitted to:
Md. Enamul Haque
Assistant Professor
United International University
Prepared by:
Suzona Asad 111 081 149
S.M. Sakib 111 081 205
Mahim Iqbal Jagirdar 111 081 166
Ismat Jerin Chetona 111 082
Date of submission: April 26, 2011
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This section will focus on:
Letter of Transmittal
Acknowledgement
Executive Summary
Table of contents
Introductory Part
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April 26, 2011
Md. Enamul Haque
Assistant Professor
Course Name: Corporate Finance
Course Code # BUS 2112
United International University
Dhanmondi, Dhaka.
Dear Sir
Subject: Submission of Report on Case Study Related to Capital Budgeting and
Probability Distribution
With due respect and humble submission, we student of BBA, spring 2011 are submitted
the report on Case Study Related to Capital Budgeting and Probability Distribution. It
gives us immense pleasure to inform you that we have completed this report under your
kind hearted direct supervision.
Now we have placed this report before you for your approval. We hope that our report
will satisfy you.
Sincerely yours,
___________
Suzona Asad
ID # 111081149
(On the behalf of)
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Acknowledgement
At first we would like to thank almighty God for helping us all the way, and then
Bachelor of Business Administration (BBA) for having such a wonderful and unique
course, through which we get chance to know about the implication of Corporate
Finance.
We would like to give special thanks to our honorable instructor Md. Enamul Haque for
giving us the great chance to report on this kind of important topic. And he has helped us
from time to time on different issues regarding the case study & preparation of report.
During the preparation of the report, we had some problem that had been erased out with
his propound lecture and assistance. Without his cooperation and guideline this report
would have been an incomplete one
We would like to thanks the United International University for helping us all the time
and in all the way. And we would like to convey our thanks to our one of the facultiesMoshtafa Monzur Hasan who has helped us a lot to solve this problem. And without his
support, we will not be able to solve this case. We would like to convey our thanks to one
of our faculties Jinea Akhter who has assisted us in every possible ways.
We also appreciate the unity, spontaneous workability and successful team spirit of our
fellow group members/friends. Without cooperation and support from each other, it
would not be possible to prepare a resourceful report.
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Table on Contents
Serial no. Parts Page no.
Executive summary VII
1. INTRODUCTION 01
1.1 Objective 01
1.2 Scope 01
1.3 Limitation 011.4 Methodology 01
1.4.1 Types and Sources of Data 01
1.4.2 Data Collection Plan 01
1.4.3 Data Analysis Plan 01
2 2. WHAT IS GLOBALWARMING?
02
2.1 History 02
2.2 Global Warming andBangladesh at a Glance 03
2.3What is Green House Effect
05
2.4 Causes of Rising CarbonDioxide
05
2.5
Effects of Global Warming
06
2.6 Causes of Global Warming 09
2.7 Impact of Global Warmingon Bangladesh
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2.8 Effect of global warmingon soil and land resourcesin Bangladesh
14
2.9 Consequences of GlobalWarming
15
2.10 What we can do to reduceglobal warming
16
2.11Solutions and Technology
17
3.
CONCLUSION ANDRECOMMEDATION
19
REFERENCE21
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EXECUTIVE SUMMARY
University City Lounge is a lounge that is located in the college community ofClaremont, Pennsylvania, about 65 miles north of Pittsburgh. The case study is related tothe University City Lounge, which is operated by Richard James. In this case, it has beenseen that the owner of the lounge has two mutually exclusive projects, Conventional setand Video-projector. These two projects are having different initial investment anddifferent and different returns. We have shown various financial analyses for theselection of any one of them.
The objective of this report is to know about the real scenario of financial condition, toknow how to implement different financial tools. For completion of this report, we haveused only secondary data. And there are some limitations in this report that is mainlybecause of the limitation of information. But we have tried to give our 100% effort toprepare this report.
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This section will focus on:
Origin of the report
Scope of the report
Rationale of the study
Objectives of the study
Methodology of the study
Limitation of the study
Report
Preliminaries
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1.1: Origin of the report:
This report has been undertaken as a part of course requirement of Cases in
Financial Decision Making. Our course instructor Md. Enamul Haque has
assigned us the case on University City Lounge) so as to gain some
practical knowledge about Capital budgeting Decision. The study really
provides us an opportunity to explore and confront the reality about issues
relating to Capital Budgeting Decision.
1.2: Scope of the study:
The report intends to analyze the case of University City Lounge. The
report is prepared with a view to provide a brief but complete idea
about Capital Budgeting Decision. For the analysis of the case different
tools of Finance have been applied. These are namely Net Present
Value (NPV) approach, Probability analysis, Profitability Index, Standard
deviation sensitivity analysis and simulation analysis.
1.3: Rationale of the study:
The case is a part of our term paper. We believe that such an intensive
study will help us in many ways in the future. This will surely enhance
our analytical ability. In the case analysis we apply various tools and
techniques of finance. This present study enables us to gather
knowledge Capital Budgeting Decision. The knowledge of the study will
help, when we will work in our professional career as a financialanalyst. So, we thanked to our course teacher to arrange this study.
1.4: Objectives of the study:
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The primary objective of this case report is to analyze the criticalissues and pros and cons of University City Lounge. The objectives canbe more specifically stated as:
To get an idea about the Capital Budgeting Decision
To enable to apply the concepts in financial decision making. To know how to link various complex situation.
To increase our analytical ability.
Apart from this, the case study also has following objectives:
Identification of the problem or problems
Identification of the alternative courses of action
Critical Analysis; both qualitative and quantitative
Provide Recommendation
1.5: Methodology:
This case report is an analytical report in nature.
Data Collection: The organization part of the report is mainlybased on the secondary data provided in the case.
Assumptions: As there was no scope for acquiring data fromoutside sources, some realistic assumptions have beenconsidered for missing information.
Data Analysis:We have analyzed the data from the perspectiveof
Qualitative Judgments: In the qualitative analysis, we
provide theoretical aspect of Budgeting Decision. Weconduct economy analysis, Industry analysis, and Companyanalysis. In company analysis we put emphasis on SWOTanalysis. Apart from this we also analyze financial historyof the company, business risk, and financial risk.
Quantitative Appraisal: The data was analyzed withsimple financial tools like Net Present Value (NPV)approach, profitability index. In quantitative analysis, wedeal with the problem of the case and analyze somefocusing point of the case.
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Language:Abstract terminology and technical terms have beenavoided as much as possible so that any person can understandthe theme of the case report.
1.6: Limitations of the study:
The limitations of the study are defined by the extensive of the factscovered by the study and those that left out. However, theselimitations can be presented in the following lines:
The first limitation is the lack of intellectual thought and analytical
ability to make it the most perfect one.
The analysis is based on some limited data, so it has become
difficult to draw a complete figure.
Lacking of detailed information on many aspects.
Use of case based data only is another limitation of the study.
We lack the advanced statistical, mathematical and analytical skills
for the complex analysis of the report.
We had to complete the analysis within a very short span of time,
which restricted our analysis.
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This section will focus on:
Capital Budgeting
Different investment decisions:
Techniques of capital budgeting and their acceptance criteria
Different situation analysis
Conceptualframework
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This section will focus on:
Overview of University City Lounge
Formation of University City Lounge
Investment Strategy of University City Lounge
Problem Statement
Alternative courses of actions
Introduction
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Introduction:
Capital budgeting is one of the most important tasks faced by financial managers. A
firms capital budgeting decisions define its strategic direction, because moves into new
products, services, or markets must be preceded by capital expenditures. Capital
budgeting is very obviously a vital activity in business. The results of capital budgeting
decisions continue for many years. Vast sums of money can be easily wasted if the
investment turns out to be wrong or uneconomic.
In the case University City Lounge, we have applied various tools of capital budgetingto determine whether the owner of University City Lounge invest in the Conventionalset or in the Video projector.
3.1: University City Lounge: A close Overview
University City Lounge a small corporation in the college community of Claremont,
Pennsylvania. It is primarily a university-oriented city. University City Lounge (UCL)operate by Richard James founded five years ago in down town section of the city.
University City Lounge (UCL) growth opportunity is 10 percent each year. James owns
all the stocks of UCL. The firm has no outstanding debt. University City Lounge (UCL)
mainly appealing to students in general and young adults. The room of the business
contains ten tables that seat four persons each and five large booths capacity is six
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persons each. Also there is a separate game room. There are five tables that seats 20
customers. The third area within UCL is situated to the right of the central drinking
space. Also there is a bar house in the T.V. lounge and right now UCL T.V. is not
working. So this time James going for two mutually exclusive investment project. (1) A
conventional color set with a 25-inch screen or (2) a product called video-projector,
which is offers a 24-square-foot (6 feet high by 4 feet wide). James tax matters handle by
Danial Ruggins. He and James began to develop the data necessary for making an
effective choice between the two televisions. First project costs $700 fixed and other
inventory costs is $200. Second project $3800 including set-up costs. James would add 6
tables at a unit cost of $30 and 24 chairs at unit costs of $10 and additional assets costs is
$300. The assets of UCL were always depreciated using the straight-line method. They
estimated UCL will get 218 customers daily and their seating factor is 1.5 times. James
operates UCL on all 365 days of the year. Last year, UCL earned $24,371 after taxes,
sales were $358,000, Cost of goods sold was $187,592 and last year their tax was 29.1
percent. Now current tax rate is 34 percent. UCL is expecting adding one extra customer
in their lounge which increased their annual sales $1643. UCL is thinking two different
types of probability in terms of their project. James and Ruggins are now considering one
of the projects from two.
3.4: Investment Strategy:
The owner of University City Lounge has decided that they are having two mutually
exclusive projects. First one is the conventional set and second one is the video projector.
3.6: Alternative courses of actions:
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We can determine whether the investment should made in Conventional set or in
Video projector by using both qualitative and quantitative approaches. The quantitative
approaches include:
Net Present Value (NPV) approaches
Profitability Index
Probability distribution
Standard deviation
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This section will focus on:
Revenues and Expenses
Initial results and investment considerations
Current Investmentopportunity: University City
Lounge
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4.1: University City Lounge: Base Case Analysis
University City Lounge has two options for investment, Conventional set or videoprojector. The initial cost for Conventional set is $(700+200) = $900 and the initial costfor Video projector is ($3800+6*30+24*10+300) = $ 4520. the return is different forthe two projects.
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For complete, rational and prudent study, we divide the analysis into twobroad classes:
Analytical Part
Analysis
Qualitative Analysis Quantitative Analysis
Economy Analysis
Industry Analysis
Company Analysis
Risk Analysis
Capital Budgeting
Probability distribution
Risk Analysis
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Economy Analysis:
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This section will focus on:
Economy Analysis
Industry Analysis
Company Analysis
Qualitative Analysis
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The city has never faced depression.
The city has diversified and sound industrial base.
Other restaurant has the capability to buy a high priced videoprojector.
5.3: Company Analysis:
SWOT Analysis
Strengths
High Sales volume:
High growth rate
Location
Environment
Sales in last year was proximate $24371
The growth of the net profit is 10%
Located in a sound industrial based area.
The lounge is having three separate environments,dining area, game room and lounge.
Weaknesses
Distance from city
Sole proprietorship
Its located about 65 miles north of Pittsburgh
One owner
Opportunities
Economical situation
Good personal
relationship
The city gas never faced depression.
The owner has a good personal relationship with
several local bankers.
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Threats
Increased tax amount
Uncertainties:
The tax rate was 29%, but now its go to be 34%
There is an uncertainty that whether the video
projector or the conventional set will be profitable.
6.1: Risk analysis:
As it is mentioned, Gas industry is highly risky investment arena. In the Bailey prospectthere are many uncertainties. The uncertainties include:
Uncertainty about cost of initial investment. Uncertainty about customers preference
Uncertainty about sales amount.
Uncertainty about demand of Lounge.
Due to the existence of the above uncertainties, it can be said that University City Loungeis going to invest in a risky projects.
In our analysis throughout the report we have considered different scenarios. Thisincludes:
For Conventional set, the optimistic situation hasbeen determined.
For conventional set, the demand has been decidedbased on probability distribution
For Video projector, the seating-factor has beenconsidered.
For video projector, the probability distribution hadbeen used.
All the situations have been determined by using various discounting rates, because thediscounting rate is not certain here.
Risk Analysis- Base case:
After Tax cash flow:
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s
6.2: Analysis of Bailey Prospect:
For the accept / reject decision we have used following techniques:
Net present value (NPV)
Internal rate of Return (IRR)
Modified IRR
Payback period method
Profitability Index
Apart from this we have used:
Sensitivity analysis
Scenario analysis
Simulation analysis
6.2.: Capital budgeting technique: Analysis of BaileyProspect:
The capital budgeting techniques are shown in the appendix.
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This section will focus on:
Financing the project
Hamada equation
Optimum capital structure
Analysis of bailey prospect
Project Financing
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7.1: Financing the project:
To raise fund for business expansion or for other purposes the company can issue equity
or debt to private or public market or it can take term loan from any financial institution.
But it is important to determine the best source of fund for the company. This depends on
many variables like economic condition, interest rates, companys financial condition,
industrys condition, and many other potential macro economic factors.
Debt has some advantages. Interest on debt is tax deductible and it lowers the effective
cost of debt. However, debt has negative sides as well. The higher the proportion of debt,
the more risky the firm is. Due to high riskyness the debt holder and equity holder
demand for additional risk premium. This increases the cost of firm. Again if the firm
fails to pay fixed payment on debt, it may results in the bankruptcy of the firm. So, it is
vital for the firm to set the optimal combination of debt and equity.
In this case, we have assumed that the firm will either use its own capital money, or itwill use 50% debt and 50% equity.
Calculation of risk free rate and required rate of return:
in the case, the after tax risk-free rate is 5%it has been assumed that the cost of debt is 10% and the required rate of capital is 12%,we have assumed that the risk-premium is 7% when the risk is comparatively lower andthe risk premium is 10% when the risk is comparatively higher.
Required rate of return calculation:
According to Capital Asset Pricing Model:
r= RF+ (RM-RF)
Here, risk-free rate=5%
=1 (Considering average capital market)
Risk premium is 7%
r = 0.05+ 1*0.07
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=12%
Comparative qualitative analysis of Conventional set and Video projector.
Conventional set is colorful and 25 inch.
Video projector is 24 square feet and having clear image.
Video projector is more costly than that of the conventional set.
There is possibility that the conventional set can be bought by other lounges.
Main part:
Considering 12% required rate of return, and 34% tax-rate, NPV of Conventional-
set:(when the situation is optimistic)
Year-1 Year-2 Year-3 Year-4 Year-5out flow 700 0 0 0 0
out flow 200 0 0 0 0
before tax income 2.142 2.142 2.142 2.142 2.142
After tax income (for 1 day) 1.41372 1.41372 1.41372 1.41372 1.41372
After tax income (for 1 year) 516.0078 516.0078 516.0078 516.0078 516.0078
Depreciation 140 140 140 140 140
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Depreciation tax shield 47.6 47.6 47.6 47.6 47.6
For 5 years the inflow is 47.6*A 5%,5years+516.0078*A12%,5years
2066.18912
For 5 years the outflow is 900
NPV of the project is 1166.18912
profitability index 2.29576569
Required rate of return calculation:
According to Capital Asset Pricing Model:
r= RF+ (RM-RF)
Here, risk-free rate=5%
=1 (Considering average capital market)
Risk premium is 10%
r = 0.05+ 1*0.10
=15%
r wacc = S/B+S (rs) + B/B+S (rb) (1-T)
= * 0.12+ * 0.10 (1-0.34)=9.3%
The risk of the Lounge may increase, that time the required rate of return may increase.So considering higher risk, we have assumed that the required rate of return is 15%
year-1 Year-2 year-3 year-4 year-5
out flow 700 0 0 0 0
out flow 200 0 0 0 0before tax income 2.142 2.142 2.142 2.142 2.142After tax income (for 1day) 1.41372 1.41372 1.41372 1.41372 1.41372
After tax income (for 1year) 516.0078 516.0078 516.0078 516.0078 516.0078
Depreciation 140 140 140 140 140
Depreciation tax shield 47.6 47.6 47.6 47.6 47.6
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For 5 years the inflow is 47.6*A 5%,5years+516.0078*A15%,5years
1935.821
For 5 years the outflow is 900
NPV of the project is 1035.821
profitability index 2.150912222
Considering 9.3% required rate of return:
year-1 year-2 year-3 year-4 year-5out flow 700 0 0 0 0
out flow 200 0 0 0 0
before tax income 2.142 2.142 2.142 2.142 2.142
After tax income (for 1 day) 1.41372 1.41372 1.41372 1.41372 1.41372
After tax income (for 1 year) 516.0078 516.0078 516.0078 516.0078 516.0078
Depreciation 140 140 140 140 140
Depreciation tax shield 47.6 47.6 47.6 47.6 47.6
For 5 years the inflow is 47.6*A 5%, 5years+516.0078*A9.3%, 5years
2197.64726
For 5 years the outflow is 900
NPV of the project is 1297.64726
profitability index 2.441830294
Considering 5% required rate of return: (Considering only risk-free rate)
Conventional
year-1 Year-2 year-3 year-4 year-5
out flow 700 0 0 0 0
out flow 200 0 0 0 0
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before tax income 2.142 2.142 2.142 2.142 2.142After tax income (for 1day) 1.41372 1.41372 1.41372 1.41372 1.41372
After tax income (for 1year) 516.0078 516.0078 516.0078 516.0078 516.0078
Depreciation 140 140 140 140 140Depreciation tax shield 47.6 47.6 47.6 47.6 47.6
For 5 years the inflow is 47.6*A 5%, 5years+516.0078*A5%, 5years
2440.126822
For 5 years the outflow is 900
NPV of the project is 1540.126822
profitability index 2.711252024
Standard deviation:
Mean= (2066.189117+ 1935.821+ 2197.647265+ 2440.126822)/4=2159.946051
= 215.2092
Cumulativeprobability
Profitabilityindex
Profitability index based on probabilitydistribution
0.1 2.295765686 0.229576569
0.2 2.295765686 0.459153137
0.3 2.295765686 0.688729706
0.4 2.295765686 0.9183062740.5 2.295765686 1.147882843
0.6 2.295765686 1.377459412
0.7 2.295765686 1.60703598
0.8 2.295765686 1.836612549
0.9 2.295765686 2.066189117
0.95 2.295765686 2.180977402
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0.1 2.150912222 0.215091222
0.2 2.150912222 0.430182444
0.3 2.150912222 0.645273667
0.4 2.150912222 0.8603648890.5 2.150912222 1.075456111
0.6 2.150912222 1.290547333
0.7 2.150912222 1.505638555
0.8 2.150912222 1.720729778
0.9 2.150912222 1.935821
0.95 2.150912222 2.043366611
0.1 2.441830294 0.244183029
0.2 2.441830294 0.488366059
0.3 2.441830294 0.732549088
0.4 2.441830294 0.9767321180.5 2.441830294 1.220915147
0.6 2.441830294 1.465098176
0.7 2.441830294 1.709281206
0.8 2.441830294 1.953464235
0.9 2.441830294 2.197647265
0.95 2.441830294 2.319738779
0.1 2.711252024 0.271125202
0.2 2.711252024 0.542250405
0.3 2.711252024 0.813375607
0.4 2.711252024 1.08450081
0.5 2.711252024 1.355626012
0.6 2.711252024 1.626751214
0.7 2.711252024 1.897876417
0.8 2.711252024 2.169001619
0.9 2.711252024 2.440126822
0.95 2.711252024 2.575689423
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0
0.5
1
1.5
2
2.5
3
1 2 3 4 5 6 7 8 9 10
Series1Series2
Series3
Series4
Pessimistic situation
Considering 15% required rate of return:
out flow 700 0 0 0 0
out flow 200 0 0 0 0
before tax income 0.700434 0.700434 0.700434 0.700434 0.700434After tax income (for 1day) 0.46228644 0.462286 0.462286 0.462286 0.462286
After tax income (for 1year) 168.7345506 168.7346 168.7346 168.7346 168.7346
Depreciation 140 140 140 140 140
Depreciation tax shield 47.6 47.6 47.6 47.6 47.6
For 5 years the inflow is 47.6*A 5%,5years+168.7345506A12%,5years
771.7074735
For 5 years the outflow is 900
NPV of the project is -128.2925265
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profitability index 0.857452748
Considering 12% required rate of return:
out flow 700 0 0 0
out flow 200 0 0 0
before tax income 0.700434 0.700434 0.700434 0.700434After tax income (for 1day) 0.46228644 0.462286 0.462286 0.462286
After tax income (for 1year) 168.7345506 168.7346 168.7346 168.7346
Depreciation 140 140 140 140
Depreciation tax shield 47.6 47.6 47.6 47.6
For 5 years the inflow is 47.6*A 5%,5years+168.7345506A12%,5years
814.333382
For 5 years the outflow is 900
NPV of the project is -85.666618
profitability index 0.904814869
Considering 9.3% required rate of return:
Year-1 Year-2 Year-3 Year-4 Year-4
out flow 700 0 0 0 0
out flow 200 0 0 0 0
before tax income 0.700434 0.700434 0.700434 0.700434 0.700434After tax income (for 1day) 0.46228644 0.462286 0.462286 0.462286 0.462286
After tax income (for 1year) 168.7345506 168.7346 168.7346 168.7346 168.7346
Depreciation 140 140 140 140 140
Depreciation tax shield 47.6 47.6 47.6 47.6 47.6
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For 5 years the inflow is 47.6*A 5%,5years+168.7345506A9.3%,5years
862.4016474
For 5 years the outflow is 900
NPV of the project is -37.5983526
profitability index 0.958224053
Considering 5% required rate of return:
out flow 700 0 0 0 0
out flow 200 0 0 0 0
before tax income 0.70043 0.700434 0.700434 0.700434 0.700434
After tax income (for 1day) 0.46229 0.46228644 0.46228644 0.462286 0.462286After tax income (for 1year) 168.735 168.7345506 168.7345506 168.7346 168.7346
Depreciation 140 140 140 140 140
Depreciation tax shield 47.6 47.6 47.6 47.6 47.6
For 5 years the inflow is 47.6*A 5%,5years+168.7345506A12%,5years
936.615
For 5 years the outflow is 900
NPV of the project is 36.6154
profitability index 1.04068
Standard deviation:Mean= 846.2645
Standard deviation=70.71548
Pessimistic
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cumulativeprobability profitability index out come
0.1 0.857452748 0.085745275
0.2 0.857452748 0.17149055
0.3 0.857452748 0.257235824
0.4 0.857452748 0.3429810990.5 0.857452748 0.428726374
0.6 0.857452748 0.514471649
0.7 0.857452748 0.600216924
0.8 0.857452748 0.685962198
0.9 0.857452748 0.771707473
0.95 0.857452748 0.814580111
cumulativeprobability profitability index Out come
0.1 0.904814869 0.090481487
0.2 0.904814869 0.180962974
0.3 0.904814869 0.271444461
0.4 0.904814869 0.361925948
0.5 0.904814869 0.452407435
0.6 0.904814869 0.542888921
0.7 0.904814869 0.633370408
0.8 0.904814869 0.723851895
0.9 0.904814869 0.814333382
0.95 0.904814869 0.859574126
cumulativeprobability profitability index Out come
0.1 0.958224053 0.095822405
0.2 0.958224053 0.191644811
0.3 0.958224053 0.287467216
0.4 0.958224053 0.383289621
0.5 0.958224053 0.479112027
0.6 0.958224053 0.574934432
0.7 0.958224053 0.670756837
0.8 0.958224053 0.766579242
0.9 0.958224053 0.862401648
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0.95 0.958224053 0.91031285
cumulative
probability profitability index Out come0.1 1.04068 0.104068
0.2 1.04068 0.208136
0.3 1.04068 0.312204
0.4 1.04068 0.416272
0.5 1.04068 0.52034
0.6 1.04068 0.624408
0.7 1.04068 0.728476
0.8 1.04068 0.832544
0.9 1.04068 0.936612
0.95 1.04068 0.988646
0
0.2
0.4
0.6
0.8
1
1.2
1 2 3 4 5 6 7 8 9 10
Series1
Series2
Series3
Series4
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Video-projector:
Considering 15% required rate of return:
Videoprojector
year-1 Year-2 year-3 year-4 year-5
out flow 3800 0 0 0 0
Outflow 300
Out flow 180
out flow 240 0 0 0 0
before tax income 3.0536352 3.053635 2.678999 2.678999 2.678999
After tax income (for 1 day) 2.015399232 2.015399 1.76814 1.76814 1.76814
After tax income (for 1 year) 735.6207197 735.6207 645.371 645.371 645.371
Depreciation 844 844 844 844 844
Depreciation tax shield 286.96 286.96 286.96 286.96 286.96
For 5 years the inflow is $3,552.65
For 5 years the outflow is 4520
NPV of the project is ($967.35)
Profitability index $0.79
Considering 12% required rate of return:
Year-1 Year-2 Year-3 Year-4 Year-5
out flow 3800 0 0 0 0
Outflow 300
Out flow 180out flow 240 0 0 0 0
before tax income 3.0536352 3.053635 2.678999 2.678999 2.678999After tax income (for 1day) 2.015399232 2.015399 1.76814 1.76814 1.76814
After tax income (for 1year) 735.6207197 735.6207 645.371 645.371 645.371
Depreciation 844 844 844 844 844
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Depreciation tax shield 286.96 286.96 286.96 286.96 286.96
For 5 years the inflow is 3721.331278
For 5 years the outflow is 4520
NPV of the project is -798.668722
Profitability Index 0.82330338
Considering 9.3% required rate of return:
Videoprojector
year-1 Year-2 year-3 year-4 year-5
out flow 3800 0 0 0 0
Outflow s
Out flow 180
out flow 240 0 0 0 0
before tax income 3.0536352 3.053635 2.678999 2.678999 2.678999After tax income (for 1day) 2.015399232 2.015399 1.76814 1.76814 1.76814
After tax income (for 1
year) 735.6207197 735.6207 645.371 645.371 645.371
Depreciation 844 844 844 844 844
Depreciation tax shield 286.96 286.96 286.96 286.96 286.96
For 5 years the inflow is 3893.203861
For 5 years the outflow is 4520
NPV of the project is -626.796139
Profitability index 0.861328288
Considering 5% required rate of return:
Videoprojector
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year-1 Year-2 year-3 year-4 year-5
out flow 3800 0 0 0 0
Outflow 300
Out flow 180
out flow 240 0 0 0 0
before tax income 3.0536352 3.0536352 2.6789994 2.6789994 2.6789994
After tax income (for 1day) 2.015399232 2.015399232 1.768139604 1.768139604 1.768139604
After tax income (for 1year) 735.6207197 735.6207197 645.3709555 645.3709555 645.3709555
Depreciation 844 844 844 844 844
Depreciation tax shield 286.96 286.96 286.96 286.96 286.96
For 5 years the inflow is $4,204.32
For 5 years the outflow is 4520
NPV of the project is ($315.68)
Profitability index $0.93
Mean:
$3,842.88
Standard deviation 278.19592
Cumulative Probability Profitability index outcome
0.1 0.79 0.079
0.2 0.79 0.158
0.3 0.79 0.237
0.4 0.79 0.316
0.5 0.79 0.395
0.6 0.79 0.474
0.7 0.79 0.553
0.8 0.79 0.632
0.9 0.79 0.711
0.95 0.79 0.7505
Cumulative Probability Profitability index outcome
0.1 0.82330338 0.08233
0.2 0.82330338 0.164661
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0.3 0.82330338 0.246991
0.4 0.82330338 0.329321
0.5 0.82330338 0.411652
0.6 0.82330338 0.493982
0.7 0.82330338 0.576312
0.8 0.82330338 0.6586430.9 0.82330338 0.740973
0.95 0.82330338 0.782138
Cumulative Probability Profitability index outcome
0.1 0.861328288 0.086133
0.2 0.861328288 0.172266
0.3 0.861328288 0.258398
0.4 0.861328288 0.344531
0.5 0.861328288 0.4306640.6 0.861328288 0.516797
0.7 0.861328288 0.60293
0.8 0.861328288 0.689063
0.9 0.861328288 0.775195
0.95 0.861328288 0.818262
Cumulative Probability Profitability index outcome
0.1 0.93 0.093
0.2 0.93 0.186
0.3 0.93 0.279
0.4 0.93 0.372
0.5 0.93 0.465
0.6 0.93 0.558
0.7 0.93 0.651
0.8 0.93 0.7440.9 0.93 0.837
0.95 0.93 0.8835
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0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1 2 3 4 5 6 7 8 9 10
Series1
Series2
Series3
Series4
Current seating factor:
Considering 15% required rate of return:
Year-1 year-2 year-3 year-4 year-5
out flow 3800 0 0 0 0
Outflow 300
Out flow 180
out flow 240 0 0 0 0before tax income 77.112 77.112 77.112 77.112 77.112After tax income (for 1day) 50.89392 50.89392 50.89392 50.89392 50.89392
After tax income (for 1year) 18576.2808 18576.28 18576.28 18576.28 18576.28
Depreciation 844 844 844 844 844
Depreciation tax shield 286.96 286.96 286.96 286.96 286.96
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For 5 years the inflow is $63,512.96
For 5 years the outflow is 4520
NPV of the project is $58,992.96
Profitability index $14.05
Considering 12% required rate of return:
out flow 3800 0 0 0 0
Outflow 300
Out flow 180out flow 240 0 0 0 0
before tax income 77.112 77.112 77.112 77.112 77.112After tax income (for 1day) 50.89392 50.89392 50.89392 50.89392 50.89392
Tax rateAfter tax income (for 1year) 18576.2808 18576.28 18576.28 18576.28 18576.28
0.34
Depreciation 844 844 844 844 844
R=12% Depreciation tax shield 286.96 286.96 286.96 286.96 286.96
For 5 years the inflow is $68,205.72
For 5 years the outflow is 4520
NPV of the project is $63,685.72
Profitability index $15.09
Considering 9.3% required rate of return:
Year-1 Year-2 Year-3 Year-4 Year-5
out flow 3800 0 0 0 0
Outflow 300
Out flow 180
out flow 240 0 0 0 0
before tax income 77.112 77.112 77.112 77.112 77.112After tax income (for 1day) 50.89392 50.89392 50.89392 50.89392 50.89392
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Tax rateAfter tax income (for 1year) 18576.2808 18576.28 18576.28 18576.28 18576.28
0.34
Depreciation 844 844 844 844 844
R=9.3% Depreciation tax shield 286.96 286.96 286.96 286.96 286.96
For 5 years the inflow is $72,938.69
For 5 years the outflow is 4520
NPV of the project is $68,418.69
Profitability index $16.14
Considering 5% required rate of return:
year-1 year-2 year-3 year-4 year-5
out flow 3800 0 0 0 0
Outflow 300
Out flow 180
out flow 240 0 0 0 0
before tax income 77.112 77.112 77.112 77.112 77.112After tax income (for 1day) 50.89392 50.89392 50.89392 50.89392 50.89392
After tax income (for 1
year) 18576.2808 18576.28 18576.28 18576.28 18576.28
Depreciation 844 844 844 844 844
Depreciation tax shield 286.96 286.96 286.96 286.96 286.96
For 5 years the inflow is $81,667.96
For 5 years the outflow is 4520
NPV of the project is $77,147.96
Profitability index $18.07
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Mean
$71,581.33
Standard deviation 7747.59895
Current seating factor
Cumulative Probability Profitability index Outcome
0.1 14.05 1.405
0.2 14.05 2.81
0.3 14.05 4.215
0.4 14.05 5.62
0.5 14.05 7.025
0.6 14.05 8.43
0.7 14.05 9.835
0.8 14.05 11.24
0.9 14.05 12.645
0.95 14.05 13.3475
Cumulative Probability Profitability index Outcome
0.1 15.09 1.509
0.2 15.09 3.018
0.3 15.09 4.527
0.4 15.09 6.036
0.5 15.09 7.545
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0.6 15.09 9.054
0.7 15.09 10.563
0.8 15.09 12.072
0.9 15.09 13.581
0.95 15.09 14.3355
Cumulative Probability Profitability index Outcome
0.1 16.14 1.614
0.2 16.14 3.228
0.3 16.14 4.842
0.4 16.14 6.456
0.5 16.14 8.07
0.6 16.14 9.684
0.7 16.14 11.298
0.8 16.14 12.912
0.9 16.14 14.526
0.95 16.14 15.333
Cumulative Probability Profitability index Outcome
0.1 18.07 1.807
0.2 18.07 3.614
0.3 18.07 5.421
0.4 18.07 7.2280.5 18.07 9.035
0.6 18.07 10.842
0.7 18.07 12.649
0.8 18.07 14.456
0.9 18.07 16.263
0.95 18.07 17.1665
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0
2
4
6
8
10
12
14
16
18
20
1 2 3 4 5 6 7 8 9 10
Series1
Series2
Series3
Series4
Conclusion and recommendations