Instructor: Mr. Sabin Bikram Panta
Submitted By: Group 3
Shivshankar Yadav (12336)
Theory and Case Background:
The term capital budgeting refers to the process of decision making by which firms evaluate the purchase of major fixed assets, including building, machineries, and equipment. Capital budgeting describes the firm’s formal planning process for the acquisition and investment of capital and results in capital budget that is the firm’s formal plan for the expenditure of money to purchase new fixed asset for expansion or replacement of business. Egret printing and publishing company is a family owned company established by Jhon and Keith in 1956. Patrick Hill joined the firm in 1979 in accounting department. As being in this department he has responsibility for both internal and external financial decision. Egret is an all equity capital structured company. It was a success company specially, in printing business. It has also made a investment in a diversified business named local video text service. Over one half of the system’s subscribers pay for the video text service. Belford had identified four major investment proposals for his firm’s internal fund 1.5 million. The four projects are as follows: Project A: Major Plant Expansion:
This project has been designed to alleviate the capacity problem by constructing a new wing on the main plant. This additional space would allow to hold a greater vriety of paper stock in inventory and to reposition its various processes for a more efficient work flow.
Project B: Alternative Plan for Plant Expansion
This project was an alternative of project A. it can be installed much more quickly and will allow Egret to take several major printing jobs in the next few years.
Project C: Purchase of New Press
This is a dependence project on A or B. so, the existence of this project don’t affect the future cash flow for project A or B. it is basically for covering the extra market of high quality color calendar demanders.
Project D: Upgrade of Egret’s Video Text Service
This is independent project toward video test service in which the firm has made investment since 1991 and because the number of existing as well as new subscribers has fallen, it is inherent to invest in this project.
Significance of this study:
This case as well as applied concept In this case really contributes more many knowledge to us for making decision on selecting appropriate project to invest. Let us deal its contribution point wise.
* To evaluate projects based on future cash flow and its impact on wealth maximization * To use various method of evaluation and also to find the best approach of evaluation * To compare various types of projects like mutual exclusive project, dependent project, expansion project. * To compare the projects of size disparity, time disparity. * To relate the theoretical concepts in practical life.
* To make decision of capital budgeting in fallout of capital rationing situation. * To know the impact of qualitative factors in decision making for capital budgeting * To know the use of appropriate cost of capital for calculation NPV. * To know the effect of time value of money in selection criteria * To know the impact of change in cost of capital to decision criteria.
Question 1: Determine the payback, net present value (NPV) and internal rate of return (IRR) for each project, using both 15 and 21% discount rates. Rank the investment proposals considering the capital budget of $1.5 million. Which projects should the company choose and why? Which discount rate is more appropriate? (Note that project A and B are mutually exclusive). Calculation part derived from Excel
| project A| Project B| Project C| Project D|
Year| Cash Flow| Cash Flow| Cash Flow| Cash Flow|
0| -500000| -500000| -1000000| -500000|
1| 136000| 370000...