Question

Create your own hypothetical capital budgeting project.

A)     Make up a company (it could be real or fictional) and make up/describe a potential project for that company (you should be able to do this in one or two sentences…don’t worry about extreme detail).

B)      Create a cash flow stream for this project (the cash flow stream should be between 4-7 years in length), a critical acceptance level (T), and a required return (k). (Hint: Your cash flows must exceed your initial investment and your critical acceptance level must be less than the length of the project).

C)      Calculate the PP, IRR and NPV for your project

D)     For each decision technique, identify whether or not that technique suggests you should accept or reject the project

E)      Overall, identify whether or not you should accept or reject the project and why.  Note that part D is asking for 3 answers (one for each decision technique) while E is just asking for one answer – what is your final recommendation. Also, why doesn’t need to be a long answer, just a few words.

Answer 1

A):-  XYZ is a company who took Land from Government on lease for 5 years for road construction. Company collect toll from the passenger for 5 years and after those 5 years passes the right of road to Government back.

B) :- Cash flow of the Road project for 5 years

Particular	Year 1	Year 2	Year 3	Year 4	Year 5
Operating Income	57.19	61.85	66.89	72.34	78.23
Other Income	1.15	1.26	1.39	1.53	1.68
Revenue	58.34	63.11	68.28	73.87	79.92
Operating Expenses	32.60	35.86	39.44	43.39	47.73
Employee Benefit Expenses	1.89	2.08	2.28	2.51	2.76
Other Expenses	2.23	2.45	2.69	2.96	3.26
Expenditure	36.71	40.38	44.42	48.86	53.75
EBITDA	21.63	22.73	23.86	25.01	26.17
Depreciation & Amortisation	14.00	14.00	14.00	14.00	14.00
Finance Costs	3.00	3.00	3.00	3.00	3.00
Profit	4.63	5.73	6.86	8.01	9.17
Operating Cash Flow
Profit After Tax	4.63	5.73	6.86	8.01	9.17
Add: Depreciation & Amortisation	14.00	14.00	14.00	14.00	14.00
Add: Finance Costs	3.00	3.00	3.00	3.00	3.00
Cash Flow From Operations	21.63	22.73	23.86	25.01	26.17
Investing Cash Flow
Investment in Property & Equipment	-70	-	-	-	-
Cash Flow From Investing Activities	-70
Financing Cash Flow
Capital Introduced	45
Loan	25
Loan Repayed	-5	-5	-5	-5	-5
Finance Costs	-3.00	-3.00	-3.00	-3.00	-3.00
Cash Flow From Financing Activities	62.00	-8.00	-8.00	-8.00	-8.00
Net Cash Flows	13.63	14.73	15.86	17.01	18.17
Opening Cash & Cash Equivalents	-	13.63	28.36	44.22	61.23
Closing Cash & Cash Equivalents	13.63	28.36	44.22	61.23	79.40

  

3. IRR

Year	Cash Flow
0	-45
1	13.63
2	14.73
3	15.86
4	17.01
5	18.17
IRR	21.21%

NPV

NPV calculating @ 20 % cost of capital

Year	Cash Flow	pV@20%	Present Value
1	13.63	0.8333	11.36
2	14.73	0.6944	10.23
3	15.86	0.5787	9.18
4	17.01	0.4823	8.20
5	18.17	0.4019	7.30
		Present value of Cash Inflow	46.27
		Initial Outflow	45
		NPV	1.27

D. On the Basis of IRR technique and NPV @ 20% on cost of capital technique this proposal should be accepted.

E. I will accept the project because it is giving me 21.2 % return and My Cost of capital is 20 % . So it is beneficial for Investor.