corporate finance case final1

7/27/2019 Corporate Finance Case Final1

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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


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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3

S e g m e n t O b j e c t i v e sS e g m e n t O b j e c t i v e s

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


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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9



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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13



Capital Budgeting

Different investment decisions:

Techniques of capital budgeting and their acceptance criteria

Different situation analysis

Conceptualframework


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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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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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19


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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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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24



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


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For 5 years the inflow is 47.6*A 5%,5years+516.0078*A15%,5years

1935.821




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




Depreciation 140 140 140 140 140


For 5 years the inflow is 47.6*A 5%, 5years+516.0078*A9.3%, 5years

2197.64726




Considering 5% required rate of return: (Considering only risk-free rate)

Conventional


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


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




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



Depreciation 140 140 140 140 140


For 5 years the inflow is 47.6*A 5%,5years+168.7345506A12%,5years

771.7074735


NPV of the project is -128.2925265

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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


814.333382





Year-1 Year-2 Year-3 Year-4 Year-4

out flow 700 0 0 0 0

out flow 200 0 0 0 0



Depreciation 140 140 140 140 140


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For 5 years the inflow is 47.6*A 5%,5years+168.7345506A9.3%,5years

862.4016474





out flow 700 0 0 0 0

out flow 200 0 0 0 0


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



936.615




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:


Videoprojector


out flow 3800 0 0 0 0

Outflow 300

Out flow 180

out flow 240 0 0 0 0




Depreciation 844 844 844 844 844


For 5 years the inflow is $3,552.65


NPV of the project is ($967.35)

Profitability index $0.79



out flow 3800 0 0 0 0

Outflow 300

Out flow 180out flow 240 0 0 0 0



Depreciation 844 844 844 844 844

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For 5 years the inflow is 3721.331278



Profitability Index 0.82330338


Videoprojector


out flow 3800 0 0 0 0

Outflow s

Out flow 180

out flow 240 0 0 0 0


After tax income (for 1

year) 735.6207197 735.6207 645.371 645.371 645.371

Depreciation 844 844 844 844 844


For 5 years the inflow is 3893.203861



Profitability index 0.861328288


Videoprojector

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out flow 3800 0 0 0 0

Outflow 300

Out flow 180

out flow 240 0 0 0 0


After tax income (for 1day) 2.015399232 2.015399232 1.768139604 1.768139604 1.768139604


Depreciation 844 844 844 844 844




NPV of the project is ($315.68)


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


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


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


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

39


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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:


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


Depreciation 844 844 844 844 844


40


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NPV of the project is $58,992.96



out flow 3800 0 0 0 0

Outflow 300

Out flow 180out flow 240 0 0 0 0


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







out flow 3800 0 0 0 0

Outflow 300

Out flow 180

out flow 240 0 0 0 0


41


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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






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


After tax income (for 1

year) 18576.2808 18576.28 18576.28 18576.28 18576.28

Depreciation 844 844 844 844 844






42


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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


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


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


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

44


45/45

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

corporate finance case final1

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