Egret Printing & Publishing CompanyPresented By:Ayush Nepal

Barsha ShresthaChhokpa SherpaDeepak PandeyMeera Khannal Neelam MallaPramila Nepal

Prakash Pandey

Introduction

# Egret Printing and Publishing Company is a family owned specialty printing business Found by Keith Belford in

1986.

# Hill has responsibility for the both internal and external financial operations.

# Belford’s have identified four major capital investment proposals as potential candidates for funding

in the coming year.

# All equity capital structure to be overly conservative

# Belford family not willing to go for debt financing.

Four Major Capital Investment Proposals

Project A: Major Plant Expansion

Project B: Alternative Plan For Plant Expansion

Project C: Purchase Of New Press

Project D: Upgrade Of Egret’s Video Text Service

Pay Back Period‘000 USD

Project A Project B Project C Project D Remarks

Project Cost 1000 1000 2000 1000

Discount rate (15%) 3.787 years 2.014 years 4.446 years 3 years Accept B and D

Discount rate (21%) 4.826 years 2.582 years 5.274 years 4.822 years Accept B and D

Life of project 4 years 4 years 10 years 5 years

Capital budget $3.0 million

Project A and B mutually exclusive

Net Present Value Project A Project B Project C Project D Remarks

Cost of project 1000 1000 2000 1000

Net Present value (15%) 197.35

186.8

1262.22

173.27

Accept A and C

Net Present Value (21%) 49.12 93.87 635.165 24.1 Accept B and C

Life of project 4 years 4 years 10 years 5 years

IRR Project A Project B Project C Project D Remarks

Cost of project 1000 1000 2000 1000

Internal rate of return (IRR) 23.30% 28.49% 30.18% 22.11% Select B and C

Life of project 5 years 5 years 10 years 6 years

The company should use NPV method instead of payback period method and IRR method.

It takes into account all cash flows.

All cash flows are discounted at the appropriate market-determined opportunity cost of capital.

NPV of a project is exactly the same as the increase in shareholders’ wealth.

A zero NPV is one, which earns a fair return to compensate both debt holders & equity holders.

A positive NPV project earns more than the required rate of return, & equity holders receive all excess

cash flows.

Suggestion to the Company

Equivalent Annual Annuity (EAA) Project A Project B Project C Project D Remarks

Cost of Project 1000 1000 2000 1000

Equivalent Annual Annuity (15%)

69.12 65.43 251.50 51.69 Select A and C

Equivalent Annual Annuity (21%)

19.34 36.95 156.67 8.24 Select B and C

Life of Project 4 years 4 years 10 years 5 years

Cash Flow with $3,80,000

Project D Before change in cash flow After change in cash flow Remarks

15% 21% 15% 21%

Payback period 4 years 4.822 year 3.61 years 4.237 years Improve in PBP

Net Present value 173.27

24.1 273.836

111.88 Improve in NPV

EAA 51.69 8.24 81.69 38.24 Improve in EAA

Internal rate of return

21.11% 26.07% Improve in EAA

Particular Project A(industry average)

Project B Remarks

Payback period(PBP) 3.425 year 2.014 year Project B (good)

Net present value(NPV) 197.35 186.8 Project A (good)

Internal rate of return(IRR) 23.30 28.49 Project B (good)

Comparison of Project B with Project A (Industry Average)

Approximately 3 million available for investment With this amount company will only be able to invest in either project A and C or projects B

and C. Without using debt financing company is losing the opportunity to invest in project D. 1 million as long term debt. All projects are positive it would be highly profitable for the company. Debt financing capital reducing it from 15% to 12% only. Project D will also profitable if belford brothers invest from debt financing.

If Cash Flow of Project D = $3,80,000Payback period Net present value IRR EAA

15% 3.61 years $273.836 26.07 $81.69

21% 4.237 years $111.88 26.07 $38.24

Project D has a positive NPV hence, shows a good profitability. It has low return compared to that of project C.In the situation , Belford brothers acquire the loan of 1 million , project D is advisable

Effect on capital structure and COC - DebtSource of Capital Amount Weight After tax cost of capital Product

Long term debt 1 M 0.25 7.2 1.8

Common equity 3M 0.75 15 11.25

Total 4 M Weighted average cost of capital 13.05 %

Comparison Before Debt and After DebtCost Of Capital Net Present Value of the Project

A B C D15% 197.35

186.8

1262.22

173.27

21% 49.12 93.87 635.165 24.1

13.5% 252.625

220.32

1523 228.5

Time Interest Earned RatioEBIT $6120000

Less: Interest(12%) ($120000)

EBT $6000000

Less: tax @40% ($2400000)

EAT $3600000

Less : dividends ($600000)

Retained Earnings $3000000

Times Interested Earned Ratio = EBIT/ Interest

= 6120000/120000 = 51 times

Handling of Project C Valid?

Project C is best according to the NPV analysis Based on the NPV analysis we came to know : Project with higher NPV is better In case of independent project, having Higher positive NPV project should be selected In case of mutually exclusive, project with highest NPV is selected. Profitability index of A&C and B&C ranked first and second respectively Project C handled in the case earlier is valid because project C cannot be chosen without choosing either

Projects A or B.

Quantitative factors can only be measured in numeric terms whereas qualitative factors are based on value judgment.

It involves:

•Some preliminary quantitative analysis and judgments.

•It plays an important role in the overall capital budgeting.

•It is used in project evaluation.

Not the only factor is effective for evaluation. So, both the factors are required for the capital budgeting evaluation.

Quantitative Vs Qualitative Factors

Lesson Learnt

• Debt financing is important for any company.

• Positive NPV is the best criteria.

• Profitability index helps in deciding the

• Combinations of projects to be undertaken.

• Have ultimate authority over investment

Thank You!!!