8/2/2019 Copy of Capital Budgeting and Cost of Capital

1/6

Note:

All figures are in rupees

Plan 1

Plan 2

Plan 3

Particulars Plan 1 Plan 2 Plan 3

Unit Selling Price 50 50 50

Estimated Volume to be sold 40,000 40,000 40,000

Estimated Annual Sales 2000000 2000000 2000000

Less: Cost of material 720000 720000 680000

Conversion Cost 660000 660000 560000

Contribution 620000 620000 760000

Less: Fixed Costs

Supervision 160000 160000 180000

Taxes and Insurance 30000 50000

Maintenance 30000 20000

Lease 400000

PBDT 60000 400000 510000

Less: Depreciation 170000 270000

PBT 60000 230000 240000

Less: Taxes 24000 92000 96000

PAT 36000 138000 144000

Add: Depreciation 170000 270000

CFAT 36000 308000 414000

Calculation of Present Value of Cash Inflows at Plan 1 Plan 2 Plan 3

Present factor of Annuity at 10% 3.791 3.791 3.791

Present value of Cash Inflows 136476 1167628 1569474

Scrap Value 0 400000 300000

Year 5 0.620921 0.620921 0.620921

Present Value of Scrap Value 0.0000 248368.5292 186276.3969

Total Present Value of Cash Inflow 136476 1415997 1755750

Leasing a general purpose instrument

Purchasing a general purchase instrument

Purchasing a special purpose equipment

8/2/2019 Copy of Capital Budgeting and Cost of Capital

2/6

Calculation of Present value of Cash Outflow at 10%

Year Plan 1 Plan 2 Plan 3

Year 0 1250000 1650000

Year 1 0 0 0

Year 2 0 0 0

Year 3 0 0 0

Year 4 0 0 0

Year 5 0 0 0

Year 0 1 1 1

Year 1 0.909091 0.909091 0.909091

Year 2 0.826446 0.826446 0.826446

Year 3 0.751315 0.751315 0.751315

Year 4 0.683013 0.683013 0.683013

Year 5 0.620921 0.620921 0.620921

Present value of Cash Outflow

Year 0 0 1250000 1650000

Year 1 0 0 0

Year 2 0 0 0Year 3 0 0 0

Year 4 0 0 0

Year 5 0 0 0

Total Present Value Of Cash Outflow 0 1250000 1650000

Net Present Value 136476 165997 105750

Profitabilty Index 0.00 1.13 1.06

Cash Outlay 0 1250000 1650000

Scrap Value 0 400000 300000

Working Capital 0 0 0Average Investment 0 1250000 1650000

Average PAT 36000 138000 144000

Average rate of Return(%) 0 11.04 8.727272727

Total Investment 0 1250000 1650000

Payback period(In years) 0.00 4.06 3.99

Cash Outflows

Present Value factor at 10%

8/2/2019 Copy of Capital Budgeting and Cost of Capital

3/6

Note:

All figures are in millions

Particulars Figures(In million Particulars Figures

Fixed Assets $4,000.00 Interest Rate 10%

Current Assets $1,000.00 PE ratio 10Debt $2,500.00 Beta value 1.2

Equity(Equity+Retained earnings) $2,500.00 Treasury Bond Rate 8%

Market Value of Debentures $2,000.00 Tax Rate 40%

No of Shares 50.00 Market Risk Premiu 5.50%

Market Price of Shares $4,000.00 Market price(1 sha $80.00

Equity share capital $2,300.00 Face Value(1 share) $50.00

Retained Earnings $200 Dividend per share $4.00

Debt Equity Ratio(Book value) 1.00

Debt Equity Ratio(Market value) 0.5

Debt/(Debt+Equity ratio(Book value) 0.50

Debt/(Debt+Equity ratio(Market value) $0.32

Calcultation of After Tax cost of Debt

Interest Amount $250.00

Net Proceeds $2,500.00

Cost of Debt(Before Tax) 10.00%

Cost of Debt(After tax) 6.00%

Calculation of cost of Firm's equity share capital

Capital asset pricing model

Market risk 13.500%

Cost of equity 14.600%

Dividend Per share $4Earnings per share $8

Retained earning per share $4

Total Retail Earnings(Book Value) $200.00

Total Retail Earnings(Market Value) $347.83

8/2/2019 Copy of Capital Budgeting and Cost of Capital

4/6

Particulars Cost of Capital B Weights(Book ValuMarket Value

Debt 6.00% # 0.5 $2,000.00

Equity 14.60% # 0.46 $4,000.00

Retained Earnings 14.60% # 0.04 $347.83

# 1 $6,347.83

8/2/2019 Copy of Capital Budgeting and Cost of Capital

5/6

Price earni 10

Market pri $80EPS $8

PAT $400.00

Taxes $266.67

EBT $666.67

Interest $250

EBIT $916.67

DFL 1.375

8/2/2019 Copy of Capital Budgeting and Cost of Capital

6/6

Weights(Mark Weighted Weighted Average cost of capital(Market Value)

0.315068493 3 1.890410959

0.630136986 6.716 9.2

0.054794521 0.584 0.8

1 10.3 11.89041096