Beruflich Dokumente
Kultur Dokumente
If NPV is positive the project is accepted. If NPV negative, the project is rejected.
Profitability Index:
It is the sum of the present values of all cash inflows divided by initial investment.
If profitability index is greater than 1, the project should be accepted. If it is less than 1, the
project should be rejected.
Internal Rate of Return:
It is the rate of return from the project. It is the discount rate at which the sum of present
values of all cash inflows equals initial investment.
If IRR is greater than the required rate of return, project is accepted. If it is less than the
required rate of return, the project is rejected.
8
4.1 Capital Investment Decisions
Capital Investment Decisions:
To evaluate a project, a firm requires to estimate of related items of a project. They may be:
1. Total investment required
2. Working capital requirement
3. Quantity to be sold
4. Unit selling price
5. Unit variable cost
6. Fixed cost
Pro forma financial statements:
In evaluating a project it is required to prepare projected financial statement. This projected
financial statement is called pro forma financial statement. It is the financial statement
projecting future years operations.
Pro forma cash flow statement:
Project cash flow = Project operating cash flow Addition to capital spending Addition to net
working capital.
9
5.0 Analysis of the Project
Before making the Pro Forma Financial Statements, the calculations of the values of the
different components have been shown below.
1. Total initial investment required:
Machine No. of machines
(A)
Per unit machine cost
(B)
Total cost per model
(A B)
Machine 1 15 units BDT 7,000,000 BDT 105,000,000
Machine 2 8 units BDT 7,000,000 BDT 56,000,000
Machine 3 7 units BDT 4,500,000 BDT 31,500,000
Total initial investment required BDT 192,500,000
Figure: Table 4
The values used in this table have been gathered from Table 1 in Segment 3.0 of the report. As
we can see, the total initial investment adds up to BDT 192,500,000.
2. Total units to be sold:
Machine Units produced
per hour per
machine (C)
No. of
Machines
(D)
Units
produced per
hour (C D)
Hours
worked per
day (E)
Days per
year
(F)
Units per year
(C D E F)
Machine 1 40 units 15 600 units 14 hours 300 2,520,000
Machine 2 40 units 8 320 units 14 hours 300 1,344,000
Machine 3 40 units 7 280 units 14 hours 300 1,176,000
Total number of units sold per year 5,040,000
Figure: Table 5
The values used in this table are from Table 1 and Table 3 in Segment 3.0 of the report. We
have assumed that the number of working days in a year for the company to be 300 days
10
adjusting for the holidays and vacations of the workers. We have found out the total number of
units sold in a year to be 5,040,000 units. Mr. Joshim Chowdhury has confirmed that Rainbow
Embroidery does not keep any finished goods left in their ending inventory at the end of each
year. This means that the total number of units produced in a year is the total number of units
sold in a year.
3. Total sales per year:
As mentioned in Table 3 in Segment 3.0 of the report, per unit selling price of the finished good
is BDT 24. Thus, using this value and the value of total number of units to be sold in a year from
Table 5 in the previous page (which is 5,040,000 units), we can calculate the Total sales per
year.
Thus, from the calculation that has been showed above, the total sales per year if Rainbow
Embroidery accepts the project is BDT 1,20,960,000.
4. Total variable cost per year:
As mentioned in Table 3 in Segment 3.0 of the report, per unit variable cost (confirmed by Mr.
Joshim Chowdhury) is BDT 12. This value and the value of the total number of units to be sold in
a year from Table 5 in the previous page can be used to calculate the Total variable cost per
year.
Calculation 1:
Total sales per year = Selling price per unit Number of units sold per year
= BDT (24 5,040,000)
= BDT 1,20,960,000
Calculation 2:
Total variable cost per year = Variable cost per unit Number of units sold per year
= BDT (12 5,040,000)
= BDT 60,480,000
11
Thus, from the calculation that has been shown above, the total variable cost per year from the
project will be BDT 60,480,000.
5. Total fixed cost per year:
As mentioned in Table 3 in Segment 3.0 of the report, the overhead rate per unit of output is
BDT 15. This overhead rate per unit consists of both fixed cost and variable cost. This value
along with the value of the total number of units to be sold in a year from Table 5 and the value
of total variable cost per year from the previous page can be used to calculate the Total fixed
cost per year.
Thus, from the calculation that has been shown above, the total fixed cost per year from the
project will be BDT 15,120,000.
6. Total depreciation expense from the machines per year:
To calculate the total depreciation from the machines per year, the values that will be required
are:
Cost of per unit machine (Table 1 from Segment 3.0 of the report)
Calculation 3:
Total overhead per year = Overhead rate per unit Number of units sold per year
= BDT (15 5,040,000)
= BDT 75,600,000
Again,
Total overhead per year = Total variable cost per year + Total fixed cost per year
Or,
Total fixed cost per year = Total overhead per year - Total variable cost per year
= BDT (75,600,000 60,480,000)
= BDT 15,120,000
12
Number of machines to be bought (Table 1 from Segment 3.0 of the report)
Life of the machines (Table 2 from Segment 3.0 of the report)
Salvage value of the machines at the end of their lives (Table 2 from Segment 3.0 of the
report)
Depreciation will be calculated in the following way:
The depreciation expenses per year per machine calculated above can now be used to find the
total depreciation expense per year.
Machines Depreciation expense per
machine per year (G)
No. of machines
(H)
Depreciation expense
per year (G H)
Machine 1 BDT 125,000 15 BDT 1,875,000
Machine 2 BDT 140,000 8 BDT 1,120,000
Machine 3 BDT 135,000 7 BDT 945,000
Total depreciation expense per year BDT 3,940,000
Figure: Table 6
7. Pro forma income statement
The values that have been identified in the previous calculations and tables will now be used to
construct a pro forma income statement for Rainbow Embroidery. As there are no changes in
the annual values of sales, total variable cost, total fixed cost and depreciation expenses
throughout the years, one income statement has been shown which is constant for Years 1 to
Calculation 4:
Depreciation expense for each machine = (Cost of machine Salvage value) Life of machine
The depreciation expenses per year are:
For each unit of Machine 1 = BDT {(7,000,000 4,500,000) 20} = BDT 125,000
For each unit of Machine 2 = BDT {(7,000,000 4,200,000) 20} = BDT 140,000
For each unit of Machine 3 = BDT {(4,500,000 1,800,000) 20} = BDT 135,000
13
10 of the project. The corporate tax rate for non-publicly traded companies like Rainbow
Embroidery is 37.5% (Source: (Laila, 2012)).
A graph showing the various components in the income statement as a percentage of Sales
are given below.
Figure: Graph 1
50%
13%
3%
13%
21%
Variable Costs
Fixed Costs
Depreciation
Tax
Net Income
Rainbow Embroideries
Pro forma Income Statements (For the end of Years 1 to 10)
Years 1 to 10 (in BDT)
Sales 120,960,000
Less:
Variable Costs (60,480,000)
Fixed Costs (15,120,000)
Gross Profit 45,360,000
Less: Depreciation Expenses (3,940,000)
Earnings Before Taxes 41,420,000
Less: Tax (37.5%) (15,532,500)
Earnings After Taxes 25,887,500
14
8. Pro forma cash flow statement
To construct the pro forma cash flow statement, the first step is to calculate the Operating
Cash Flow. The operating cash flow will be constant throughout the years 1 to 10 and can be
found out using the following method.
This value of the operating cash flow per year can now be used to make the cash flow
statement. All the values in the Cash Flow statement below are in BDT.
Calculation 5:
Operating cash flow = Net Income + Depreciation expense
= BDT (25,887,500 + 3,940,000)
= BDT 29,827,500
Rainbow Embroideries
Pro forma Cash Flow Statements (For the end of Years 1 to 10)
Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
O
.
C
.
F
.
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
29,827,
500
C
a
p
.
S
p
e
n
d
i
n
g
(192,50
0,000)
104,31
2,500
P
r
o
j
e
c
t
C
.
F
.
(192,50
0,000)
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
29,82
7,500
134,14
0,000
15
The value of the Capital Spending in Year 0 is the value of the initial investment that has been
found out in Table 4 in the same segment of the report. The value of Capital Spending in Year
10 has been found out using the method shown below (for the numbers refer to Table 2 of
Segment 3.0 of the report).
Calculation 6:
Value of Capital Spending in Year 10 = Market value of all the machines Tax on it
For 15 units of Machine 1, Total market value = 15 BDT 6,100,000 = BDT 91,500,000
For 8 units of Machine 2, Total market value = 8 BDT 6,100,000 = BDT 48,800,000
For 7 units of Machine 3, Total market value = 7 BDT 3,800,000 = BDT 26,600,000
Total Market value of all the machine = BDT 91,500,000 + BDT 48,800,000 + BDT 26,600,000
= BDT 166,900,000
Tax on market value of all the machines = 0.375 BDT 166,900,000
= BDT 62,587,500
Value of Capital Spending in Year 10 = BDT (166,900,000 62,587,500)
= BDT 104,312,500
16
9. Calculation of Net Present Value
Using the values of the Project Cash Flow from Years 1 to 10 shown in the Pro forma cash
flow statement, we will calculate the Net Present Value of the project. As mentioned in
Segment 3.0 of the report, the required rate of return from the project is 16%. The calculation
has been shown below.
As we can see from the calculation above, the value of NPV for the project at a return of 16% is
BDT 24,690,974. Because the Net Present Value is negative, the project should not be
accepted.
Calculation 7:
= PV of Yr 0 + PV of Yr 1 + PV of Yr 2+ PV of Yr 3 + PV of Yr 4 + PV of Yr 5
+ PV of Yr 6 + PV of Yr 7 + PV of Yr 8 + PV of Yr 9 + PV of Yr 10
=
= BDT ( 192,500,000 + 25,713,362.1 + 22,166,691.4 + 19,109,216.8 + 16,473,462.8
+ 14,201,261 + 12,242,466.4 + 10,553,850.3 + 9,098,146.8 + 7,843,230
+ 30,407,338.6)
= BDT 24,690,974
17
10. Calculation of Profitability Index
Using the values of the Project Cash Flow from Years 1 to 10, we will calculate the Profitability
Index of the project. The calculation has been shown below.
The value of the Profitability Index of the project is 0.8717. As it is less than 1, the project
should not be accepted.
Calculation 8:
= (PV of Yr 1 + PV of Yr 2+ PV of Yr 3 + PV of Yr 4 + PV of Yr 5 + PV of Yr 6 + PV of Yr 7
+ PV of Yr 8 + PV of Yr 9 + PV of Yr 10) PV of Yr 0
=
= (25,713,362.1 + 22,166,691.4 + 19,109,216.8 + 16,473,462.8 + 14,201,261 + 12,242,466.4
+ 10,553,850.3 + 9,098,146.8 + 7,843,230 + 30,407,338.6) 192,500,000
= 0.8717
18
11. Calculation of Internal Rate of Return
Using the values of the Project Cash Flow from Years 1 to 10, we will calculate the Internal
Rate of Return of the project. The calculation has been shown below.
Calculation 9:
At a discount rate of 13%,
PV of cash flows from Yr 1 to 10 = PV of Yr 1 + PV of Yr 2 + PV of Yr3 + PV of Yr 4
+ PV of Yr 5 + PV of Yr 6 + PV of Yr 7 + PV of Yr 8
+ PV of Yr 9 + PV of Yr 10
=
= BDT 192,580,524.3
At a discount rate of 14%,
PV of cash flows from Yr 1 to 10 = PV of Yr 1 + PV of Yr 2 + PV of Yr3 + PV of Yr 4
+ PV of Yr 5 + PV of Yr 6 + PV of Yr 7 + PV of Yr 8
+ PV of Yr 9 + PV of Yr 10
=
= BDT 183,721,340.6
19
From the calculation shown overleaf, we see that for the present values of cash flows from year
1 to year 10 are:
BDT 183,721,340.6 for a 14% discount rate
BDT 192,580,524.3 for a 13% discount rate
The initial investment on the whole project was BDT 192,500,000 and we see that this value of
the initial investment lies between the sum of present values at discount rates of 13% and 14%.
This means that the internal rate of return is between these two discount rates.
The internal rate of return for the project is determined below.
As the calculated IRR for the project (which is 13.0091%) is lower than the required rate of
return of 16%, the project should not be accepted.
Calculation 10:
For a change in the PV of BDT (192,580,524.3 183,721,340.6), there is a change in 1%
discount rate
Thus, for a change in PV of BDT (192,580,524.3 192,500,000), the change in discount rate is:
= (192,580,524.3 192,500,000) (192,580,524.3 183,721,340.6)
= 0.0091%
Therefore, IRR = 13% + 0.0091%
= 13.0091%
20
6.0 Recommendation
The findings from the analysis section of the report are repeated once again:
The Net Present Value is negative.
The Profitability Index is less than 1.
The Internal Rate of Return is less than the required rate of return.
All these findings compel us to recommend that Rainbow Embroidery should not accept this
project.
21
7.0 Bibliography
Laila, U. (2012, July). Tax Rates in Bangladesh. Retrieved June 18, 2013, from Blogspot:
http://taxratesinbangladesh.blogspot.com/
World Football News and Update. (2013, June 18). World Football News and Update. Retrieved
from Worldwide Football:
https://www.facebook.com/worldwide.football/posts/529842653746630