ASSIGNMENT ON INVESTMENT DECISSION FOR A

TRADING UNIT
 About our project
The name of our enterprise is BEST PRICE privet ltd. We have got a contractual business offer
from worlds largest shoe brand LIFE STYLE. They have given us the proposal for next three
years on a contractual mode. So, we are planning to open our store at BAPUJI NAGAR area of
BHUBANESWAR.

We have outsourced our market research task to a well known market research organization
named IMRB. They have given us the forecasting report , which indicates there is a large
demand for this brand in near future.

So we have decided to invest our own money and some part of bank loan to start our business.

BUSINESS SET UP REQUIREMENT.

Basing upon the above proposal we are going to start a shoe store in BAPUJI NAGAR and the
basic requirements of the projects are

I. Space- 2000sq.ft @ Rs. 320 = 6,40,000

II. One 1ton A/C = 47,000

III. Sofa set(2×40,000) = 80,000

IV. Cash counter table(15000×2) = 30,000

V. One LCD computer with printer = 40,000

VI. Show case(9×15=3racks

9×8=2racks

9×14=4racks

9×12=4racks) =6, 50,000

VII. Eight sales persons salary =4,80,000

VIII. Lighting = 33,000

Total = 20,00,000
SOURCES OF FUND
The fund requirement for our financial expences estimated is 30,00,0000. So as two partner we
will contribute 10, 00,000 each and another 10, 00,000, we will take bank loan.

So, fund arrangement structure is like:

Owner’s contribution: 100000*2= 20, 00,000

Long term bank loan= 10, 00,000

Total= 30, 00,000

Application of fund
Fixed investment = 20, 00,000

Working capital expences = 10, 00,000

Total = 30,00,000

Sales forecasting
From our forecasting we have estimated that there will be at least 1800pcs of shoes can be sell
and we are keeping 200 unit as stock in our hand. So, we will purchase 2000 per month.
Annually we will purchase 24000 unit and sell 21600 units and rest 2400 as stock, which is 1.5
month of sales. The estimated figures are as follows:

 Projected annual sales is 1800*12= 21600 unit

 We want keep stock for one and half month of sales= 2400 unit

 Total purchase = 24000 unit

 Average cost of purchase =Rs728

 Average sales price = 874( 20% profit )

 Cost of our products
Section Types Amount (in
Rs.)

Gents Shoes=400×1500 6,00,000

Sleeper=700×650 4,55,000

Ladies Shoes=400×650 2,60,000

Sleeper=200×500 1,00,000

Kids Sleeper=100×80 8,000

Shoes=150×120 18,000

Fancy sleeper=50×280 14,000

Cost of capital:-
Calculation of cost of debt

Cost of debt=12×(1-0.035)/100=7.8%

Owner’s contribution with the expectation of 15.68%

Capital structure Total After tax cost Weights Weighted

Average Cost
12% debt 10,00,000 0.078 0.33 0.0195
Owners 20,00,000 0.1568 0.67 0.1050
contribution
Total 0.1245
So the cost of capital is 12.45%

We have taken loan from bank with an interest rate of 12% and as investor our minimum
required rate of return is 15.68%. Thus the weighted average cost of capital is 12.45%. Which is
our minimum cut of rate, which we have to earn to justify our investment?

Assessment of Working Capital

Year – 0th
At the beginning Amount (in Rs.)

CURRENT ASSETS : 17,47,200

Stock (2400 units) 1,26,400
Cash

CURRENT LIABILITIES : 8,73,600

Creditors (1 month)
10,00,000
NET CURRENT ASSET

We have no plan to change stocks at the end, so at the end there is same working capital.

Year -1st
Opening is 10,00,000

Closing is 10,00,000

So there is no change in working capital

Year – 2nd
At the end Amount (in Rs.)

CURRENT ASSETS :
Stock (5280 units) 38,43,840

CURRENT LIABILITIES :
Creditors (2 month) 17,47,200

NET CURRENT ASSET 20,96,640

Year – 3rd
As we are closing the business we do not want to keep any working capital. So our closing
working capital is nil and opening is the closing of previous year.

Working capital requirement

0 1 2 3
Beginning 10,00,000 10,00,000 10,00,000 20,96,640
Closing 10,00,000 10,00,000 20,96,640 Nil

We have estimated that our initial working capital requirement will be RS 10, 00,000. As we are
not planning to change our stock for first year end so our there will be no change in working
capital at the end of the 0th year and beginning of the first. Same will repeat for next year. But as
per the growth potential we are planning to increase the working capital for second year. And as
we are going to close our business in third year, we will not keep any working capital for the last
year.

COMPUTATION OF NET CASH FLOW

(In Rs.) 0 1 2 3
Initial Cash (20,00,000)
Investment
PBT ------------- 20,95,360 27,34,080 34,83,184
Add:- ------------- 2,00,000 1,80,000 1,62,000
Depreciation
Less: - Tax ------------- (7,33,376) (9,56,928) (12,19,114)
(30%)
Cash Flow ------------- 15,61,984 19,57,152 24,26,070
From
Operations
Working (1,0,00,000 nil (10,96,640) 20,96,640
Capital/Change )
in WC
Scrap value 10,00,000
Net Cash Flow (30,00,000) 15,61,984 8,60,512 55,22,710

YEAR CASH COST OF DISCOUNTING PV

INFLOW CAPITAL FACTOR
1 15,61,984 12.45% 0.889 13,89,047

2 8,60,512 12.45% 0.790 6,79,804

3 55,22,710 12.45% 0.703 38,82,465

TOTAL 59,51,316

From our sales figure we expect that there will be a cash flow of 15,60,512 and 860512 and
55,22,710 for 1st ,2nd and 3rd year respectively. For increase in working capital of 2nd year there is
less cash flow in 2nd year but for clearance of all stock and scrap value ,cash flow increased in
third year .

NET PRESENT VALUE = 59, 51,316 – 30, 00, 000

= 29, 51,316

PAYBACK PERIORD
Here the payback period is 2 years 3months and 16 days

2+ 931149* 12/5951316 = 2 YEAR 3 MONTH 16 DAYS.

Expected Trading and Profit and Loss Account of 1st year

Incomes Amount in Rs.

Sales (21,600 @728) 1,88,78,400
Closing stock 17,47,200
Total 2,06,25,600
Expenses
Purchases 1,74,60,000
Personnel expenses 4,80,000
Selling expenses 1,20,000
Administrative expenses 1,20,000
Other expenses 30,240
Total 1,82,10,240
Net profit 24,15,360
Less depreciation 2,00,000
PBIT 22,15,360
Less interest 1,20,000
PBT 20,95,360
Less tax 7,33,376
PAT 13,61,984

We are expecting that our income from operation will 2, 06, 25,600 as well as expences will be
1, 82,10,240. So net profit for first year will be 13, 61,984.

Expected Trading and Profit and Loss Account of 2nd year

Incomes Amount in Rs.
Sales (21,600 @728) 2,26,54,080
Closing stock 38,43,840
Total 2,64,97,920
Expenses
Purchases 2,09,66,400
Opening stock 17,47,200
Personnel expenses 4,80,000
Selling expenses 1,20,000
Administrative expenses 1,20,000
Other expenses 30,240
Total 2,34,63,840
Net profit 30,34,080
Less depreciation 1,80,000
PBIT 28,54,080
Less interest 1,20,000
PBT 27,34,080
Less tax 9,56,928
PAT 17,77,512

We are expecting that our income from operation will 2, 64, 97,920 as well as expences will be2,
34, 63,840. So net profit for first year will be17, 77,512.

Expected Trading and Profit and Loss Account of 3rd year

Incomes Amount in Rs.

Sales (21,600 @728) 2,71,84,896
Expenses
Purchases 1,87,99,872
Opening stock 38,43,840
Personnel expenses 4,80,000
Selling expenses 1,32,000
Administrative expenses 1,32,000
Other expenses 32,000
Total 2,34,19,712
Net profit 37,65,184
Less depreciation 1,62,000
PBIT 36,03,184
Less interest 1,20,000
PBT 34,83,184
Less tax 12,19,114
PAT 22,64,070
We are expecting that our income from operation will 2, 71, 84,896 as well as expences will be
2, 34, 19,712. So net profit for first year will be 22, 64,070.

Expected Balance sheet of 1st year

Sources Amount (in Rs.)

Owner’s contribution 20,00,000
Add net profit 13,61,984 33,61,984
Long term loan 10,00,000
Total 43,61,984
Resources
Gross block 20,00,000
Less depreciation 2,00,000
Net block 18,00,000
Working capital 10,00,000
Cash at bank 15,61,984
Total 43,61,984

Balance sheet for the first years is as per the above table. That is our fixed asset is 18, 00, 00 and
working capital is 10, 00,000 and we are keeping our profit in bank. So our cash bank balance is
15, 61,984. So our total asset is 43, 61,984

On the other hand our liability is from our own contribution, bank loan and profit is 13, 61,984.
So total liability is 43, 61,984.

PROFITABILITY INDEX:
PRESENTVALUE/ INITIAL INVESTMENT = 59, 51,316 /30, 00, 000

= 1.9837

INVESTMENT DECISION TECHNIQUE:

We have followed three investment techniques. Those are NET PRESENT VALUE,
PROFITABILITY INDEX & PAY BACK PERIOD.

As per NPV method, the present value is more than the initial investment and net present value is
more than one, so this project is profitable.

As per profitability index , it is more than one. So it is also viable.

As per the payback period method, the initial investment can be recover in 2 years and 3month
and 16 days.

CONCLUSION: