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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. II. III. IV. V.

Space- 2000sq.ft @ Rs. 320 One 1ton A/C Sofa set(2×40,000) Cash counter table(15000×2) One LCD computer with printer Show case(9×15=3racks 9×8=2racks 9×14=4racks 9×12=4racks)

= 6,40,000 = 47,000 = = 80,000 30,000

= 40,000

VI.

=6, 50,000 =4,80,000 = 33,000

VII. VIII.

Eight sales persons salary Lighting 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 Gents Types Shoes=400×1500 Sleeper=700×650 Ladies Shoes=400×650 Sleeper=200×500 Kids Sleeper=100×80 Shoes=150×120 Fancy sleeper=50×280 Amount (in Rs.) 6,00,000 4,55,000 2,60,000 1,00,000 8,000 18,000 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 0.078 0.1568 Weights 0.33 0.67 Weighted Average Cost 0.0195 0.1050 0.1245

12% debt 10,00,000 Owners 20,00,000 contribution Total 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 CURRENT ASSETS : Stock (2400 units) Cash CURRENT LIABILITIES : Creditors (1 month) NET CURRENT ASSET Amount (in Rs.) 17,47,200 1,26,400 8,73,600 10,00,000

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 CURRENT ASSETS : Stock (5280 units) CURRENT LIABILITIES : Creditors (2 month) NET CURRENT ASSET Amount (in Rs.) 38,43,840 17,47,200 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
Beginning Closing 0 10,00,000 10,00,000 1 10,00,000 10,00,000 2 10,00,000 20,96,640 3 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 ------------Add:Depreciation Less: - Tax (30%) Cash Flow From Operations Working Capital/Change in WC Scrap value Net Cash Flow YEAR 1 2 3 TOTAL ------------------------------------(1,0,00,000 ) (30,00,000) CASH INFLOW 15,61,984 8,60,512 55,22,710

20,95,360 2,00,000 (7,33,376) 15,61,984 nil

27,34,080 1,80,000 (9,56,928) 19,57,152 (10,96,640)

34,83,184 1,62,000 (12,19,114) 24,26,070 20,96,640 10,00,000 55,22,710

15,61,984

8,60,512

COST OF DISCOUNTING PV CAPITAL FACTOR 12.45% 0.889 13,89,047 12.45% 12.45% 0.790 0.703 6,79,804 38,82,465 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 Sales (21,600 @728) Closing stock Total Expenses Purchases Personnel expenses Selling expenses Administrative expenses Other expenses Total Net profit Less depreciation PBIT Less interest PBT Less tax PAT Amount in Rs. 1,88,78,400 17,47,200 2,06,25,600 1,74,60,000 4,80,000 1,20,000 1,20,000 30,240 1,82,10,240 24,15,360 2,00,000 22,15,360 1,20,000 20,95,360 7,33,376 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 Sales (21,600 @728) Closing stock Total Expenses Purchases Opening stock Personnel expenses Selling expenses Administrative expenses Other expenses Total Net profit Less depreciation PBIT Less interest PBT Less tax PAT

Amount in Rs. 2,26,54,080 38,43,840 2,64,97,920 2,09,66,400 17,47,200 4,80,000 1,20,000 1,20,000 30,240 2,34,63,840 30,34,080 1,80,000 28,54,080 1,20,000 27,34,080 9,56,928 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 Sales (21,600 @728) Expenses Purchases Opening stock Personnel expenses Selling expenses Administrative expenses Other expenses Total Net profit Less depreciation PBIT Less interest PBT Less tax PAT Amount in Rs. 2,71,84,896 1,87,99,872 38,43,840 4,80,000 1,32,000 1,32,000 32,000 2,34,19,712 37,65,184 1,62,000 36,03,184 1,20,000 34,83,184 12,19,114 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 Owner’s contribution Add net profit Long term loan Total Resources Gross block Less depreciation Net block Working capital Cash at bank Total Amount (in Rs.) 20,00,000 13,61,984 33,61,984 10,00,000 43,61,984

20,00,000 2,00,000 18,00,000 10,00,000 15,61,984 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: