Profitability Status Value ofconstraint

capital rationing
Project Initial Investment NPV Bi
Index
A $25 $10 0.40 1 Accepted
B 30 25 0.83 1 Accepted
C 40 20 0.50 0 Rejected
D 10 10 1.00 1 Accepted
E 15 10 0.67 1 Accepted
50
F 60 20 0.33 0 Rejected
G 20 10 0.50 1 Accepted
H 25 20 0.80 1 Accepted
I 35 10 0.29 0 Rejected
J 15 5 0.33 1 Accepted

Objective
Function Maximize∑(PI)*Bi 4.5

∑Bi<=10 7
Constraints
∑Initial Inv*Bi<=150 140
Option a Option B Option C
Initial Investment 12000 Initial Investment 5000 Initial Investment 3500
Maintenance cost 500 Maintenance cost 1000 Maintenance cost 1200
Duration Perpetual Duration 20 Duration 15
Cost of capital 10% PVIFA(10%,20yrs) 8.51 PVIFA(10%,20yrs) 7.61
PV of maintenance cost 5000 Cost of capital 10% Cost of capital 10%
NPV of all cost -17000 PV of maintenance cost 8513.56 PV of maintenance cost 9127.30
EAC -1700 NPV of all cost ### NPV of all cost -12627.30
EAC -1587.30 EAC -1660.16
Out of option A,B and C, Option B is the best as Equivalent Annual Cost is minimumin case of project B
Year 0 1 2 3 4 5 6 7 8 9 10
Initial Investment -10
Total Market 100 100 100 100 100 100 100 100 100 100
Revenue 10 20 20 20 20 20 20 20 20 20
Fixed Cost 2 2 2 2 2 2 2 2 2 2
Var. cost 4 8 8 8 8 8 8 8 8 8
Additional Adv 1 1 1 1 1 1 1 1 1 1
Depreciation 1 1 1 1 1 1 1 1 1 1
EBIT 2 8 8 8 8 8 8 8 8 8
Tax 40% 40% 40% 40% 40% 40% 40% 40% 40% 40%
EAT 1.2 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8
Depreciation 1 1 1 1 1 1 1 1 1 1
Working capital 1 2 2 2 2 2 2 2 2 2 0
Net Change in WC 1 0 0 0 0 0 0 0 0 -2
Salvage Value 0 0 0 0 0 0 0 0 0 0
FCF -10 1.2 5.8 5.8 5.8 5.8 5.8 5.8 5.8 5.8 7.8
PV of CF 1.11 4.97 4.60 4.26 3.95 3.65 3.38 3.13 2.90 3.61
Total PV of Cf 35.59
NPV 24.59
 Current Machine New Machine
Annual Depreciation 100000 Annual Depreciation 200000
Annual tax advantage 40000 Annual tax advantage 80000
PVIFA(10%,5 years) 3.79079 PVIFA(10%,5 years) 6.14457
PV of tax advantage 151631 PV of tax advantage 491565
Foregone tax advantage 151631 Net gain from new m/c

Cost of new machine 2000000

Salvage value of old machine 300000

Additional Inv required 1700000

Total saving reqd at the end
of 10 years 1360066
PVIFA (10%,10 years) 6.14457
Annual Saving*PVIFA 1360066
Annual Saving 221344
Year 0 1 2 3 4 5
Initial Inv 50000
Sales 15000 15750 16537.5 17364.4 18232.6
Operating Expense 7500 7875 8268.75 8682.19 9116.3
Depreciation 8000 8000 8000 8000 8000
EBIT -500 -125 268.75 682.188 1116.3
Tax rate 40% 40% 40% 40% 40%
After tax earning -300 -75 161.25 409.313 669.778
Additional Sales from book 20000 22000 24200 26620 29282
Pretax op margin 40%
Pretax tax margin 8000 8800 9680 10648 11712.8
Post tax income 4800 5280 5808 6388.8 7027.68

Total post tax income from

all rev sources 4500 5205 5969.25 6798.11 7697.46

FCFF from coffee shop only 7700 7925 8161.25 8409.31 8669.78
PV of cash flow from coffee
shop 6875 6317.76 5809.02 5344.27 4919.46

Salvage value 0 0 0 0 10000

NPV from coffee shop -15060
FCFF from additional book
sales
PV of only
cash flow from coffee 4800 5280 5808 6388.8 7027.68
shop 4285.71 4209.18 4134.02 4060.2 3987.69
PV of book sales business 20676.8

Net PV from all business 5616.59

Particulars Plan A Plan B
Initial Cost $50,000 $120,000
Annual $9,000 $6,000
maintenance cost
Salvage value $10,000 $20,000
Life 20 years 40 years
PVIFA 9.82 11.92
PV of maintenance $88,363.33 $71,547.68
PV of salvage value $2,145.48 $920.62
NPV of project ### ###
Eqvivalent Annual
Cost ($13,874.09) ($15,986.02)

Conclusion We will select the plan A

 Project A B C
Initial Investment 5 0 10
After tax cash flow 2.5 1 2.5
Duration 5 10 Perpetual
Additional Investment 0 0 5
Salvage Value 0 2 0
Discount rate 10% 10% 10%
PVIFA 3.79 6.14
PV of project 4.47697 6.91565 13.0723
EAC 1.18101 1.12549 1.30723
Conclusion So we will go with the project C as it has highest equivalent annuity
Laptop type Old machines New Machines
Initial Investment 2000 4000
Annual maintenance 150 50
Duration 3 5
Cost of capital 12% 12%
PVIFA 2.40 3.60
PV of annual maintenance 360.27 180.24
NPV -2360.27 -4180.24
EAC -982.70 -1159.64
Conclusion I will select old machines as they are cheaper on annual basis
 PV of project I = 10*k*6.81 - 10
Market size 200 PV of project II = 20*k*6.81 - 40
Strategy I II
For considering project II, PV of PII >=PV of P1
Initial Inv 10 40
Market share 5% 10% 10k*6.81-10 = 20k*6.81-40, k is operating margin
10*k*6.81 = 30
Revenue 10 20 So K = 30/(68.1) = 0.4405
Operating margin 44.05% 44.05% So operating margin should be atleast 44.05% for
Profit 4.40529 8.81058 PII to be considered
Duration 15 15
Cost of capital 12% 12%
PVIFA 6.81 6.81
PV of project 20.0 20.0
 Profitability
Project Initial Investment NPV IRR Bi Status(PI) Status(IRR)
Index
I 10 3 21% 0.30 0 Rejected
II 5 2.5 28 0.50 1 Accepted
III 15 4 19 0.27 0 Rejected
IV 10 4 24 0.40 1 Accepted
V 5 2 20 0.40 1 Accepted

Objective
func Max(∑PI*Bi) 1.3
Constraint I ∑(Bi)<=5 3
Constraint I ∑(Initial Inv*Bi)<=20 20

Cosidering IRR we will take project II,IV only as they have max IRR and inv limit is 20 million only

There is difference between IRR and PI because of intermediate cash flow reinvestment rate assumptions. The
cash flow in case of IRR is reinvested @ IRR whereas in case of PI cash is reinvested at Cost of capital and
therefore the difference between IRR and PI rates
 Gardening store scenario Lost sales scenario
Initial Investment 50000 Lost sales 3000
After tax cash flow 10000 Op margin 40%
Duration 10 Cash flow lost 1200
Operating margin 40% PV of lost sales 6259.34
Discount rate 14%
PVIFA 5.21612
PV of investment 2161.16

Net PV -4098.18 Hence we should not open up gardening store

Year 0 1 2 3 4 5 6 7 8 9 10
Initial Investment 150000
Annual expense 60000 60000 60000 60000 60000 60000 60000 60000 60000 60000
Sales 5000000 6000000 6000000 6000000 6000000 6000000 6000000 6000000 6000000 6000000
After tax op margin 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Op margin 500000 600000 600000 600000 600000 600000 600000 600000 600000 600000
Cash flow annually -150000 440000 540000 540000 540000 540000 540000 540000 540000 540000 540000
PV of annual CFs 392857 430485 384361 343180 306411 273581 244269 218097 194729 173866
NPV 2811835Since NPV is positive, hence I will start the Service
 Buying Scenario Leasing scenario
Employees 5000 Leasing fees -5E+06
Cost/computer 2500 Tax benefit -3E+06
Total Cost 12500000
Resale value 2500000
Depreciation 666.666667
Tax benefit of dep 1333333.33
PVIFA 2.48685199
PVIFA -7305910.34
Annual Cost -2937814.7

Conclusion I will prefer buying than leasing as it is cheaper option

Year Old product New Product Total Capacity Rev lost Lost Profit PV of loss
1 50.00 30.00 80.00
2 52.50 33.00 85.50
3 55.13 36.30 91.43
4 57.88 39.93 97.81
5 60.78 43.92 104.70 4.70 4.70 2.92
6 63.81 48.32 112.13 12.13 12.13 7.53
7 67.00 53.15 120.15 20.15 20.15 12.51
8 70.36 58.46 128.82 28.82 28.82 17.89
9 73.87 64.31 138.18 38.18 38.18 23.71
10 77.57 70.74 148.30 48.30 48.30 29.99
PV of lost profit in 10 years 94.55

Capacity Growth Revenues

Product Fixed
Used
Line Cost/ Yr Variable Cost/Yr
Currently Rate/year Currently Contribution
Old 50% 5% 100 25 50
Product 1
New 30% 10% 80 20 44
Product 1.2
Year 0 1 2 3 4 5 6 7 8 9
Tennis racket 25000 27500 30250 33275 36602.5 40262.75 44289.03 48717.93 50000 50000
Revenue 2500000 2750000 3025000 3327500 3660250 4026275 4428903 4871793 5000000 5000000
Max cap available 60% 60% 60% 60% 60% 60% 60% 60% 60% 60%
Max racket that can be mfg 30000 30000 30000 30000 30000 30000 30000 30000 30000
Lost Sales 0 250 3275 6603 10263 14289 18718 20000 20000
Cost of lost rev 0 25000 327500 660250 1026275 1428903 1871793 2000000 2000000
Cost of lost EBIT 0 15000 196500 396150 615765 857341.5 1123076 1200000 1200000
Cost of lost EAT 0 9000 117900 237690 369459 514404.9 673845.4 720000 720000
PV of lost EAT 0 7438.017 88580.02 162345.5 229405 290368.2 345789.2 335885.3 305350.3
Opportunity cost loss 2042753
 10
50000
5000000
60%
30000
20000
2000000
1200000
720000
277591.2
 0 1 2 3 4 5
2008 2009 2010 2011 2012
REVENUE 45,000 84,960 94,801 105,156 116,048
UNITS 48,000 52,000 56,000 60,000
SELLING PRICE/UNIT 1.77 1.82 1.88 1.93
RAW MATERIAL/UNIT 0.94 0.97 1.00 1.03
RAW MATERIAL 45,120 50,346 55,846 61,630
MANUFACTURING OVERHEADS 3,600 3,708 3,819 3,934
MAINTENANCE EXPENSE 2,250 2,318 2,387 2,459
LABOR 18,640.0 20,233.3 22,842.4 25,254.6
SG&A 6,627 7,394 8,202 9,052
DEPRECIATION 4,000 4,000 4,000 4,000
EBIT 4,723 6,802 8,060 9,719
NOPAT (EBIT*(1-t)) 2,834 4,081 4,836 5,831
DEPRECIATION 4,000 4,000 4,000 4,000
∆ Capital Expenses 0 0 0 0

ACCOUNTS RECEIVABLE 11,234 12,413 13,635 14,901

INVENTORY 8,874 9,805 10,771 11,771
ACCOUNTS PAYABLE & AC 8,071 8,919 9,797 10,707
WORKING CAPITAL 12,037 13,299 14,609 15,965
WORKING CAPITAL - REVISED 12,817 13,299 14,609 15,965
∆ Net Working Capital -12,817 -482 -1,310 -1,356

PPE (End) 41,000 37,000 33,000 29,000

CAPITAL EMPLOYED 53,817 50,299 47,609 44,965
ASSET UTILIZATION (%)
RETURN ON CAPITAL 5.27% 8.11% 10.16% 12.97%
ASSET TURNOVER 1.58 1.88 2.21 2.58

Initial Investment -45,000

FCFF -5,983 7,599 7,526 8,475

PVCF
NPV

ROC 5.27% 8.11% 10.16% 12.97%

WACC 9.35% 9.35% 9.35% 9.35%
EXCESS RETURN -4.08% -1.24% 0.81% 3.62%
ECONOMIC VALUE ADDED -2,198 -622 384 1,627
PV (EVA) -2,010 -520 294 1,138
NPV (EVA) 12,967
NPV (SALVAGE) 2,045
PV (UNEXPIRED CAPITAL EMPLOYED) 10,381
NPV 4,632
 6 7 8 9 10 11
2013 2014 2015 2016 2017 2018
127,498 139,530 143,716 148,028 152,468 157,043
64,000 68,000 68,000 68,000 68,000 68,000
1.99 2.05 2.11 2.18 2.24 2.31 Changed growth from 2% t
1.06 1.09 1.12 1.16 1.19 1.23 Changed growth from 1% t
67,711 74,101 76,324 78,614 80,972 83,401
4,052 4,173 4,299 4,428 4,560 4,697
2,532 2,608 2,687 2,767 2,850 2,936
28,174.8 30,888.5 31,969.6 33,088.5 34,246.6 35,445.2
9,945 10,883 11,210 11,546 11,893 12,249
4,000 4,000 4,000 4,000 4,000 4,000
11,083 12,876 13,228 13,585 13,947 14,314
6,650 7,725 7,937 8,151 8,368 8,588
4,000 4,000 4,000 4,000 4,000 4,000
0 0 0 0 0 0

16,212 17,571 17,922 18,281 18,646 19,019

12,807 13,879 14,157 14,440 14,729 15,022
11,649 12,624 12,877 13,134 13,397 13,665
17,370 18,826 19,202 19,587 19,978 20,376
17,370 18,826 19,202 19,587 19,978 20,376
-1,405 -1,456 -376 -385 -391 -398

25,000 21,000 17,000 13,000 9,000 5,000

42,370 39,826 36,202 32,587 28,978 25,376

15.69% 19.40% 21.92% 25.01% 28.88% 33.84%

3.01 3.50 3.97 4.54 5.26 6.19

5,354
9,245 10,269 11,561 11,766 11,977 17,544

15.69% 19.40% 21.92% 25.01% 28.88% 33.84%

9.35% 9.35% 9.35% 9.35% 9.35% 9.35%
6.34% 10.05% 12.57% 15.66% 19.53% 24.49%
2,688 4,002 4,552 5,104 5,659 6,216
1,719 2,341 2,435 2,497 2,531 2,543
Changed growth from 2% to 3%
Changed growth from 1% to 3%
 Project No 1 2 3 4 5 6
Initial Investment -2,000 -2,000 -2,000 -2,000 -2,000 -2,000
1 330 1,666 160 280 2,200
2 330 334 200 280
3 330 165 350 280
4 330 395 280
5 330 432 280
6 330 440 280
7 330 442 280
8 1,000 444 280
9 446 280
10 448 280
11 450 280
12 451 280
13 451 280
14 452 280
15 10,000 -2,000 280
-0.0039
PVIFA 5.3349 2.4869 0.9091 7.6061 7.6061 0.9091
NPV 73.0856 -85.4545 393.9205 228.2220 129.7023 0.0000
Rank (NPV) 5 7 1 2 4 6
IRR 10.9% 6.3% 11.3% 12.3% 11.1% 10.0%
Rank (IRR) 5 7 3 2 4 6
EA 13.699 -34.363 433.313 30.005 17.052 0.000
Rank (EA) 5 7 1 3 4 6
PI 0.03654 -0.04273 0.19696 0.11411 0.06485 0.00000
Rank (PI) 5 7 1 2 4 6
 7 8
-2,000 -2,000
1,200 -350
900 -60
300 60
90 350
70 700
1,200
2,250

3.7908 4.8684
165.0409 182.9844
3 The company should select Projects 3,4,5,8
15.3% 11.4%
1 The company should select Projects 3,4,5,7
43.537 37.586
2 The company should select Projects 3,4,5,7
0.08252 0.09149
3 The company should select Projects 3,4,5,8