Mid Term Project - Capital Budgeting decision – Summer 2021

You have already worked on a set of financial statements of one of the large listed
manufacturing companies, for the year ending 2020, in assignment 1 & 2. Thus your
understanding of Financial Analyses’, ‘Time Value of Money’, ‘Equity & Debt Valuation’, ‘Risk &
Return’ and ‘Cost of Capital’ is expected to reach a stage where you should now be ready for
spreading these financial numbers, use the tools taught for enabling ‘Capital Budgeting
Decisions’ and take an appropriate decision for putting up the proposed project or otherwise.

This time you shall chose another company from the listed manufacturing companies on PSX,
different from the ones already chosen for assignment 1 & 2 and get the same approved from
your CR, and draw its financials for at least last 5 years to check its historical patterns.

Assumptions Underlying the Expansion Project

Your management is considering to expand its existing capacity and sales by 50%, and you have
been given the task is to evaluate this project and give your recommendations on the same
You are the required to proceed as follows for first developing data for your projections:

1. Assume that the year 2020 is the year 0, project/forecast the Income Statement for the
next 5 years assuming the growth rate as you expect in the coming years as per your
understanding of the economy. For this purpose, you may refer to SBP’s economic
projections and the economic policies of the Government and its diplomatic efforts
globally. Pl specify the justifications behind your projected growth figures)

2. Assume all variable expenses, fixed asset investments and net working capital will also
grow in relation to increase in sales.

3. Assume a reasonable fixed cost as per the historical numbers and project it in line with
your growth projections.

4. Assume that the fixed equipment cost in year 0 will be 50% of its gross fixed assets

5. Similarly, Net Working Capital be assumed at 50% of the existing NWC.

6. Equipment shall be depreciated on straight line basis over 5 years

7. Salvage value of machinery at the end of the year 5 will be 30% of its year 0 value.

8. Tax rate to be 35%

9. Assume required rate of return as 10%.

10. All other expenses be assumed as per the historical record

Required Calculations

Once you are done with spreading your numbers as per above, you are required to:
1. Calculate the Operating Cash Flow
2. Work out the adjustments for change in NWC, Fixed Capital expenditures, salvage value
and recovery of net working capital towards the end of the project.

3. Find out Project’s cash flow

4. Then compute the following, on standalone basis:
a) NPV
b) IRR (in case of more than one negative cash flows, compute MIRR)
c) Payback Period
d) Discounted Payback Period
e) Profitability Index
f) Average Accounting Rate of Return

Review the Quality of Your Assumptions

Now that you have applied all the tools available for decision making, you must ensure the
quality of your assumptions with the help of the following:
1. Work out the ‘Sensitivity Analysis’ assuming an appropriate percentage change in all
significant variables, plot the on graph to determine which variables are most sensitive,
which ones are moderately sensitive and which are of least concern.
2. Repeat the above with the help of ‘Scenario Analysis’ to check out the sustainability
level of the project, assuming a reasonable percentage changes in ‘Worst Case’, ‘Base
Case’ and ‘Best Case’ scenarios.

3. Review your projections and workings once again to ensure that whatever assumptions
you have made are fairly accurate and you are confident that your decision is fully
justified.

Please note that you must justify all your assumptions with rationnale and duly record these
along with documents referred.
Conclusion and Recommendations as an Analyst

Finally, you need to present the most important part of the project which is reflecting your
understanding of chapter ‘Capital budgeting” laying out your conclusion about the overall
viability of the project in as much detail as discussed in class and the book. This must be
followed by your recommendations whether we should go for this project as along with reasons
and justifications thereof.

You may make assumptions where facts are not available but the same must be reported duly
highlighted with rationale/justifications.

The last day for submission is July 13, 2021 at 11:55 PM.

No assignment will be accepted thereafter.

M. Yousuf Saudagar