Class notes on Performance Operations (P1) by Rafiqul Islam, FCMA

Year Year 1 Year 2 Year 3 Year 4 Year 5

Production units 5000 8000 12000 10000 6000

The price of plastic furniture in the first year will be Tk.2000 per unit. The plastic market is very
competitive, so the CFO believes that the price will increase by only 2 percent per year, as compared
to general inflation rate of 5 percent. First year production cost will be Tk.1000 per unit, production
costs are expected to grow at 10 percent per year. The company is subject to 35 percent corporate tax
rate. Management determines that an immediate (year 0) investment in different items of working
capital of Tk.10 lacs is required. Thereafter net working capital would be 10 percent of sales of the
year up to the 4th year and all working capital would be recovered in the 5th year.

The project would be financed by bank loans and equity at a debt-equity ratio of 70:30. Incremental
borrowing rate would be 13.50 percent and required rate of return on share capital is 19.50 percent.
Weighted average cost of capital to be rounded to nearest whole number.

Required:
Calculate Net Present Value (NPV) of the project and advise the company whether to accept the
investment project.

Solution
Question one

Figure in lacs Taka

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Investments
Plastic Furniture machines -100.00 3.00
Opportunity of land and building -150.00 200.00
Net Working Capital 10.00 10.00 16.32 24.97 21.22 0.00
Change in Working Capital -10.00 0.00 -6.32 -8.65 3.75 21.22
Total Cash flow of investment -260.00 0.00 -6.32 -8.65 3.75 224.22
Income
Sales Revenues 100.00 163.20 249.72 212.20 129.90
Operating costs 50.00 88.00 145.20 133.10 87.84
Depreciation 19.40 19.40 19.40 19.40 19.40
Income before taxes 30.60 55.80 85.12 59.70 22.66
Tax @35% 10.71 19.53 29.792 20.895 7.931
Income after taxes 19.89 36.27 55.33 38.81 14.73
Add: Depreciation 19.40 19.40 19.40 19.40 19.40
Cash flows from Operations 39.29 55.67 74.73 58.21 34.13

Total Cash flow from the project -260.00 39.29 49.35 66.08 61.96 258.35
PV factor @12%
( 13.5%*.65*.70+.19.5%*.3) 1.00 0.89 0.80 0.71 0.64 0.57
Discounted cash flows -260.00 35.08 39.34 47.03 39.37 146.59
NPV 47.42

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