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SEMESTER Fall 2017 Corporate Finance (FIN722) Assignment No. 1 Due Date: 16-November-2017 Marks: 20

Due Date: 16-November-2017 Marks: 20

Topic: Capital Budgeting

Techniques Learning Outcomes: After attempting this assignment, students will be able to know that how to compute different capital budgeting techniques and select the projects.

Case Study: Shiner Threads Limited (STL) is in the business of textile and is a renowned supplier of toddler and teens outfits in the industry. The company is equipped with hi-tech machinery and is recognized for its unique designs. Due to its key investment in technology and human capital, company’s financials of last five years depict a continuous increasing trend in sales and profits at the rates of 30% and 35% respectively. Company’s management is now planning to expand its business operations, for which, Research and Development (R&D) department of STL has proposed following three Mutually Exclusive projects based on their market surveys: (It is notable that feasibility report of each project is based on the estimates of six years).

Project 1: The first project proposed by R&D is to open company’s own Clothing Stores. Estimates presented in the feasibility report tell that this project requires an investment of Rs. 1,950,000. This will generate after tax cash inflows of Rs. 400,000 each in the first and second years, Rs. 600,000 each in 3rd, 4th & 5th years while Rs. 900,000 in 6th year. Other information which has been provided in the report is as follow:

Required Rate of Return NPV (Rs.) IRR (%) Profitability Index (Times) Payback period (years) Discounted Payback (years) 15% 125,246 ----- 1.06 3.92 5.68

Project2: The second project proposed by R&D is to open Consultancy Centers. These centers will aim to provide consultancy services to other factories of the industry and to its buyers regarding their real-life problems of doing business. This project requires an initial cost of Rs. 900,000 while it will generate after tax cash inflows of Rs. 300,000 each in first five years and Rs. 500,000 in 6th year. The required rate of return for the project is 28%. However, the feasibility report for this project is not very much comprehensive as it is providing information only about capital budgeting measure of IRR which is approximately 26.7%.

Project 3: The third project proposed by R&D is to open Skill Development Cells. The aim of these development cells will be to launch different professional training courses in the market. The initial investment required for this project is Rs. 1,270,000. This project also requires net working capital of Rs. 180,000 at the start of the project which will be recovered at the end of 6th year. After tax cash inflows estimated to be generated from this project are as follows: Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Yr. 6 Rs. 250,000 Rs. 310,000 Rs. 400,000 Rs. 460,000 Rs. 580,000 Rs. 600,000 Other information which has been provided in the report is as follow: Required Rate of Return NPV (Rs.) IRR (%) Profitability Index (Times) Payback period (years) Discounted Payback (years) 15% ------ 18.17% 1.10 ------ 5.54


Requirement No. 1: It can be observed that the feasibility report of project 1 is providing values against all capital budgeting measures except IRR. So, you are required to determine the approximate value of IRR to complete the report. (5 Marks)

Requirement No. 2: Although the information provided in feasibility report of project 2 is missing for most of the capital budgeting measures, however, you are required to determine only the values of NPV & Profitability Index (PI) for this project. (5 Marks)

Requirement No. 3: Determine the missing values of NPV and Payback period for project 3 to complete its feasibility report. (8 Marks)

Requirement No. 4: After finding out all the required values of each project, analyze which of the projects should be selected by STL and why? (2 Marks)

Important Instructions:  Working of each missing value carries certain marks so, it is necessary to provide detailed working of each value to avoid any inconvenience. 

Before attempting the assignment, it is advised to consult the relevant lectures, recommended book(s) and the additional material. This additional material has also been provided on VULMS in different lessons. You can view these supplements on VULMS under the link of “lessons” along with PPTs. Other Important Instructions: Please also read the following instructions carefully before attempting the assignment solution. Deadline:  Make sure that you upload the solution file before the due date. No assignment will be accepted through e-mail after due date once the solution has been uploaded by the instructor. Formatting guidelines:  Use the font style “Times New Roman or Arial” and font size “12”.  It is advised to compose your document preferably in MS-Word.  Use black and blue font colors only. Rules for Marking Please note that your assignment will not be graded or graded as Zero (0) if:  It has been submitted after due date  The file you uploaded does not open or is corrupt  It is cheated or copied from other students, internet, books, journals etc. Note: Only in the case of Assignment, 24 hours extra / grace period after the due date is usually available to overcome uploading difficulties which may be faced by the students on last date. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience. Note related to load shedding: Please be proactive Dear students! As you know that semester activities have started and load shedding problem is also prevailing in our country now a days. Keeping in view the fact, It is requested to all of you to manage to post your activities as early as possible and don’t wait for the due date. For your convenience activity schedule has already been uploaded on VULMS for the current semester, therefore no excuse will be entertained after due date of assignments, quizzes or GDBs.

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