The document summarizes three scenarios presented in a case study about a gas trading company considering expanding operations by building new storage units. Scenario 1 analyzes the initial proposal, which all capital budgeting techniques indicate would be profitable. Scenario 2 adjusts for tax and price increases, which further improves the analysis. However, Scenario 3 increases interest rates, resulting in a negative NPV and profitability index below 1, indicating the project should be rejected under those conditions.

1. Anwal Gas Traders:
Capital Budgeting
for Expansion
Project

2. Introduction
The case was developed by Imran Yousaf,
Zhichuan (Frank) Li, and Aaqib Nawaz for the sole
purpose of classroom discussion. The case study is
an effective material through which the concepts
of capital budgeting and its techniques is displayed
in a practical situation.
The case study is about a gas trading company
exploiting the opportunities in the market and
developing plans to invest in the new project.
Robin Rai (03200276)

3. Table of contents
Problem
Statement
Inadequate storage and
higher operational costs
Scenario 1
The proposal from the
manager
Scenario 2
Change in tax and
product prices
Scenario 3
Change in interest rate
WACC
01 02
03 04
Robin Rai (03200278)

4. Problem Statement
01
Robin Rai (03200278)

5. Problem
The company is facing an LPG shortage due to
delays by the supplier, especially when
demand is high. Due to lack of enough storage,
the company was unable to meet consumer
demand and was forced to rely on its supplier,
which had a bad impact on the company's
reputation and put future customers at risk.
Therefore the company was debating whether
to invest in growth in February 2021.
Robin Rai (03200278)

6. LPG Distribution Process
LPG Production
Company
LPG Distributor/ Sub-
Distributors
LPG Retail
Sales Shop
LPG Marketing &
Distribution
Company
LPG Retail
Agent
Rigzin Pema Namgyel (03200268)

7. In the proposal for the
company to expand and build
new storage units, Malik Asad
used his university
knowledge to forecast and
estimate the cash flows for
the installation as well as
cash flows for the next 10
years of the project.
Scenario 1
Rajesh Monger (03200262)

8. Capital Budgeting Process
9/7/2022 8
The manager proposed a
plan for expansion of the
business in the case study.
Proposal
Information's regarding the sales, cost
and other related expenses is used to
determine the cash flows
Determining the
expected cash flows
The annual increase or decrease in
each aspects of sales and expenses
has been provided and is accordingly
forecasted.
FORECASTING
With all the information's
determined, earning or revenue is
determined. For the proposal
REPORTING
The analysis of the tax,
depreciation, salvage value
is also carried out based on
the information's provided
in the case study..
BUDGETING
Rajesh Monger (03200262)

9. WACC WACC
14%
Cost of
debt
RRR
16% 16.64%
Rajesh Monger (03200262)

10. Capital Budgeting Techniques
18.81%
Internal Rate
of Return
6,782,787.56
Net Present
Value (NPV)
4 years and
1 month
Payback Period
1.07
Profitability Index
Rajesh Monger (03200262)

11. Investment Decision
As in the scenario of this
proposal, all the capital
budgeting techniques proves
to be profitable for the
company and we advice them
to invest in this current
scenario of the proposal
Rajesh Monger (03200262)

12. Scenario 2
02
Rinzin Dolkar (03200273)

13. The consultant advises that
the government could increase
the sector’s tax from 29 per
cent to 35 percent. The
resulting price increase would
be only 3 per cent annually.
Rinzin Dolkar (03200273)

14. Data we have
22,981,866
17.6%
Annuity of Loan
RRR
3%
Increase in price
35%
14%
Tax
WACC
95,100,000
Initial Investment
Rinzin Dolkar (03200273)

15. Capital Budgeting Results
30.7160
2 years
8 months
IRR
58,632,170.59
NPV
1.62
PI
Payback
Period
Rinzin Dolkar (03200273)

16. Analysis
All the capital budgeting techniques such as
NPV, IRR, PBP and PI saw a substantial increase
indicating that:
1. Increase in NPV was mainly due to the
increase in the required rate of return and
cash inflows of the firm. An increase in NPV
would be desirable for the firm.
2. Higher the internal rate of return, the more
desirable an investment is to undertake.
3. Shorter the payback period, the more
desirable it is for the company
4. Higher is accepted for profitability index as
well.
Rinzin Dolkar (03200273)

17. Scenario 3
03
Sangay Zangmo (03200295)

18. The finance department
advises a local bank
interest rate of 19 per
cent and a weighted
average cost of capital
(WACC) of 15 per cent.
Sangay Zangmo (03200295)

19. The Data We have
95,100,000
Initial Investment
15%
WACC
19%
Loan interest rate
29%
Tax
16.5%
RRR
27,078,221
Annuity of loan
Sangay Zangmo (03200295)

20. Results
NPV
-6,496,117
IRR
30.915
Payback Period
4years 5 months
Profitability Index
0.93
Sangay Zangmo (03200295)

21. Analysis
PBP is the longest
amongst all three
scenarios indicating
that a long period of
time is require
recovering or
retaining the initial
investment
PBP
IRR is similar to
scenario 2,
whereby its
desirable by the
firm.
IRR
NPV is negative, thus
the acceptance rule
of NPV has not
fulfilled as NPV is
less than 0 so the
project should be
rejected.
NPV
Profitability index is
also less than 1, thus
the acceptance rule
is not fulfilled,
indicating that the
firm should not take
or undertake the
project
PI
Sangay Zangmo (03200295)

22. Investment Decision
Therefore it can be
concluded that under such
scenario, the firm should not
accept the project as
majority of the capital
budgeting techniques
indicate that the scenario
will not be profitable for the
firm.
Sangay Zangmo (03200295)

23. Summary
Problems
The central problem
Scenario 1
Accept the proposal
Scenario 2
Has an effect but the
decision remains the same
Scenario 3
Reject the decision
Rigzin Pema Namgyel (03200268)

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Rigzin Pema Namgyel (03200268)