The document discusses capital investment proposals being considered by Egret Printing and Publishing Company. It analyzes four potential projects - Project A involving a major plant expansion, Project B an alternative plant expansion, Project C purchasing a new press, and Project D upgrading Egret's video text service. Various quantitative measures like NPV, IRR, payback period and qualitative factors are examined. Based on the analysis, Projects C and B are recommended as they have the highest positive NPVs and returns. Introducing some debt financing is also suggested to allow investing in additional profitable projects like D. Both quantitative and qualitative factors need consideration in capital budgeting decisions.

1. Presented By:
Ayush Nepal
Barsha Shrestha
Chhokpa Sherpa
Deepak Pandey
Meera Khannal
Neelam Malla
Pramila Nepal
Prakash Pandey

2. # Egret Printing and Publishing Company is a family owned specialty printing business Found by Keith Belford in
1986.
# Hill has responsibility for the both internal and external financial operations.
# Belford’s have identified four major capital investment proposals as potential candidates for funding
in the coming year.
# All equity capital structure to be overly conservative
# Belford family not willing to go for debt financing.

3.  Project A: Major Plant Expansion
 Project B: Alternative Plan For Plant Expansion
 Project C: Purchase Of New Press
 Project D: Upgrade Of Egret’s Video Text Service

4. Pay Back Period
‘000 USD
Project A Project B Project C Project D Remarks
Project Cost 1000 1000 2000 1000
Discount rate (15%) 3.787 years 2.014 years 4.446 years 3 years Accept B and D
Discount rate (21%) 4.826 years 2.582 years 5.274 years 4.822 years Accept B and D
Life of project 4 years 4 years 10 years 5 years
Capital budget $3.0 million
Project A and B mutually exclusive

5. Project A Project B Project C Project D Remarks
Cost of project 1000 1000 2000 1000
Net Present value (15%) 197.35 186.8 1262.22 173.27 Accept A and C
Net Present Value (21%) 49.12 93.87 635.165 24.1 Accept B and C
Life of project 4 years 4 years 10 years 5 years

6. Project A Project B Project C Project D Remarks
Cost of project 1000 1000 2000 1000
Internal rate of return (IRR) 23.30% 28.49% 30.18% 22.11% Select B and C
Life of project 5 years 5 years 10 years 6 years

7. Suggestion to the Company

8. Project A Project B Project C Project D Remarks
Cost of Project 1000 1000 2000 1000
Equivalent Annual Annuity
(15%)
69.12 65.43 251.50 51.69 Select A and C
Equivalent Annual Annuity
(21%)
19.34 36.95 156.67 8.24 Select B and C
Life of Project 4 years 4 years 10 years 5 years

9. Cash Flow with $3,80,000
Project D Before change in cash flow After change in cash flow Remarks
15% 21% 15% 21%
Payback period 4 years 4.822 year 3.61 years 4.237 years Improve in PBP
Net Present value 173.27 24.1 273.836 111.88 Improve in NPV
EAA 51.69 8.24 81.69 38.24 Improve in EAA
Internal rate of
return
21.11% 26.07% Improve in EAA

10. Particular Project A
(industry average)
Project B Remarks
Payback period(PBP) 3.425 year 2.014 year Project B (good)
Net present value(NPV) 197.35 186.8 Project A (good)
Internal rate of return(IRR) 23.30 28.49 Project B (good)
Comparison of Project B with Project A (Industry Average)

11.  Approximately 3 million available for investment
 With this amount company will only be able to invest in either project A and C or projects B
and C.
 Without using debt financing company is losing the opportunity to invest in project D.
 1 million as long term debt.
 All projects are positive it would be highly profitable for the company.
 Debt financing capital reducing it from 15% to 12% only.
 Project D will also profitable if belford brothers invest from debt financing.

12. Payback period Net present value IRR EAA
15% 3.61 years $273.836 26.07 $81.69
21% 4.237 years $111.88 26.07 $38.24
Project D has a positive NPV hence, shows a good profitability.
It has low return compared to that of project C.
In the situation , Belford brothers acquire the loan of 1 million , project D is advisable

13. Source of Capital Amount Weight After tax cost of capital Product
Long term debt 1 M 0.25 7.2 1.8
Common equity 3M 0.75 15 11.25
Total 4 M Weighted average cost of capital 13.05 %

14. Cost Of Capital Net Present Value of the Project
A B C D
15% 197.35 186.8 1262.22 173.27
21% 49.12 93.87 635.165 24.1
13.5% 252.625 220.32 1523 228.5

15. EBIT $6120000
Less: Interest(12%) ($120000)
EBT $6000000
Less: tax @40% ($2400000)
EAT $3600000
Less : dividends ($600000)
Retained Earnings $3000000
Times Interested Earned
Ratio = EBIT/ Interest
= 6120000/120000
= 51 times

16.  Project C is best according to the NPV analysis
 Based on the NPV analysis we came to know :
 Project with higher NPV is better
 In case of independent project, having Higher positive NPV project should be selected
 In case of mutually exclusive, project with highest NPV is selected.
 Profitability index of A&C and B&C ranked first and second respectively
 Project C handled in the case earlier is valid because project C cannot be chosen without choosing either
Projects A or B.

17. Quantitative factors can only be measured in numeric terms whereas qualitative factors are based on value judgment.
It involves:
•Some preliminary quantitative analysis and judgments.
•It plays an important role in the overall capital budgeting.
•It is used in project evaluation.
Not the only factor is effective for evaluation. So, both the factors are required for the capital budgeting evaluation.

18. • Debt financing is important for any company.
• Positive NPV is the best criteria.
• Profitability index helps in deciding the
• Combinations of projects to be undertaken.
• Have ultimate authority over investment