Sunday, 18 November 2012
Due Date: 19-11-2012 Marks: 20
Capital Budgeting Techniques for Projects Evaluation
Learning objectives:
Understanding project evaluation techniques used to determine the financial viability of a project.
Learning outcomes:
After attempting this assignment, students will be able to understand how capital budgeting techniques
can help in deciding whether to accept or reject a project.
Case
Tyres Manufacturing Incorporation (TMI) - a fast growing tyremanufacturing company in Pakistan
has been serving nationally and internationally for the last 40 years. The company is a standard
manufacturer of rubber tyres and tubes for all types of light vehicles running on the country’s roads.
TMI is reliable name known for its quality products. Major customers of the company include people
owing and driving vehicles manufactured by famous vehicle manufacturers in Pakistan.
To meet the rising demand for its products, TMI is thinking to expand manufacturing capacity for
which two mutually exclusive investment opportunities named as project Alphaand Project Betaare
under consideration.
The management has gathered necessary data which will be helpful in evaluation of the projects.
Evaluation will be done through capital budgeting techniques. The company has to choose between
these two equally risky and mutually exclusive projects. The expected cash flows of two projects are
as follows:
Year
End
Project Alpha
Rs.(000)
Project Beta
Rs. (000)
0 (200,000) (200,000)
1 60,000 55,000
2 80,000 65,000
3 75,000 70,000
4 60,000 80,000
TMI has estimated its required rate of return for each project at 12.3%. It has also estimated internal
rate of return (IRR) for project Alphaat 14% and for project Betaat 12%.
Required
You as financial analyst need to recommend one of the two projects that TMI may add to its assets.
Your decision is subject to the following:
1. Calculate Net Present Value (NPV) and profitability Index (PI) for each project. (16 marks)
2. If you apply NPV criterion, which projectshould be selected and why? (1 mark)
3. If you apply Profitability Index criterion, which project should be selected and why? (1mark)
4. If you apply IRR criterion, which project should be selected and why? (2 marks)
Show formulas and complete calculations as they carry marks.
Note:
Only in the case of Assignment, 24 hours extra / grace period after the due date is usually
available to overcome uploadingdifficulties which maybe faced bythe students on last date.
This extra time should onlybe used to meet the emergencies and above mentioned due dates
should always be treated as final to avoid any inconvenience.
Important Instructions:
Please read the following instructions carefullybefore 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 once the solution has been uploaded by the instructor.
Formatting guidelines:
Use the font style “Times New Roman”/ “Arial” and font size “12”.
It is advised to compose your document in MS-Word 2003.
Use black and blue font colors only.
Solution guidelines:
Everystudent will work individuallyand has to write in the form of an analytical
assignment.
Give the answer according to question.
For acquiringthe relevant knowledge don’t relyonlyon handouts but watch the
video lectures and use other reference books also.
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 in any format other than .doc (MS. Word)
It is cheated or copied from other students, internet, books, journals etc…
Best Of Luck!!
Capital Budgeting Techniques for Projects Evaluation
Learning objectives:
Understanding project evaluation techniques used to determine the financial viability of a project.
Learning outcomes:
After attempting this assignment, students will be able to understand how capital budgeting techniques
can help in deciding whether to accept or reject a project.
Case
Tyres Manufacturing Incorporation (TMI) - a fast growing tyremanufacturing company in Pakistan
has been serving nationally and internationally for the last 40 years. The company is a standard
manufacturer of rubber tyres and tubes for all types of light vehicles running on the country’s roads.
TMI is reliable name known for its quality products. Major customers of the company include people
owing and driving vehicles manufactured by famous vehicle manufacturers in Pakistan.
To meet the rising demand for its products, TMI is thinking to expand manufacturing capacity for
which two mutually exclusive investment opportunities named as project Alphaand Project Betaare
under consideration.
The management has gathered necessary data which will be helpful in evaluation of the projects.
Evaluation will be done through capital budgeting techniques. The company has to choose between
these two equally risky and mutually exclusive projects. The expected cash flows of two projects are
as follows:
Year
End
Project Alpha
Rs.(000)
Project Beta
Rs. (000)
0 (200,000) (200,000)
1 60,000 55,000
2 80,000 65,000
3 75,000 70,000
4 60,000 80,000
TMI has estimated its required rate of return for each project at 12.3%. It has also estimated internal
rate of return (IRR) for project Alphaat 14% and for project Betaat 12%.
Required
You as financial analyst need to recommend one of the two projects that TMI may add to its assets.
Your decision is subject to the following:
1. Calculate Net Present Value (NPV) and profitability Index (PI) for each project. (16 marks)
2. If you apply NPV criterion, which projectshould be selected and why? (1 mark)
3. If you apply Profitability Index criterion, which project should be selected and why? (1mark)
4. If you apply IRR criterion, which project should be selected and why? (2 marks)
Show formulas and complete calculations as they carry marks.
Note:
Only in the case of Assignment, 24 hours extra / grace period after the due date is usually
available to overcome uploadingdifficulties which maybe faced bythe students on last date.
This extra time should onlybe used to meet the emergencies and above mentioned due dates
should always be treated as final to avoid any inconvenience.
Important Instructions:
Please read the following instructions carefullybefore 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 once the solution has been uploaded by the instructor.
Formatting guidelines:
Use the font style “Times New Roman”/ “Arial” and font size “12”.
It is advised to compose your document in MS-Word 2003.
Use black and blue font colors only.
Solution guidelines:
Everystudent will work individuallyand has to write in the form of an analytical
assignment.
Give the answer according to question.
For acquiringthe relevant knowledge don’t relyonlyon handouts but watch the
video lectures and use other reference books also.
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 in any format other than .doc (MS. Word)
It is cheated or copied from other students, internet, books, journals etc…
Best Of Luck!!
