Capital Budgeting Techniques for the Project - Pinto Limited

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Author’s Note:

1
FINANCE
Memorandum
Memo to: Board of Directors
Company: Pinto Limited
From: Author
Subject: Capital Budgeting Techniques for the Project
Date: 25/05/2018
Introduction
As per the case which is provided in the question, the management of Pinto ltd is
planning to invest in a project so that the company can establish itself in a new product market.
The company is planning to introduce a new product in a new market for which the business has
decided conduct a capital budgeting analysis so that the management of the company can judge
the viability of the project (Burns and Walker 2015).

2
FINANCE
Capital Budgeting Analysis
Particulars 0 1 2 3 4 5
Initial Investment:
Cost of Plant & Equipment -$150,00,000
Net Working Capital -$30,00,000
Total Initial Investment -$180,00,000
Operating Cash Flow:
Sales revenue $150,00,000 $231,75,000 $358,05,375 $184,39,768 $94,96,481
Cost of Goods Sold -$90,00,000 -$139,05,000 -$214,83,225 -$110,63,861 -$56,97,888
Selling, General & Administration
Expenses -$10,00,000 -$10,50,000 -$11,02,500 -$11,57,625 -$12,15,506
Loss of Rental Revenue -$2,50,000 -$2,50,000 -$2,50,000 -$2,50,000 -$2,50,000
Depreciation Expenses -$30,00,000 -$30,00,000 -$30,00,000 -$30,00,000 -$30,00,000
Net Profit Before Tax $17,50,000 $49,70,000 $99,69,650 $29,68,282 -$6,66,914
Income Tax @30% -$5,25,000 -$14,91,000 -$29,90,895 -$8,90,485 $0
Net Profit after Tax $12,25,000 $34,79,000 $69,78,755 $20,77,798 -$6,66,914
Add: Depreciation Expenses $30,00,000 $30,00,000 $30,00,000 $30,00,000 $30,00,000
Net Operating Cash Flow $42,25,000 $64,79,000 $99,78,755 $50,77,798 $23,33,086
Salvage Value:
Recovery of Net Working Capital $30,00,000
Net Salvage Value $0 $0 $0 $0 $30,00,000
Net Cash Flow -$180,00,000 $42,25,000 $64,79,000 $99,78,755 $50,77,798 $53,33,086
WACC 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Discounted Cash Flow -$180,00,000 $38,40,909 $53,54,545 $74,97,186 $34,68,204 $33,11,427
Cumulative Cash Flow -$180,00,000 -$137,75,000 -$72,96,000 $26,82,755 $77,60,553 $130,93,639
Cumulative Discounted Cash Flow -$180,00,000 -$141,59,091 -$88,04,545 -$13,07,359 $21,60,845 $54,72,272
Net Present Value $54,72,272
IRR 20.94%
Payback Period (in years) 2.73
Discounted Payback Period (in years) 3.38
Profitability Index 1.30
Capital Budgeting Analysis:
As shown in the above figure the calculations of NPV, Profitability index, Payback
Period, IRR and Discounted Payback Period. It is clear from the above analysis that the company
wants to undertake an investment in plant and machinery for which the amount required is $