Assignment on Investment Decission for a Trading Unit

8/14/2019 Assignment on Investment Decission for a Trading Unit

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ASSIGNMENT ON INVESTMENT DECISSION FOR ATRADING UNIT


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About our project

The name of our enterprise is BEST PRICE privet ltd. We have got a contractual business offer from worlds largest shoe brand LIFE STYLE. They have given us the proposal for next threeyears on a contractual mode. So, we are planning to open our store at BAPUJI NAGAR area of BHUBANESWAR.

We have outsourced our market research task to a well known market research organizationnamed IMRB. They have given us the forecasting report , which indicates there is a largedemand for this brand in near future.

So we have decided to invest our own money and some part of bank loan to start our business.

BUSINESS SET UP REQUIREMENT .

Basing upon the above proposal we are going to start a shoe store in BAPUJI NAGAR and the basic requirements of the projects are

I. Space- 2000sq.ft @ Rs. 320 = 6,40,000

II. One 1ton A/C = 47,000

III. Sofa set(240,000) = 80,000

IV. Cash counter table(150002) = 30,000

V. One LCD computer with printer = 40,000

VI. Show case(915=3racks

98=2racks

914=4racks

912=4racks) =6, 50,000

VII. Eight sales persons salary =4,80,000

VIII. Lighting = 33,000

Total = 20,00,000


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SOURCES OF FUND

The fund requirement for our financial expences estimated is 30,00,0000. So as two partner wewill contribute 10, 00,000 each and another 10, 00,000, we will take bank loan.

So, fund arrangement structure is like:

Owners contribution: 100000*2= 20, 00,000

Long term bank loan= 10, 00,000

Total= 30, 00,000

Application of fund

Fixed investment = 20, 00,000

Working capital expences = 10, 00,000

Total = 30,00,000

Sales forecasting

From our forecasting we have estimated that there will be at least 1800pcs of shoes can be selland we are keeping 200 unit as stock in our hand. So, we will purchase 2000 per month.Annually we will purchase 24000 unit and sell 21600 units and rest 2400 as stock, which is 1.5month of sales. The estimated figures are as follows:

Projected annual sales is 1800*12= 21600 unit

We want keep stock for one and half month of sales= 2400 unit

Total purchase = 24000 unit

Average cost of purchase =Rs728

Average sales price = 874( 20% profit )


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Cost of our products

Section Types Amount (inRs.)

Gents Shoes=4001500 6,00,000

Sleeper=700650 4,55,000

Ladies Shoes=400650 2,60,000

Sleeper=200500 1,00,000

Kids Sleeper=10080 8,000

Shoes=150120 18,000

Fancy sleeper=50280 14,000

Cost of capital:-

Calculation of cost of debt

Cost of debt=12(1-0.035)/100=7.8%

Owners contribution with the expectation of 15.68%

Capital structure Total After tax cost Weights WeightedAverage Cost

12% debt 10,00,000 0.078 0.33 0.0195Ownerscontribution

20,00,000 0.1568 0.67 0.1050

Total 0.1245So the cost of capital is 12.45%

We have taken loan from bank with an interest rate of 12% and as investor our minimumrequired rate of return is 15.68%. Thus the weighted average cost of capital is 12.45%. Which isour minimum cut of rate, which we have to earn to justify our investment?

Assessment of Working Capital


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Year 0th

At the beginning Amount (in Rs.)

CURRENT ASSETS :

Stock (2400 units)Cash

CURRENT LIABILITIES :Creditors (1 month)

NET CURRENT ASSET

17,47,200

1,26,400

8,73,600

10,00,000

We have no plan to change stocks at the end, so at the end there is same working capital.

Year -1 st

Opening is 10,00,000

Closing is 10,00,000

So there is no change in working capital

Year 2nd

At the end Amount (in Rs.)

CURRENT ASSETS :Stock (5280 units)

CURRENT LIABILITIES :Creditors (2 month)

NET CURRENT ASSET

38,43,840

17,47,200

20,96,640

Year 3rd


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As we are closing the business we do not want to keep any working capital. So our closingworking capital is nil and opening is the closing of previous year.

Working capital requirement0 1 2 3

Beginning 10,00,000 10,00,000 10,00,000 20,96,640Closing 10,00,000 10,00,000 20,96,640 Nil

We have estimated that our initial working capital requirement will be RS 10, 00,000. As we arenot planning to change our stock for first year end so our there will be no change in workingcapital at the end of the 0 th year and beginning of the first. Same will repeat for next year. But as

per the growth potential we are planning to increase the working capital for second year. And aswe are going to close our business in third year, we will not keep any working capital for the lastyear.

COMPUTATION OF NET CASH FLOW


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(In Rs.) 0 1 2 3

Initial CashInvestment

(20,00,000)

PBT ------------- 20,95,360 27,34,080 34,83,184

Add:-Depreciation

------------- 2,00,000 1,80,000 1,62,000

Less: - Tax(30%)

------------- (7,33,376) (9,56,928) (12,19,114)

Cash FlowFromOperations

------------- 15,61,984 19,57,152 24,26,070

WorkingCapital/Changein WC

(1,0,00,000)

nil (10,96,640) 20,96,640

Scrap value 10,00,000Net Cash Flow (30,00,000) 15,61,984 8,60,512 55,22,710

YEAR CASHINFLOW

COST OFCAPITAL

DISCOUNTINGFACTOR

PV

1 15,61,984 12.45% 0.889 13,89,047

2 8,60,512 12.45% 0.790 6,79,804

3 55,22,710 12.45% 0.703 38,82,465

TOTAL 59,51,316

From our sales figure we expect that there will be a cash flow of 15,60,512 and 860512 and55,22,710 for 1 st ,2nd and 3 rd year respectively. For increase in working capital of 2 nd year there isless cash flow in 2 nd year but for clearance of all stock and scrap value ,cash flow increased inthird year .

NET PRESENT VALUE = 59, 51,316 30, 00, 000

= 29, 51,316

PAYBACK PERIORD

Here the payback period is 2 years 3months and 16 days

2+ 931149* 12/5951316 = 2 YEAR 3 MONTH 16 DAYS.


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Expected Trading and Profit and Loss Account of 1 st year

Incomes Amount in Rs.Sales (21,600 @728) 1,88,78,400Closing stock 17,47,200Total 2,06,25,600Exp ensesPurchases 1,74,60,000Personnel expenses 4,80,000Selling expenses 1,20,000Administrative expenses 1,20,000Other expenses 30,240

Total 1,82,10,240 Net profit 24,15,360Less depreciation 2,00,000PBIT 22,15,360Less interest 1,20,000PBT 20,95,360Less tax 7,33,376PAT 13,61,984

We are expecting that our income from operation will 2, 06, 25,600 as well as expences will be

1, 82,10,240. So net profit for first year will be 13, 61,984.

Expected Trading and Profit and Loss Account of 2nd year


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Incomes Amount in Rs.Sales (21,600 @728) 2,26,54,080Closing stock 38,43,840Total 2,64,97,920Expenses

Purchases 2,09,66,400Opening stock 17,47,200Personnel expenses 4,80,000Selling expenses 1,20,000Administrative expe nses 1,20,000Other expenses 30,240Total 2,34,63,840

Net profit 30,34,080Less depreciation 1,80,000PBIT 28,54,080Less interest 1,20,000PBT 27,34,080Less tax 9,56,928PAT 17,77,512

We are expecting that our income from operation will 2, 64, 97,920 as well as expences will be2,34, 63,840. So net profit for first year will be17, 77,512.

Expected Trading and Profit and Loss Account of 3 rd year

Incomes Amount in Rs.Sales (21,600 @728) 2,71,84,896ExpensesPurchases 1,87,99,872Opening stock 38,43,840Personnel expenses 4,80,000Selling expenses 1,32,000Administrative expenses 1,32,000Other expenses 32,000Total 2,34,19,712

Net profit 37,65,184Less depre ciation 1,62,000PBIT 36,03,184Less interest 1,20,000PBT 34,83,184Less tax 12,19,114PAT 22,64,070


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We are expecting that our income from operation will 2, 71, 84,896 as well as expences will be2, 34, 19,712. So net profit for first year will be 22, 64,070.

Expected Balance sheet of 1st

yearSources Amount (in Rs.)Owners contribution 20,00,000Add net profit 13,61,984 33,61,984Long term loan 10,00,000Total 43,61,984ResourcesGross block 20,00,000Less depreciation 2,00,000

Net block 18,00,000

Working capital 10,00,000Cash at bank 15,61,984Total 43,61,984

Balance sheet for the first years is as per the above table. That is our fixed asset is 18, 00, 00 andworking capital is 10, 00,000 and we are keeping our profit in bank. So our cash bank balance is15, 61,984. So our total asset is 43, 61,984

On the other hand our liability is from our own contribution, bank loan and profit is 13, 61,984.So total liability is 43, 61,984.

PROFITABILITY INDEX:

PRESENTVALUE/ INITIAL INVESTMENT = 59, 51,316 /30, 00, 000

= 1.9837

INVESTMENT DECISION TECHNIQUE:

We have followed three investment techniques. Those are NET PRESENT VALUE,PROFITABILITY INDEX & PAY BACK PERIOD.

As per NPV method, the present value is more than the initial investment and net present value ismore than one, so this project is profitable.

As per profitability index , it is more than one. So it is also viable.


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As per the payback period method, the initial investment can be recover in 2 years and 3monthand 16 days.

CONCLUSION :

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Assignment on Investment Decission for a Trading Unit