Egret Printing and

Publishing
company
A case study.

PRESENTERS:
N I S H A N RA J B H A N DA R I
S I D D H A RT H A C H H E T R I
S U D H I R B O G AT I
S U P RAVA S H A R M A
S U J ATA PAT H A K

Background of the study

# 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.
# Belfords 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.

Four Major Capital Investment Proposals

Project A: Major Plant Expansion
Project B: Alternative Plan For Plant Expansion
Project C: Purchase Of New Press
Project D: Upgrade Of Egrets Video Text Service

Pay Back Period

Project A

Project B

Project C

(In thousand US
dollar)
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

Net present Value

Project A

Project B

Project C

Project D

Cost of project

1000

1000

2000

1000

Remarks

Net
Present
(15%)

value 197.35

186.8

1262.22

173.27

Accept
and C

Net
Present
(21%)

Value 49.12

93.87

635.165

24.1

Accept B and
C

4 years

10 years

5 years

Life of project

4 years

IRR

Project A

Project B

Project C

Project D

Cost of project

1000

1000

2000

1000

of 23.30%

28.49%

30.18%

22.11%

5 years

5 years

10 years

6 years

Internal
rate
return (IRR)

Life of project

Remarks

Select B and
C

SUGGESTION TO COMPANY
The company should use NPV method instead of payback period method and IRR method.
It takes into account all cash flows.
All cash flows are discounted at the appropriate market-determined opportunity cost of
capital.
NPV of a project is exactly the same as the increase in shareholders wealth.
A zero NPV is one, which earns a fair return to compensate both debt holders & equity
holders.
A positive NPV project earns more than the required rate of return, & equity holders receive
all excess cash flows.

EAA
Remarks

Project A

Project B

Project C

Project D

Cost of project

1000

1000

2000

1000

Equivalent
annual 69.12
annuity (15%)

65.43

251.50

51.69

Select A and C

Equivalent
annual 19.34
annuity (21%)

36.95

156.67

8.24

Select B and C

Life of project

4 years

10 years

5 years

4 years

Cash Flow with 380000$

Project D

Before change in cash

flow
15%
21%

Payback period 4 years

After change in cash flow

Remarks

15%

21%

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

Comparison of Project B with Project A( industry

average)
particular
Project A
Project B
Remarks
(industry average)

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)

-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.

If cash flows project D =

$380000
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 advisible

Effect on capital structure and

COC - debt
Source of capital Amount

Weight

After tax cost Product

of capital

Long term debt

1M

0.25

7.2

1.8

Common equity

3M

0.75

15

11.25

Total

4M

Weighted average cost of capital

13.05 %

Comparison before debt and

after debt
COST

OF

CAPITAL

NET PRESENT VALUES OF PROJECT

A
B
C
D

15%

197.35

186.8

1262.22

173.27

21%
13.5%

49.12
252.625

93.87
220.32

635.165
1523

24.1
228.5

Time interest earned Ratio

EBIT

$6120000

Less:

$120000

Interest(12%)
EBT

$6000000

Less: tax @40%

$2400000

EAT

$3600000

Less : dividends $600000

Retained
Earnings

$3000000

Times interested
earned ratio =
EBIT/ Interest
=
6120000/120000
= 51 times

Handling of project C valid?

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.

Quantitative Vs Qualitative Factors

Quantitative factors can only be measured in numeric terms. Whereas,
Qualitative measures is judgment based. 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.

Lesion learnt
Debt fi nancing is important for any company.
A positive NPV is a best criteria.
Profi tability index helps in deciding the combinations
of projects to be undertaken.
Have ultimate authority over investment decisions
equity holders

Thank
You