Global Journal of Management and Business Research: C

Finance
Volume 16 Issue 7 Version 1.0 Year 2016
Type: Double Blind Peer Reviewed International Research Journal
Publisher: Global Journals Inc. (USA)
Online ISSN: 2249-4588 & Print ISSN: 0975-5853

Dashen Bank Share Company: Capital Budgeting Decision

(Real-World Case Studies)
By Andualem Ufo
Wolaita Sodo University
Case Description- The capital budgeting decision is one of the most important financial decisions in
business firms. In this case, Dashen Bank Share Company (DBSC) is considering whether to invest in a
system to modernize its local money transfer services. To determine if the project is profitable, DBSC
must first determine the weighted average cost of capital to finance the project. The simple payback
period, discounted payback period, net present value (NPV), internal rate of return (IRR), and modified
internal rate of return (MIRR) techniques are used to study the profitability of the project. MIRR is a
relatively new capital budgeting technique, which assumes that the reinvestment rate of the project’s
intermediary cash flows is the bank’s cost of capital. The stand- alone risk of the project is evaluated with
the sensitivity analysis and scenario analysis techniques assuming that the new system would not affect
the current market risk of the bank. The case gives students an opportunity to use the theoretical
profitability and risk analyses techniques explained in their financial management module and related
tutorial classes in a real- world setting.
Keywords: capital budgeting, weighted average cost of capital, cash flow, payback period, net present
value, internal rate of return, modified internal rate of return, sensitivity analysis, scenario analysis.
GJMBR - C Classification : JEL Code: G31

DashenBankShareCompanyCapitalBudgetingDecisionRealWorldCaseStudies
Strictly as per the compliance and regulations of:

© 2016. Andualem Ufo. This is a research/review paper, distributed under the terms of the Creative Commons Attribution-
Noncommercial 3.0 Unported License http://creativecommons.org/licenses/by-nc/3.0/), permitting all non-commercial use,
distribution, and reproduction in any medium, provided the original work is properly cited.
 Dashen Bank Share Company: Capital
Budgeting Decision (Real-World Case Studies)
Andualem Ufo
Case Description- The capital budgeting decision is one of
the most important financial decisions in business firms. In
this case, Dashen Bank Share Company (DBSC) is
considering whether to invest in a system to modernize its
local money transfer services. To determine if the project is
profitable, DBSC must first determine the weighted
average cost of capital to finance the project. The simple
payback period, discounted payback period, net present
value (NPV), internal rate of return (IRR), and modified
internal rate of return (MIRR) techniques are used to study
the profitability of the project. MIRR is a relatively new capital
budgeting technique, which assumes that the reinvestment
rate of the project’s intermediary cash flows is the bank’s cost
of capital. The stand- alone risk of the project is evaluated
with the sensitivity analysis and scenario analysis
techniques assuming that the new system would not affect
the current market risk of the bank. The case gives students
an opportunity to use the theoretical profitability and risk
analyses techniques explained in their financial management
module and related tutorial classes in a real- world setting.
The case is best suited for Master of Business
administration, Master of Accounting & finance, Master of
Project Management students and is expected to take
approximately four to five hours to complete. The case is
moreover; very useful for Ethiopian Students for thinking how
they can make capital decision in Ethiopian context. Similar
case study were previously developed by Meric et al., is used
as a base for development of this case in Dashen bank
Ethiopian with its original in nature and different solution keys
context. It is teachable to students in Ethiopia and elsewhere
in the world. This review of Finance case Studies is very useful
for understanding the concept of Cost of capital and Capital
budgeting techniques.
Keywords: capital budgeting, weighted average cost
of capital, cash flow, payback period, net present
value, internal rate of return, modified internal rate of
return, sensitivity analysis, scenario analysis.
I. Case Information
D
BSC is planning to invest in a special system to
deliver local money transfer services to its
customers. The invoice price of the system is
Br.280,000 subject to 15% non-refundable VAT. It would
require Br.18,000 in shipping expenses and
Br.25,000 in installation costs. The system will be
depreciated using straight line method with 25%
annual rate on original cost of the system. DBSC
plans to use the system for four years and it is
expected to have a salvage value of Br.80,000 after four
Author: Lecturer, Wolaita Sodo University, Department of Accounting &
Finance. e-mail: ufoandualem@gmail.com
years of use. The bank expects the system will increase
the number of local money transfer customers by
100,000. The company estimates that it will charge on
the average Br.5 fee per customer for the transfer
2016
service in the first year with a cost of Br.3 per customer,
excluding depreciation. Management forecasts that
Year
both the service fee and cost per customer will
increase by 10% per year due to inflation. DBSC’s net
19
operating working capital would have to increase by
18% of fees earned to deliver the transfer service. The
Global Journal of Management and Business Research ( C ) Volume XVI Issue VII Version I
bank is subject to 30% income tax.
DBSC’s WACC
Mehretu, a recent MBA graduate of Addis
Ababa University, is conducting the capital budgeting
analysis for the project. The bank hired him only a
few weeks ago as the head of the newly formed
Capital Budgeting Analysis Department. In order to
evaluate feasibility of the investment in the new system,
Mehretu’s first task is to estimate DBSC’s WACC. He
plans to use the financial data in Exhibit 1 to estimate
the WACC. When DBSC started evaluating the project,
the following conversation took place between Mehretu
and Ato Nesru. Ato Nesru, the CEO of the bank, is a
London School of Business graduate with a major in
financial economics and long years of administrative
experience.
Mehretu: It may be difficult to estimate cost of
borrowing in the current recessionary environment.
Nesru: We can determine the yield to maturity (YTM) on
our outstanding bonds by using their current market
prices. We can assume that we will be able to issue
additional bonds with this YTM as the cost of
borrowing. We should be able to place the new
bonds without any flotation costs. Therefore, we can
assume no flotation costs in our calculations. We can
re-examine feasibility of the project later before raising
funds by using sensitivity analysis to assess the impact
of possible changes in interest rates on NPV of the
project.
Mehretu: Do you think the bank’s current market value
capital structure is optimal? Can we use the current
percentages of the capital components as weights in
calculating the bank’s WACC?
Nesru: Yes, I believe that the bank’s current market
value capital structure of 30% debt, 10% preferred
stock and 60% equity is optimal. We have about
Br.95,000 in retained earnings this year, which is also
© 20 16 Global Journals Inc. (US)
 Dashen Bank Share Company: Capital Budgeting Decision (Real-World Case Studies)

available in cash. We should be able to use this year’s
retained earnings to finance part of the equity financing
required for the project. However, we will have to issue
some new common shares for the remainder of the
necessary equity financing. We can assume a flotation
cost of about 10% for the new common shares.
Mehretu: There are three basic methods of
calculating a firm’s cost of equity when retained
earnings are used as equity capital: 1) the capital asset
pricing method (CAPM); 2) the discounted cash flow
(DCF) approach; and, 3) the bond-yield-plus-risk-
premium method. Which of these methods should we
2016
investment in the computation of cost of common
equity.
Ato Nesru gave only one week to Mehretu for
his estimation of DBSC’s WACC. With the instructions
he received from Ato Nesru and with the help of the
financial data in Exhibit 1, Mehretu began the task of
estimating the bank’s WACC immediately.
Ato Nesru knew that estimating the bank’s cost
of capital was the first critical step in the capital
budgeting process. Without this analysis, it would not
be possible to determine if the new system would be a
profitable investment for DBSC. That is why he had

use in the calculation of our cost of retained earnings? asked Mehretu to estimate the bank’s WACC as the
Nesru: Although each of these methods has its first task. Ato Nesru was very pleased when he received
Year

merits, I believe that the most appropriate approach
for our bank would be to find an average cost with the
20
three methods. Besides, we can consider the yield on
the Ethiopian Government TB as risk free return on
Global Journal of Management and Business Research ( C ) Volume XVI Issue VII Version I
Mehretu’s calculation results and the WACC estimate.
He thought that he had made a good decision in
hiring Mehretu as the head of the company’s newly
established Capital Budgeting Analysis Department.

Exhibit 1: Financial data Mehretu Plans to use in estimating DBSC’s WACC

DBSC’s current Market Value optimal capital structure:
Amount Weight
Bonds Br. 30million 30%
Preferred Stocks Br.10 million 10%
Common Stocks Br.60 million 60%

Data to be used in calculation of the cost of borrowing with bonds:

Par Value Br.1000(non-callable)
Market Value Br.1059
Coupon Interest 9%(semiannual payment)
Remaining maturity 15 years
Flotation Costs 0

Data to be used in calculation of the cost of Preferred Stocks:

Par Value Br.100
Annual Dividend 9% of Par
Market Value Br.102
Flotation Costs 7%

Data to be used in calculation of the cost of Common equity:

CAPM data: DBSC’s beta 1.2
Yield to Ethiopian Government Treasury 2%
bills
Market Return 6%
DCF data: Stock Price Br.19.08
Last year’s dividend(Do) Br.1
Expected dividend growth rate 5%
Bond-Yield-plus-Risk-Premium: Risk Premium 3.5%
Amount of Retained earnings available Br.95,000
Amount of new Common stock to be issued [(Br.365,000X60%)-95,000=124,000] Br.124,000
This exhibit shows the data needed to estimate the bank’s WACC. Specifically, it presents the DBSC’s current market
value optimal capital structure used to determine in the WACC calculation. It then provides the data required to
calculate the cost of debt, the cost of preferred stock, and the cost of common stock. The figures are computed based
on analysis of investment in Ethiopian banking industry. The amount of new common stock to be issued is provided at
the end of the exhibit.

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 Dashen Bank Share Company: Capital Budgeting Decision (Real-World Case Studies)

Analysis of the profitability of the project
Ato Nesru and Mehretu had the following
conversation regarding how they should evaluate
the potential profitability of the project.
Mehretu: With the fees and cost estimates I have
obtained from the marketing and accounting
departments in Exhibit 2, we should be able to estimate
the project’s cash flows for the four-year horizon.
Nesru: Excellent! How are we going to evaluate the
project’s profitability to determine if it is feasible?
Mehretu: The Net Present Value (NPV) and Internal
Rate of Return (IRR) methods are generally used in
terms of Birr to the stockholders of the bank. It is easier
to compare the project’s IRR with the bank’s WACC to
convince the stockholders that we can earn a higher
percentage return on the investment than what it would
cost to finance it. I have heard that there is a new
improved capital budgeting technique that measures
the profitability of a project as a percentage similar to
the IRR method and it assumes that the project’s
intermediary cash flows can be reinvested at the firm’s
cost of capital as in the NPV method. I believe the
technique is called the Modified Internal Rate of
Return (MIRR) method.
Mehretu: No problem. We should be able to calculate

2016
the evaluation of projects. However, these two methods the project’s MIRR.
have different assumptions regarding the reinvestment

Year
rate of the intermediary cash flows. The NPV method Nesru: Great! I would also like to see the NPV, IRR,
assumes that the intermediary cash flows can be simple payback period, and discounted payback
period results for the project. 21
reinvested at the firm’s cost of capital. However, the IRR
method assumes that the reinvestment rate is the Mehretu: Consider it done!

project’s IRR. Academicians argue that the reinvestment
rate assumption of the NPV method is more realistic.
Therefore, they recommend the NPV method. The
financial goal of a firm is to maximize market value. The
NPV of a project shows its contribution to the market
value of the firm.
Nesru: Correct! However, the NPV is expressed in Birr.
It is difficult to explain the profitability of a project in
Global Journal of Management and Business Research ( C ) Volume XVI Issue VII Version I
With the instructions he received from Ato
Nesru, Mehretu immediately started to work on the
cash flow calculations using the data in Exhibit 2 to
analyze the profitability of the project with the NPV, IRR,
MIRR, simple payback period, and discounted payback
period methods.

Exhibit 2 : Data Mehretu plans to use in calculating the cash flows of the
project and evaluating its profitability
Year 0 Year 1 Year 2 Year 3 Year 4
Cost of the new
system:
Invoice price of the Br.280,000
new system
VAT(15%) 42,000
Shipping 18,000
Installation 25,000
Total cost of the 365,000
new
system(depreciable
biases)
Annual 25%
depreciation rate
Salvage value 80,000

Operating fees and

costs
Number of - 100,000 100,000 100,000 100,000
customers
Fees per - Br.5
customers
Cost per - Br.3
customers
Fees earned - Br.500,000
Costs - Br.300,000

© 20 16 Global Journals Inc. (US)

 Dashen Bank Share Company: Capital Budgeting Decision (Real-World Case Studies)

Net operating
working capital
requirement
Fees earned Br.500,000
Net operating Br.90,000
working capital
requirement (18%)
Cash flow due to (90,000)
Net operating
working capital
requirement (18%)
2016

This exhibit shows the data needed to calculate the cash flows for this project.
The new money transfer system has a useful life of 4 years, a salvage value of
Year

Br.80, 000. Annual fees earned and costs estimates are presented in the
middle of the exhibit. The system is expected to increase the number of
22 customers for local money transfer services by 100,000 with average fee per
customer Br.5 and cost of Br.3. The DBSC’s net operating working capital
requirement which is shown at the bottom of exhibit is 18% of total fees earned
Global Journal of Management and Business Research ( C ) Volume XVI Issue VII Version I

in a given year.

Risk Analysis change with the 10% increase or decrease in the

After Mehretu submitted the cash flow
calculations and the project profitability analysis
results to Ato Nesru, they had the following
conversation regarding the risk analysis for the project.
Nesru: The NPV, IRR, MIRR, simple payback and
discounted payback results all look promising.
However, we should also conduct a risk analysis of the
project before we go ahead with it. Since the project is
about modernization of delivery of an existing service, I
do not believe that the new project will change the
bank’s beta and its overall market risk. Therefore, it
should be sufficient to evaluate the stand-alone risk
of the project. What are the techniques that we can
use to assess the stand-alone risk of the project?
Mehretu: Sensitivity analysis is a widely used
technique to determine how much a project’s NPV will
change in response to a given change in an input
variable. Input variables such as number of customers
or the cost of capital are often used while holding other
things constant.
Nesru: The number of customers is difficult to
forecast with a high degree of accuracy.
Therefore, we should conduct a sensitivity
analysis with regard to possible changes in the
forecasted number of customers. It should be sufficient
to evaluate the impact of an increase or a decrease of
10% in number of customers from our base forecast.
The new system will be initially employed at about
80% capacity with our base number of customers
forecast. Therefore, the unutilized capacity of the
system should enable us to accommodate a 10%
increase in the number of customers. We estimate that
costs, excluding depreciation, will be 60% of fees per
customer. We can assume that this ratio will not
number of customers.
Mehretu: No problem. We can conduct a sensitivity
analyses for the project’s NPV with regard to a
10% deviation from our base number of customers
forecast.
Nesru: Given the current volatile financial environment,
the actual WACC figure is also likely to deviate from
the expected base level. I would like to know how
sensitive the project’s NPV is to an increase or
decrease of 1% in the WACC.
Mehretu: No problem. We should be able to conduct
a sensitivity analysis for the project with regard to a
possible 1% change in the WACC. Another analysis
technique for project risk widely used in practice is
scenario analysis. In this technique, the best and
worst-case NPV scenarios are compared with the
project’s expected NPV. Do you want us to conduct a
scenario analysis of the project as well?
Nesru: Yes. It would be a good idea. As the best-
case scenario, assume that the number of customers
will be 10% higher and the WACC will be 1% lower (i.e.
initially computed WACC less 1%) than our original
estimates. For the worst-case scenario, assume that the
number of customers will be 10% lower and the WACC
will be 1% higher (i.e. initially computed WACC plus
1%). Please calculate the standard deviation and the
coefficient of variation of the project’s NPV probability
distribution with these scenarios. You can assume a
probability of 50% for the base NPV forecast, a
probability of 20% for the best- case scenario, and a
probability of 30% for the worst-case scenario.
Mehretu: No problem. I should be able to submit the
risk analysis results to you within a week.

© 2016
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 Dashen Bank Share Company: Capital Budgeting Decision (Real-World Case Studies)

With the instructions he received from Ato a) Description of the Case

Nesru, Mehretu immediately started to conduct a
stand- alone risk evaluation of the project with the
sensitivity analysis and scenario analysis techniques.
II. Questions
Assuming that you are Mehretu, answer the
following questions:
1. Calculate Dashen’s WACC using the data in Exhibit
1.
2. Calculate the project’s cash flows using the data in
Exhibit 2. Why is it important to take into account
The capital budgeting decision is one of the
most important financial decisions in business firms. In
this case, DASHEN BANK (DB) is considering whether
to invest in a new system. To determine if the project is
profitable, DB must first determine the weighted average
cost of capital to finance the project. The simple
payback period, discounted payback period, net
present value (NPV), internal rate of return (IRR), and
modified internal rate of return (MIRR) techniques are
used to study the profitability of the project. MIRR is a
relatively new capital budgeting technique, which

2016
assumes that the reinvestment rate of the project’s
the effect of inflation in forecasting the cash flows?
intermediary cash flows is the firm’s cost of capital. The
Briefly comment.

Year
stand- alone risk of the project is evaluated with the
3. Evaluate the profitability of the project with the
sensitivity analysis and scenario analysis techniques
NPV, IRR, MIRR, simple payback period, and
assuming that Bank the new product would not affect 23
discounted payback period methods. Is the
the current market risk of the company. The case gives
project acceptable? Briefly explain. Why is the

Global Journal of Management and Business Research ( C ) Volume XVI Issue VII Version I
an opportunity to use the theoretical profitability and risk
NPV method superior to the other methods of
analysis techniques explained in standard finance
capital budgeting? Briefly explain.
textbooks in a real- world setting. The case is best
4. Conduct the stand-alone risk analysis of the
suited for Masters of Business Administration and
project with the sensitivity analysis and scenario
Master of Accounting is expected to take approximately
analysis techniques. Explain why sensitivity
three to four hours to compete. The case may also be
analysis and scenario analysis can be useful
appropriate for undergraduate senior finance majors.
tools in the capital budgeting decision-making
process when economic and financial conditions
are likely to change in the future.
Answers
Question 1: Calculate Dashen Bank’s WACC using the data in Exhibit-1
Solution 1:
Cost of Debt:
Cost of debt (rd) = 9%, after-tax cost of debt, rdT = rd (1-T) = 9 %( 1-0.3) = 6.3%
Cost of Preferred Stock:
rps = Dps / Pps (1 – F) = (0.09)(Br.100) / (Br.102)(1 - 0.07)
= Br.9 / Br.94.86 = 9.48%
Cost of Common Equity:
CAPM: rs = rRF + (RPM) b = 0.02 + (0.06) (1.2) = 9.2%
DCF: rs = [D0(1 + g) / P0] + g = [Br.1(1 + 0.05) / Br.19.08] + 0.05 = 10.5%
Own-Bond Yield-Plus-Risk Premium:
rs = rd + Bond RP = 0.09 + 0.035 = 12.5%
Cost of retained earnings (average rs):
Av. rs = (9.2% + 10.5% + 12.5%) / 3 = 10.73%
Cost of new common stock(re)
re= [D0(1 + g) / P0(1-F)] + g= Br.1(1+0.05) / 19.08(1 - 0.1)+0.05 = 11.11%

Weighted Average Cost of Capital (WACC):

WACC = wd rd (1 – T) + wps rps + wre rs + wncs re = (0.3)(0.09)(1 – 0.3) + (0.1)(0.0948)
+(0.6)(95,000/219,000)(0.1073) + (0.6)(124,000/219,000)(0.1111) = 9.404%

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 Dashen Bank Share Company: Capital Budgeting Decision (Real-World Case Studies)

Question 2: Calculate the project’s cash flows using the data in Exhibit 2. Why is it important to take into account
the effect of inflation in forecasting the cash flows? Briefly comment.
Solution 2: Annual revenue and cost estimates (assume 10% inflation rate):
Year 1 Year 2 Year 3 Year 4
Customers 100,000 100,000 100,000 100,000
Unit Price Birr 5.00 Br.5.50 Br.6.05 Br.6.655
Unit Cost 3.00 3.30 3.63 3.993
Sales Br.500,000 Br.550,000 Br.605,000 Br.665,500
Costs 300,000.00 330,000.00 363,000 399,300

Depreciation:
2016

Year 1 25% x Br.365,000 = Br.91,250

Year 2 25% x Br.365,000 = Br.91,250
Year

Year 3 25% x Br.365,000 = Br.91,250

24 Year 4 25% x Br.365,000 = Br.91,250
Operating cash flows
Global Journal of Management and Business Research ( C ) Volume XVI Issue VII Version I

Year 1 Year 2 Year 3 Year 4

Sales Br.500,000.00 Br.550,000.00 Br.605,000 Br.665,500
Costs 300,000.00 330,000.00 363,000 399,300
Depreciation Br.91,250 Br.91,250 Br.91,250 Br.91,250
EBIT Br.108,750 128,750 150,750 174,950
Tax (30%) 32,625 38,625 45,225 52,485
NOPAT 76,125 90,125 105,525 122,465
Add Depreciation Br.91,250 Br.91,250 Br.91,250 Br.91,250
Net Operating Cash Flow Br.167,375 Br.181,375 196,775 213,715

Net operating working capital (NOWC) requirement

Year 0 Year 1 Year 2 Year 3 Year 4
Sales Br.500,000.00 Br.550,000.00 Br.605,000 Br. Br.665,500
NOWC (15% of sales) Br.90,000 99,000 108,000 119,700
CF due to NOWC (90,000) (9,000) (9,000) (11,700) 119,700
Salvage value: (Br.80,000)(1 – 0.3) = Br.56,000.00
Project net cash flows
Year 0 Year 1 Year 2 Year 3 Year 4
Initial Investment (Br.365,000)
Operating Cash Flows Br.167,375 Br. 181,375 Br. 196,775 Br. 213,715
CF due to NOWC (90,000.00) (9,000) (9,000) (11,700) 119,700
Salvage Cash Flow Br.56,000.00
Net Cash Flows (Br.455,000) Br. 158,375 Br. 172,375 Br. 185,075 Br. 389,415

IRR=43.858% @ this point NPV= 0, because the Sum of PV @ rate minus CF0 =0
The discount rate generally includes an inflation acceptable? Briefly explain. Why is the NPV method
premium. If the cash flows are not adjusted for inflation, superior to the other methods of capital budgeting?
the project’s NPV would be understated. Briefly explain.
Question 3: Evaluate the profitability of the project with Solution 3: The result is computed using the FV/PV
the NPV, IRR, MIRR, simple payback period, and charts, a financial calculator/ an Excel spreadsheet in
discounted payback period methods. Is the project the calculation of the NPV, IRR and MIRR.
NPV = Br.246, 930.2 Simple Payback Period = 2.184 years
IRR = 43.858% Discounted Payback Period = 2.539years
MIRR = 19%
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 Dashen Bank Share Company: Capital Budgeting Decision (Real-World Case Studies)

The NPV technique is superior to the other
techniques of capital budgeting. The goal of financial
management is to maximize the market value of the firm.
The NPV of a project shows the contribution of the
project to the market value of the firm. The NPV
method’s reinvestment rate assumption is also more
realistic compared with the IRR method.
Question 4: Conduct the stand -alone risk analysis of
the project with the sensitivity analysis and scenario
analysis techniques. Explain why sensitivity analysis and
scenario analysis can be useful tools in the capital
budgeting decision-making process when economic
flows as in Question 2 and 3 above but a higher
discount rate to find the project’s NPV.)
NPV@10.404%= Br.229, 500.98
Assume that WACC is 1 percentage point lower
(9.404% -1%=8.404%): (Use the same cash flows as in
Question 2 and 3 above but a lower discount rate to find
the project’s NPV. )
NPV @8.404% = Br.265,051.86
Assume that the project’s sales revenues and
costs (excluding depreciation) are 10% higher:
(Calculate new cash flows and find the NPV of the
project using the base WACC calculated in Answer 1).

2016
and financial conditions are likely to change in the
future.

Year
Solution 4: Assume that WACC is 1 percentage point
higher (9.404%+1%= 10.404%): (Using the same cash
25
Year 1 Year 2 Year 3 Year 4

Global Journal of Management and Business Research ( C ) Volume XVI Issue VII Version I
Sales Br.550,000.00 Br.605,000.00 Br.665,500 Br.732,050
Costs 330,000.00 363,000.00 399,300 439,230
Depreciation Br.91,250 Br.91,250 Br.91,250 Br.91,250
EBIT 128,750 150,750 174,950 201,570
Tax (30%) 38,625 45,225 52,485 60,471
NOPAT 90,125 105,525 122,465 141,099
Add Depreciation Br.91,250 Br.91,250 Br.91,250 Br.91,250
Net Operating Cash Flow Br.181,375 196,775 213,715 232,349

Net Operating Working Capital (NOWC) Requirement:

Year 0 Year 1 Year 2 Year 3 Year 4
Sales Br.550,000.00 Br.605,000.00 Br.665,500 Br.732,050
NOWC (15% of sales) 99,000 108,000 119,700 131,769
CF due to NOWC (99,000) (9,000) (11,700) (12,069) 131,769

Project net cash flows

Year 0 Year 1 Year 2 Year 3 Year 4
Initial Investment (Br.365,000.00)
Operating Cash Flows Br.181,375 196,775 213,715 232,349
CF due to NOWC (99,000) (9,000) (11,700) (12,069) 131,769
Salvage Cash Flow 56,000.00
Net Cash Flows ( 464,000) 172,375 185,075 201,646 420,118

NPV @ 9.404%= Br. 295,423.23 (Calculate new cash flows and find the project NPV
Now, assume that the project’s sales revenues using the base WACC calculated in Answer 1).
and costs (excluding depreciation) are 10% lower:
Operating cash flows

Year 1 Year 2 Year 3 Year 4

Sales Br. 450,000 Br. 495,000 Br. 544,500 Br.598,950
Costs Br.270,000 Br.297,000 Br.326,700 Br.359,370
Depreciation Br.91,250 Br.91,250 Br.91,250 Br.91,250
EBIT Br.88,750 Br. 106,750 Br. 126,550 Br. 148,330
Tax (30%) Br.26,625 Br. 32,025 37,965 44,499

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 Dashen Bank Share Company: Capital Budgeting Decision (Real-World Case Studies)

NOPAT Br.62,125 Br. 74,725 Br.88,585 Br.103,831

Add Depreciation Br.91,250 Br.91,250 Br.91,250 Br.91,250
Net Operating Cash Flow 153,375 Br.165,975 Br.179,835 Br. 195,081

Net Operating Working Capital (NOWC) Requirement

Year 0 Year 1 Year 2 Year 3 Year 4
Sales Br450,000 Br.495,000 Br. 544,500 Br.598,950
NOWC (15% of sales) Br.81,000 Br.89,100 Br.98,010 Br.107,811
CF due to NOWC (81,000) (Br. 8,100) (8,910) (Br.9,801) Br.107,811

Project net cash flows

2016

Year 0 Year 1 Year 2 Year 3 Year 4

Initial Investment (Br.365,000.00)
Year

Operating Cash Flows Br.153,375 Br. 165,975 Br.179,835 Br.195,081

26 CF due to NOWC (81,000) (8,100) (8,910) (9,801) 107,811
Salvage Cash Flow 56,000.00
Global Journal of Management and Business Research ( C ) Volume XVI Issue VII Version I

Net Cash Flows (Br. 446,000) Br. 145,275 Br.157,065 Br.170,034 Br.358,892

NPV @ 9.404% = Br. 198,373.25

Best-Case Scenario: Sales revenues and costs above with 10% higher revenues, 10 % higher costs,
(excluding depreciation) are 10% higher, and WACC is and discounts these cash flows to the present by using
1 percentage point lower. (the cash flows calculated 9.404%-1%=8.404% discount rate (new WACC):

Year 0 Year 1 Year 2 Year 3 Year 4

Cash Flows: (464,000) Br.172,375 Br.185,075 Br.201,646 Br. 420,118

NPV @ 8.404% = Br. 315,014.85 above with 10% lower revenues, 10 % lower costs , and
discounts these cash flows to the present by using
Worst-Case Scenario: Sales revenues and costs
9.404%+1%= 10.404% discount rate (new WACC):
(excluding depreciation) are 10% lower, and WACC is 1
percentage point higher. (the cash flows calculated
Year 0 Year 1 Year 2 Year 3 Year 4
Cash Flows: (Br. 446,000) Br. 145,275 Br.157,065 Br.170,034 Br.358,892

(Exchange rate $1= Ethiopian Birr 22)

NPV @ 10.404% = Br.182, 353.95E(NPV) = (0.3)(Br. 182,353.95) + (0.5)(Br. 246, 930.2) + (0.2)(Br.315,014.85) =
Br.241,174.25
σNPV = [(Br.182,353.95- Br. 241,174.25)2 (0.3) + (Br.246, 930.2- Br. 241,174.25)2 (0.5) + (Br. 315,014.85- Br.
241,174.25)2 (0.2)]1/2 = Br.46,314.15
CV(NPV) = Br. 241,174.25/ Br. 46,314.15= 5.207
Sensitivity analysis and scenario analysis can
be useful tools in the capital budgeting decision-
making process when economic and financial
conditions are likely to change in the future.

References Références Referencias

1. Ehrhardt and Brigham. (2011), Financial Manage-
ment: theory and practice, 13th edition.

© 2016
1 Global Journals Inc. (US)