Capital Budgeting and BEP related maths

NPV, IRR, PBP

Case 1: Investing in a New Manufacturing Plant
A manufacturing company in Bangladesh plans to invest BDT 1 billion in a new plant. The plant
is expected to generate annual cash inflows of BDT 300 million for 5 years. At the end of year 5,
the plant will have a salvage value of BDT 100 million. The company uses straight-line
depreciation over the 5-year period with no residual value for tax purposes. The corporate tax
rate is 25%, and the required rate of return is 10%.
Questions:
1. Calculate the annual depreciation expense for tax purposes.
2. Determine the after-tax cash inflows considering tax savings from depreciation.
3. Compute the NPV of the project.
4. Should the company accept or reject the project based on NPV?
5. If the project’s IRR is 12%, should the company proceed with the investment?
Case 2: Expansion of a Fleet for a Logistics Company
A logistics company is considering purchasing 10 new trucks for BDT 50 million. The trucks will
be used for 6 years, after which they will be sold for an estimated salvage value of BDT 5 million.
The company expects an additional annual cash inflow of BDT 12 million due to increased
operations. The trucks will be depreciated using the straight-line method over 6 years. The
corporate tax rate is 30%, and the discount rate is 12%.
Questions:
1. Calculate the depreciation expense per year for tax purposes.
2. Compute the tax shield from depreciation.
3. Determine the after-tax cash inflows considering depreciation and taxes.
4. Calculate the Payback Period (PBP) for the investment.
5. Compute the NPV and IRR for the investment.
6. If another investment option has a shorter payback period but a lower NPV, which
should the company choose?
Case 3: Investment in a Solar Power System
A garments company in Bangladesh is evaluating an investment in a solar power system costing
BDT 120 million. The expected savings in electricity costs will be BDT 35 million per year for 7
years. The system has a salvage value of BDT 10 million at the end of its useful life. The
government offers an accelerated depreciation benefit of 40% in the first year and 20% for
subsequent years. The corporate tax rate is 28%, and the required rate of return is 9%.
Questions:
 1. Calculate the depreciation expense for the first three years.
2. Determine the tax shield from depreciation and its impact on cash flows.
3. Compute the after-tax savings from the investment.
4. Calculate the NPV of the project.
5. If the Payback Period is 4.5 years, should the company accept the investment based on this
criterion?
6. How does the salvage value affect the overall investment decision?
Case 4: Setting Up a New Production Line in an FMCG Company
An FMCG company is considering setting up a new production line at a cost of BDT 500 million.
The production line will have a useful life of 10 years with a salvage value of BDT 50 million.
The expected annual operating profit (before depreciation and tax) is BDT 100 million. The
company uses straight-line depreciation and has a tax rate of 25%. The required rate of return is
11%.
Questions:
1. Calculate the annual depreciation expense for the production line.
2. Determine the after-tax operating profit.
3. Compute the after-tax cash inflows, considering depreciation tax savings.
4. Calculate the NPV and IRR of the project.
5. If the company has another project with a higher IRR but lower NPV, which one should
be prioritized?
Case 5: Replacement Decision – Old vs. New Machine
A furniture manufacturing company is deciding whether to replace its old machine with a new
one. The new machine costs BDT 200 million, has a 5-year life, and will save BDT 60 million per
year in operational costs. The old machine can be sold for BDT 30 million today, but if not
replaced, it will incur maintenance costs of BDT 20 million per year. The new machine will have
a salvage value of BDT 10 million after 5 years. The tax rate is 30%, and the discount rate is
10%.
Questions:
1. Calculate the incremental cash flows from replacing the old machine.
2. Determine the tax implications of selling the old machine.
3. Compute the Payback Period (PBP) for the new machine.
4. Calculate the NPV and IRR for the new machine investment.
5. Should the company replace the old machine based on capital budgeting analysis?
 BEP
Case 1: Break-Even Analysis for a Startup Café
A young entrepreneur in Dhaka plans to open a small café. The estimated monthly fixed costs
(rent, salaries, utilities) are BDT 500,000. The variable cost per cup of coffee (ingredients,
packaging) is BDT 50, and the selling price per cup is BDT 120.
Questions:
1. Calculate the Break-Even Point (BEP) in terms of units (cups of coffee).
2. If the café expects to sell 10,000 cups per month, what will be the profit or loss?
3. What happens to the break-even point if the rent increases by 20%?
4. How can the business reduce its BEP without increasing the price?
Case 2: BEP for a Garment Manufacturing Unit
A garment factory in Bangladesh produces T-shirts. The fixed costs (machinery, salaries, rent)
are BDT 2,000,000 per month. The variable cost per T-shirt (fabric, labor, packaging) is BDT
200, and the selling price per unit is BDT 350.
Questions:
1. Calculate the Break-Even Point (BEP) in terms of T-shirts produced.
2. If the company increases the selling price to BDT 400, how does this affect the BEP?
3. What strategies can the company use to reach profitability faster?
4. How would outsourcing production affect BEP if it reduces fixed costs by 25% but
increases variable costs by 10%?
Case 3: BEP for a Mobile Phone Distributor
A mobile phone distributor in Bangladesh has fixed monthly costs (warehouse, salaries,
advertising) of BDT 5,000,000. Each phone costs BDT 8,000 to purchase, and it is sold for BDT
12,000.
Questions:
1. Determine the Break-Even Point (BEP) in units (phones sold).
2. If the distributor wants to make a profit of BDT 2,000,000 per month, how many phones
must be sold?
3. If a competitor offers discounts and the distributor reduces the selling price to BDT 11,000,
how will the BEP change?
4. Should the distributor focus on increasing sales volume or reducing fixed costs to improve
profitability?
Case 4: BEP for a Software Company
A software company in Dhaka develops a subscription-based accounting software for small
businesses. The fixed costs (developer salaries, server costs, office expenses) are BDT 1,200,000
per month. The company charges BDT 1,500 per month per user, with BDT 300 as variable costs
per user (customer support, hosting).
Questions:
1. Calculate the Break-Even Point (BEP) in terms of number of users.
2. If the company wants to achieve BDT 500,000 in monthly profit, how many users are
needed?
3. How does offering a 20% discount to attract new users impact BEP?
4. What non-pricing strategies can the company use to improve profitability while keeping
BEP low?
Case 5: BEP for an E-commerce Business
An e-commerce startup sells fashion accessories online. The business has fixed costs (website
maintenance, warehousing, marketing) of BDT 800,000 per month. The variable cost per item
(procurement, packaging, delivery) is BDT 300, and the average selling price per item is BDT
700.
Questions:
1. Calculate the Break-Even Point (BEP) in terms of units (items sold).
2. If the company decides to increase spending on marketing by BDT 200,000, how does this
affect BEP?
3. What happens if delivery costs increase, raising the variable cost per unit to BDT 350?
4. Should the company focus on increasing sales volume or improving margins to reduce
BEP?
Case 6: BEP for a Dairy Farming Business
A dairy farm in Bangladesh produces packaged milk. The fixed costs (cattle maintenance, rent,
salaries) are BDT 1,500,000 per month. The cost of producing one liter of milk (feed, processing,
packaging) is BDT 40, and it is sold for BDT 70 per liter.
Questions:
1. Determine the Break-Even Point (BEP) in liters of milk.
2. If the farm sells 60,000 liters per month, what is the profit or loss?
3. Due to rising feed costs, the variable cost increases to BDT 50 per liter. How does this
impact BEP?
4. What strategies can the dairy farm use to keep BEP low despite increasing costs?
 Financial Ratios
Case 1: Liquidity Analysis of a Retail Business
A chain of supermarkets in Bangladesh is experiencing cash flow issues. The following financial
data is available:
• Current Assets = BDT 8 million
• Current Liabilities = BDT 5 million
• Inventory = BDT 2 million
• Accounts Receivable = BDT 1.5 million
Questions:
1. Calculate the Current Ratio and Quick Ratio.
2. If industry benchmarks suggest a current ratio of 2.0 is ideal, how does this company
compare?
3. What strategies can the company use to improve liquidity?
4. If the company delays payments to suppliers to increase cash reserves, how will that
impact the liquidity ratios?
Case 2: Profitability Ratios for a Garment Factory
A garment manufacturer in Bangladesh reported the following financial data for the year:
• Revenue = BDT 100 million
• Cost of Goods Sold (COGS) = BDT 60 million
• Operating Expenses = BDT 20 million
• Net Income = BDT 12 million
Questions:
1. Calculate the Gross Profit Margin, Operating Profit Margin, and Net Profit Margin.
2. If a competitor has a higher net profit margin, what could be the possible reasons?
3. What steps can the company take to improve its profit margins?
4. How would a 10% increase in raw material costs impact profitability?
Case 3: Efficiency Ratios for an Electronics Distributor
An electronics distributor wants to assess how efficiently it manages assets and inventory. The
financial data is as follows:
• Revenue = BDT 50 million
• Cost of Goods Sold (COGS) = BDT 30 million
• Average Inventory = BDT 6 million
• Accounts Receivable = BDT 4 million
• Total Assets = BDT 40 million
Questions:
1. Calculate the Inventory Turnover Ratio and Accounts Receivable Turnover Ratio.
2. If the industry standard for inventory turnover is 8 times per year, how does this
company compare?
3. How can the company improve its asset utilization?
4. If the company offers more credit sales to customers, how will that affect efficiency
ratios?
Case 4: Solvency Ratios for a Construction Company
A construction firm in Bangladesh is evaluating its long-term financial stability. The financial
data is:
• Total Debt = BDT 200 million
• Total Equity = BDT 150 million
• EBIT (Earnings Before Interest & Taxes) = BDT 50 million
• Interest Expense = BDT 10 million
Questions:
1. Calculate the Debt-to-Equity Ratio and Interest Coverage Ratio.
2. If the industry average Debt-to-Equity Ratio is 1.0, is the company over-leveraged?
3. How would taking an additional BDT 50 million loan impact solvency?
4. What steps can the company take to reduce financial risk?
Case 5: Market Ratios for a Publicly Listed Telecom
Company
A telecom company listed on the Dhaka Stock Exchange has the following financial data:
• Net Income = BDT 500 million
• Total Shares Outstanding = 50 million
• Market Price per Share = BDT 120
• Dividends Paid = BDT 150 million
Questions:
1. Calculate the Earnings Per Share (EPS) and Price-to-Earnings (P/E) Ratio.
2. If a competitor has a higher P/E ratio, what does that indicate?
3. Calculate the Dividend Payout Ratio and discuss its significance.
4. If the company increases its dividends, how might that impact investor confidence?
Case 6: Return on Investment (ROI) for a Startup
A tech startup in Bangladesh invested BDT 10 million in software development. After 3 years,
the startup's valuation increased, and it reported the following financials:
• Annual Net Profit = BDT 3 million
• Total Investment = BDT 10 million
Questions:
1. Calculate the Return on Investment (ROI).
2. If the industry average ROI for tech startups is 25%, how does this startup compare?
3. What strategies can the startup use to improve its ROI?
4. If the company reinvests its profits instead of distributing them, how might that affect
future growth?
Case 1: Liquidity Ratios for a Restaurant Chain
A newly established restaurant chain in Dhaka is reviewing its financial health. Below is its
financial data:
• Current Assets = BDT 2,000,000
• Current Liabilities = BDT 1,200,000
• Inventory = BDT 500,000
• Accounts Receivable = BDT 300,000
Key Ratios:
1. Current Ratio = Current Assets / Current Liabilities
2. Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Questions:
1. Calculate the Current Ratio and Quick Ratio for the restaurant.
2. If the industry standard Current Ratio is 2.0, how does this business compare?
3. How can the restaurant improve its liquidity position?
4. If accounts receivable increase by BDT 200,000, how will that affect liquidity ratios?

Case 2: Profitability Ratios for a Manufacturing Business

A textile manufacturing company in Bangladesh has the following financial data:
• Revenue = BDT 10,000,000
• Cost of Goods Sold (COGS) = BDT 6,000,000
• Operating Expenses = BDT 1,500,000
• Net Income = BDT 1,200,000
Key Ratios:
 3. Gross Profit Margin = (Revenue - COGS) / Revenue
4. Operating Profit Margin = (Revenue - Operating Expenses) / Revenue
5. Net Profit Margin = Net Income / Revenue
Questions:
1. Calculate the Gross Profit Margin, Operating Profit Margin, and Net Profit Margin.
2. If a competitor has a higher net profit margin, what could be the reasons?
3. How would a 10% increase in raw material costs impact profitability?
4. What strategies can improve profit margins?
Case 3: Efficiency Ratios for an E-commerce Startup
An e-commerce startup selling fashion accessories has the following financials:
• Revenue = BDT 5,000,000
• Cost of Goods Sold = BDT 2,500,000
• Inventory = BDT 500,000
• Accounts Receivable = BDT 600,000
• Total Assets = BDT 3,500,000
Key Ratios:
6. Inventory Turnover Ratio = COGS / Average Inventory
7. Accounts Receivable Turnover Ratio = Revenue / Accounts Receivable
8. Asset Turnover Ratio = Revenue / Total Assets
Questions:
1. Calculate the Inventory Turnover Ratio, Accounts Receivable Turnover Ratio, and
Asset Turnover Ratio.
2. If the industry benchmark for Inventory Turnover is 8 times, how does this business
compare?
3. How can the company improve its efficiency in managing inventory?
4. If customers start delaying payments, how will this impact the company’s liquidity and
efficiency?
Case 4: Solvency Ratios for a Construction Firm
A construction firm in Bangladesh has the following data:
• Total Debt = BDT 50 million
• Total Equity = BDT 40 million
• EBIT (Earnings Before Interest & Taxes) = BDT 10 million
• Interest Expense = BDT 2 million
Key Ratios:
9. Debt-to-Equity Ratio = Total Debt / Total Equity
 10. Interest Coverage Ratio = EBIT / Interest Expense
Questions:
1. Calculate the Debt-to-Equity Ratio and Interest Coverage Ratio.
2. If the industry average Debt-to-Equity Ratio is 1.5, how does this company compare?
3. How would taking an additional BDT 10 million loan affect solvency?
4. What steps can the company take to reduce financial risk?
Case 5: Market Performance Ratios for a Publicly Traded
Tech Company
A tech company listed on the Dhaka Stock Exchange (DSE) reports:
• Net Income = BDT 80 million
• Total Shares Outstanding = 10 million
• Market Price per Share = BDT 150
• Dividends Paid = BDT 20 million
Key Ratios:
11. Earnings Per Share (EPS) = Net Income / Total Shares Outstanding
12. Price-to-Earnings (P/E) Ratio = Market Price per Share / EPS
Questions:
1. Calculate the Earnings Per Share (EPS) and P/E Ratio.
2. If the company’s P/E ratio is lower than competitors, what does that indicate?
3. How does increasing dividend payments impact investor confidence?
4. Should the company focus on higher dividends or reinvesting profits for growth?