Cost of capital Computation: Risk Free Rate Risk Premium Beta Cost of Equity Cost of Debt Tax Rate

Debt/Total Capital (Target) Equity/Total Capital (Target) Weighted Average Cost of Capital (nominal) Inflation Rate Weighted Average Cost of Capital (real) Evaluation of Alternative Proposals (a) Expansion (with single large capacity) PBDIT Tax Cash Inflow PV CIF Total PV of CIF 1 2 3 4 80 100 150 150 0 0 0 0 80 100 150 150 73.24 83.81 115.09 105.37 846.956248 PV CIF PV COF NPV Probability 846.96 500.00 346.96 0.70 338.78 500.00 -161.22 0.30 Existing Business 6% 8% 1.4 17.20% 10% 0% 50% 50% 13.60% 4.00% 9.23% Hotel Project 6% 8% 1.2 15.60% 10% 0% 50% 50% 12.80% 4.00% 8.46% This real discount rate is applicable since

Project working on full capacity Project working at 40% capacity Net Present Value Note: There is a 30% chance that the project will end up with negative NPV. (b) Expansion (in two stages)

1 2 3 4 Cash Inflow with 40% capacity for the project 32.00 40.00 60.00 60.00 PV CIF 29.30 33.53 46.04 42.15 NPV of project with phase 1 only 138.78 If phase 2 of the project is implemented, the incremental cash flow is as follows Cash Inflow with 40% capacity, 100% capacity 0.00 0.00 -400.00 90.00 PV CIF 0.00 0.00 -306.92 63.22 NPV of phase 2 of the project 37.97 How do we compare Option (a) and Option (b)? Total NPV 150.17 Worst Case Best Case By selecting option (b), you are avoiding loss of 161.2 an opportunity to earn additional 170.21 Is it worth to give up an opportunity proft of 170.21 t What will be your reaction if you know that the proba and getting additional income is 70%?

(c) Hotel Project NPV of Hotel Project PBDIT No of years PV of PBDIT (cash inflow) Project Cash Outflow NPV of Hotel Project (d) NPV of continuing the risk-free bond investments (e) NPV of paying Dividend

Suppose you are participating in a game where the en if you win, you will get a prize of 170 and if you loose, Assume some probabilities values for win and loose a 100.00 30.00 1078.48 800.00 278.48 Zero Zero

(The appropriate discount rate is risk-free rate and he

Decision: Go with Hotel Project

This real discount rate is applicable since cash flows are in real terms.

5 150 0 150 96.46 Expected Value 242.87 -48.37 194.50

6 150 0 150 88.31

7 150 0 150 80.85

8 150 0 150 74.02

9 150 0 150 67.76

10 150 0 150 62.04

5 60.00 38.59

6 60.00 35.32

7 60.00 32.34

8 60.00 29.61

9 60.00 27.10

10 60.00 24.81

90.00 57.88

90.00 52.99

90.00 48.51

90.00 44.41

90.00 40.66

90.00 37.22

do we compare Option (a) and Option (b)? Option (a) Option (b) -161.22 138.78 346.96 176.75 170.21 lecting option (b), you are avoiding loss of 161.22 by giving up portunity to earn additional 170.21 worth to give up an opportunity proft of 170.21 to avoid loss of 161.22? will be your reaction if you know that the probability of loosing money is 30% etting additional income is 70%?

ose you are participating in a game where the entry ticket is 161. win, you will get a prize of 170 and if you loose, you will get zero. me some probabilities values for win and loose and examine.

appropriate discount rate is risk-free rate and hence NPV is zero)