Assignment

Introduction:
Berger is well known brand established two centuries ago and now considered world
large paint manufacturer. In Pakistan Berger starts operations in 1950s now becoming
the most popular brand among all.
Berger become public limited when a Pakistani investor bought 49.3% of equity shares
whereas 50.6% owned by Jan sons and Nicholson Limited.
Initially Berger started its manufacturing operation in Karachi in 1955. It grow
economically and industrially but maintaining quality and expansion of its product.
Berger Plc (public limited) also start its operation in Lahore in 2006, it was comparative
move to take (advantage) edge over market share.
Berger grow by meeting its customer demand. It is arguably said that they are
manufacturing by focusing customers. Traits of Berger maintain quality.
All the operations they are carrying out are quality focus.
Analytically Berger has focused on different market quality and price wise by
differentiating products.
Quality is maintained through consistent skills and technology that cause success over
its competitors.
Berger is paint manufacturing company and it entered in many contracts of technical
nature with leading international manufacturing like Japan who make Berger capable of
automotive, vehicle, refinishes.
Berger has entered into a number of technical collaboration arrangements with leading
international manufacturers. These include the largest paint company in Japan, which
enables Berger to develop Automotive, Vehicle Refinishes and Industrial Paints
conforming to international standards; a Japanese chemical company, for Bumper
Paints; PCS Powders, UK for Powder Coatings; DPI Sendirian Berhad, Malaysia for
Road & Runway Markings; Cerachem for Construction Chemicals and Asian Paints for

Assignment

Decorative Paints. Recently, Berger acquired distribution rights of DuPont for Pakistans
vehicle refinish paint segment.[reference ..]

Mission
Despite many challenges, Berger Paints has succeeded in staying at the forefront of
Pakistans paint industry.
Innovation and technological development has enabled the company to achieve
corporate success through its
commitment to provide products of the highest quality and ensuring the ultimate
satisfaction of customers.
The companys employees are constantly encouraged to pursue the Corporate Mission
Statement:
We will stay at the forefront of innovation and technological development in the paint
industry.
We will achieve corporate success through an unwavering commitment to provide our
customers high quality
products to their ultimate satisfaction.
We will vigorously promote and safeguard the interests of our employees, our
shareholders, our suppliers and all
business associates.
We will play our role as a good corporate citizen and serve community where we do
business.[Reference]

Certificate
As an ISO-9001-2000 certified company Berger continues to upgrade and improve its
range by introducing innovative products in line with consumer needs.
Berger is not only a paint company it also provide different home solution
such as construction, free color solutions and professional color scheme
to make your home looking different.

Assignment

Berger is providing advice for color selection that consumer should use for
their products. It is ethical work they are giving to their consumer to show
their loyalty.
Health and safety is main concern. Safe employees work with concern
and diligence and the good thing is that they have make it part of the
objective. In Pakistan where health and safety are legal obligation but
many companies do not observe it. Berger makes sure that their
employees are safe and working in good environment. Ecologically they
are maintaining their standards as legal and constructive obligation.
Berger organize safety training programs to make their employees safety
handlers and in case of safety hazards their employees can deal such
situations.
For all safety measures they ensure through safety control officers and
safety auditors, such things give confidence to their working team. Team
is like family working and carrying their operations.

Assignment

Proposed Project Data

HDW Co is a listed company which plans to meet increased demand for its
products by buying new machinery costing
$5 million. The machinery would last for four years, at the end of which it would
be replaced. The scrap value of the
machinery is expected to be 5% of the initial cost. Capital allowances would be
available on the cost of the machinery
on a 25% reducing balance basis, with a balancing allowance or charge claimed
in the final year of operation.
This investment will increase production capacity by 9,000 units per year and all
of these units are expected to be
sold as they are produced. Relevant financial information in current price terms is
as follows:
Forecast inflation
Selling price $650 per unit 40% per year
Variable cost $250 per unit 55% per year
Incremental fixed costs $250,000 per year 50% per year
In addition to the initial cost of the new machinery, initial investment in working
capital of $500,000 will be required.Investment in working capital will be subject
to the general rate of inflation, which is expected to be 47% per year. HDW Co
pays tax on profits at the rate of 20% per year, one year in arrears. The company
has a nominal (money terms) after-tax cost of capital of 12% per year.
Net Cash flow of company in five years time will be:
$000

3423

3083

3102

3387

(379)

Assignment

Payback Period (PBP)

Payback period is the basic technique of capital investment appraisal and can be
defined as, time period to recover the initial investment.
Company have uneven cash flows so, payback period will be calculated by using
cumulative cash flow table.
$000

Net Cash
Flows

(5000)

3423

3083

3102

3387

(379)

Cumulative (5000)

1577

Cash Flow

1577 x12months= 1 year and six month

3083
Acceptance Criteria
There are two type Acceptance Criteria:
1. If more than one project than take a project which has shorter payback period.
2. If only one project is given than company target should be considered if project is
within company target than accept the project otherwise reject.

Assignment

The company has only a one project so in a calculation if companys intension to

recover its initial investment within three years, the proposal should be accepted
because project recover initial investment in one year and six month.

Advantage of Payback period and disadvantage of payback period

Advantage

Disadvantage

It is simple and easy to understand.

It ignore time value of money.

It gives focus on liquidity to making

It paid more attention on liquidity and

decision about the investment proposals.

ignore profitably.

Payback period deals with risk so project

Only cash flow before payback period is

which has short payback period is

taking into account while cash flow

considered as less risky as compared to

occurred after payback period is ignored.

project which has large payback period.

Assignment

NPV of Investment in new machinery

Year

$000

$000

$000

$000

$000

6084

6327

6580

6844

(2374)

(2504)

(2642)

(2787)

Contribution

3710

3823

3938

4057

Fix Cost

(263)

(276)

(289)

(304)

Cash Flow

3447

3547

3649

3753

Taxation

(689)

(709)

(730)

(751)

250

188

141

372

3447

3108

3128

3164

(379)

(24)

(25)

(26)

(27)

Sales
Income
Variable
Cost

Capital
Allowance
Tax Benefit
After Tax
Cash Flows
Working
Capital
Scrap Value
Net Cash

250
3423

3083

3102

3387

(379)

.098

.797

.712

.636

.567

Flows
Discounted
@12%

Assignment

Present

3057

2457

2208

2154

(215)

Value

Present Value of Future Cash Flows

9662

Initial investment

(5000)

Working Capital

(500)

NPV

4162

Workings
Workings
Year
Selling

67600

70304

73116

76041

Sales
(units/year)

9,000

9,000

9,000

9,000

Sales income
($000)

6,084

6,327

6,580

6,844

price ($/unit)

Year

Variable cost
($/unit)

26375

27826

29356

30971

Sales
(units/year)

9,000

9,000

9,000

9,000

Variable cost
($000)

2,374

2,504

2,642

2,787

Year

$000

$000

$000

$000

Assignment

Capital
allowance

1,2500

9375

7031

1,8594

Tax benefit

250

188

141

372

$000

$000

$000

$000

Working capital

52350

54811

57387

60084

Incremental

24

25

26

27

Year

Acceptance Criteria
As the NPV of $4.161 million is positive, the expansion can be recommended as
financial acceptable.
Discussion about NPV
NPV is the advance technique of capital investment appraisal, it can be defined as, the
sum of the discounted cash flows less initial investment.
However, when calculating NPV of a project following things should be considered,
Relevant costing to calculate NPV

Future
Cash
Incremental
Cash flows connected with implementation of decision

Exception
Opportunity cost (scarification of future benefit)
Include,

Purchase price
Material cost
Wages cost

Assignment

Variable overhead
Fix overhead (only incremental FOH)

Irrelevant cost

Sunk cost
Committed cost
Notional cost
Un-avoidable cost

These cost are irrelevant to calculate NPV.

Advantage of NPV
The main advantage of NPV is that it evaluates projects in the same way as,
shareholders would do. It focus on how individual projects would affect shareholders
wealth this means only those projects with positive NPV will be accepted that will
increase shareholders wealth.
Also it considered time value of money and taking into account all cash flows.

Explanation of calculation
In the calculation of net present value in part a company is using money cash flow
technique due to inflation.it is a approach to investment appraisal discounts nominal
cash flows with a nominal cost of capital.
Nominal cash flow are founded by inflating forecast value from current price estimates
i.e. using a specific inflation.
Applying a specific inflation means that different projects cash flows are inflated by
different inflation rates in order to generate nominal project cash flows.
NPV Graph
NPV profile is a graph that shows a project NPV against variance discount rate.
Construction

Assignment

To construct a graph of NPV profile first calculate NPV using different cost of capital
assumptions and then plot these figures on graph i.e. NPV on Y-axis, cost of capital on
X-axis.