CAPITAL BUDGETTING DECISIONS

Any investment decision depends upon the decision rule that is applied under circumstances and it has
the following inputs; project life, cashflows and discounting factor. The effectiveness of the decision rule
depends on those factors.

CHARACTERISTICS OF CAPITAL BUDGETTING DECISIONS

i. They are very expensive to undertake.

ii. They are long term in nature.
iii. They are very risky and uncertain.
iv. They are complex and difficult decisions to undertake.
v. They are always irreversible
vi. They affect the liquidity position of the company.

CAPITAL BUDGETTING PROCESS

i. Project identification and generation- this is a proposal for investments. There could be various
reasons for taking up investments in a business. It could be addition of a new product line or
expanding the existing ones. It could be a proposal to either increase the production or reduce
the cost of outputs.
ii. Project screening and evaluation- this step looks at the viability of the investment whether it
matches with the organization’s objectives. Also, the estimation of the benefits and the cost
needs to be done.
iii. Project selection- this highly depends on the screening and valuation phase. Once the proposal
is finalized they look at the different alternatives of raising or acquiring funds have to be
explored by the finance team i.e. preparing capital budget
iv. Implementation- the selected projected out of the many proposals is put into action and is
constantly monitored.
v. Performance review- this is where comparison of the actual results with the standard ones is
done. Improvements are made where necessary.

There are various factors that may affect capital budgeting;

 Availability of funds
 Capital structure
 Government policy
 Management decisions
 Economic value of the project
 Lending terms of financial institutions
 Capital return
These capital budgeting decisions have various techniques which are grouped into two;

1. UNDER CERTAINITY

This refers to decisions which involve valuation of capital projects in order to make a decision on
whether to undertake them. The finance manager is required to appraise the projects using capital
budgeting appraisal techniques in order to determine their viability

This is also divided into two;

i. Non-discounted/ traditional
a) Payback period

It is the number of years to recover the original cash outlay. There two methods to calculate payback
period;

 When the cashflow is uniform

PBP=Initial cash/annual capital

 When the cashflow is not uniform

In this case the PBP is calculated till the time the cumulative cashflow becomes equal to the initial outlay

Illustration;

Period cashflow cumulative cashflow

0 2800000 2800000
1 800000 800000
2 950000 1750000
3 900000 2650000
4 750000 3400000
5 500000 3900000
6 380000 4280000

150000÷750000*12(months)=2months

=3years 2 months

The money will be recovered after 3 years and only 150000 shillings will be recovered from the 4th year
and it will take 2 months to get it.
Advantages

I. It is simple to calculate and understand.

II. It gives priority to quick recovery of invest in capital assets.
III. It is cost effective and does not require much of the time of finance executives as well as the use
of computers.
IV. Reduces the possibility of loss on account of obsolesces.
V. It’s an adequate measure for firms with adequate internal opportunities

Disadvantages

I. This method ignores the time value of money

II. It considers each investment individually and in isolation with other investments.
III. It overlooks the cost of capital which is the main basis of sound investment decisions
IV. It ignores the returns after the recoupment period.

Uses of payback period method

 It can be used in firms suffering from liquidity problems

 Its very useful for those firms which emphasizes on short run earning performances rather than
its long-term growth.

b) Accounting rate of return/ average rate of return

This method is also known as return on investment and uses accounting information rather than
cashflow information. It is the ratio of the average after tax profit divided by the average investment.

ARR is obtained by;

ARR= (Average income after tax/average initial capital) * 100

Average invested capital= initial capital/2

Average income= total income/ the number of years

Illustration

PERIOD CASHFLOW
1 150000
2 300000
3 350000
4 200000
5 120000
Average income=1120000/5= 224000

Average capital= 1000000/2 = 500000

ARR= (224000/500000) *100 =44.8%

If the ARR is higher than the minimum rate established by the management then the project is accepted
but if its less than the minimum rate then the project is rejected.

Advantages

 It is simple both in concept and application

 This technique takes into account total earnings from the project during its entire economic life.
 This is a method of liquidity. It emphasizes selecting a project with the early recovery of the
investment.

Disadvantages

 It does not consider time value of money

 It simply averages the incomes therefore not taking into account the various impacts of external
factors on profitability of the firm.

ii. Discounted
a) Net present value

This is the difference between the present value of future cash inflows and the present value of the
initial outlay. It is known also as excess present value or net gain method.

NPV= present value of inflows- present value of outflows

These values are discounted using the discounting factor table or by calculation;

𝟏
( ) ^𝒏
𝟏+𝒓
The decision criteria

 Incase NPV is positive the project is accepted

 Incase NPV is negative the project is rejected
 Incase NPV is zero this is a point of indifference so the management can either accept or decline
the project.
Illustration

A firm contemplates to invest sh.600000 in an invest which has the following returns per annum. The
initial cost of capital is 10%. Using NPV advice the management on whether to make the investment.

YEAR CASHFLOW 10% INFLOW

1 300000 0.9091 272730
2 250000 0.8264 206600
3 200000 0.7513 150260
4 180000 0.6830 122940

TOTAL INFLOW= 752530

INITIAL OUTLAY=600000

NPV=752530-600000= 152530

ADVANTAGES

 It recognizes the time value of money

 It takes into account all year’s cash flows arising out of the project over its useful life
 It’s an absolute measure of profitability
 It uses cashflows rather than profits making it reasonable.

DISADVANTAGES

 Difficult to calculate and understand compared to traditional methods

 It may not give satisfactory results in case of two projects having different effective lives
 This method requires estimation of cashflows which is very difficult due to uncertainties
existing in the business world

b) Internal rate of return

This is the interest rate that equates the present value of the expected future cashflows to the present
value of the cash outflow. It is also the rate at which NPV is equated to zero. Its computed using the trial
and error method using the following steps;

 Determine the NPV using the cost of capital given.

 Incase the NPV is positive, choose a higher rate that will change it to negative but incase the
NPV is negative, choose a lower discounting rate to change the NPV to positive.
The formula used is as follows;

IRR= A+(N/P+N) (B-A)

A= Rate with positive NPV

B= Rate with negative NPV

P= Positive NPV

N= Negative NPV

*when calculating the negative sign is assumed

DECISION CRITERIA

 If the IRR is greater than the cost of capital, accept the project (r > k)
 If the IRR is less than the cost capital, reject the project (r < k)

Advantages

 It considers the time value of money

 It takes into account all cashflows generated by any project over the life of the project.
 It is consistent with the overall objective of attaining shareholders wealth maximization.

Disadvantages

 It requires lengthy and complicated calculations

 when the projects under consideration are mutually exclusive IRR may give conflicting results.

c) Profitability index

This is a cost benefit ratio which compares the total present values of cash inflows and the total initial
outlay. Profitability index method is used to run projects under the conditions of capital rationing based
on their profitability.

P.I = Total present value cash inflow/ total initial outlay.

DECISION CRITERIA

 In case the profitability index is greater than 1, accept the project.

 In case the profitability index is less than 1, reject the project.
 In case the profitability index is equal to 1, this is a point of indifference.

ADVANTAGES

 It considers time value of money as well as all the cashflows generated by the project
 It is consistent with shareholders wealth maximization

Disadvantages

 It requires estimation of cashflows with accuracy which is very difficult under the ever-changing
world.
 It also requires correct estimation of cost of capital for getting the correct results.
 When the cash outflow occurs beyond the current period, the P.I is unsuitable as a selection
criterion

2. UNDER UNCERTAINITY AND RISK

Risk can be defined as the chance that the actual outcome will differ from the expected outcome.
Uncertainty relates to the situation where a range of differing outcome is possible, but it is not
possible to assign probabilities to this range of outcomes.
There are three different type project risk to be considered;

1. Standard alone risk- this is the risk of the project itself as measured in isolation from any effect it
may have on the firms overall corporate risk.
2. Corporate or within firm risk- this is the total or overall risk of the firm when its viewed as a
collection or portfolio of investment projects.
3. Market or systematic risk- this is the stock market’s assessment of a firm’s risk and it will affect
the firm’s share price.

The following are some techniques used in risk analysis in capital budgeting,

 Sensitivity analysis
 Scenario analysis
 Simulation analysis
 Decision tree approach
 Break even analysis
 1) Sensitivity analysis

While evaluating any capital budgeting project, there is a need to forecast cash flows. The forecasting of
cash flows depends on sales forecast and costs. The Sales revenue is a function of sales volume and unit
selling price. Sales volume will depend on the market size and the firm’s market share. The NPV and IRR
of a project are determined by analyzing the after-tax cash flows arrived at by combining various
variables of project cash flows, project life and discount rate. The behavior of all these variables are very
much uncertain. The sensitivity analysis helps in identifying how sensitive are the various estimated
variables of the project. It shows how sensitive is a project’s NPV or IRR for a given change in particular
variables.

The more sensitive the NPV, the more critical is the variables.

Steps:

The following three steps are involved in the use of sensitivity analysis.

1. Identify the variables which can influence the project’s NPV or IRR.

2. Define the underlying relationship between the variables.

3. Analyze the impact of the change in each of the variables on the project’s NPV or IRR.

The Project’s NPV or IRR can be computed under following three assumptions in sensitivity analysis.

1. Pessimistic (i.e. the worst),

2. Expected (i.e. the most likely)

3. Optimistic (i.e. the best)

For example, A company has two mutually exclusive projects for process improvement. The
management has developed following estimates of the annual cash flows for each project having a life
of fifteen years and 12% discount rate.
Sensitivity analysis

Project – A

Net Investment (Rs) 90,000

CFAT estimates: PVAIF12%, 15 years PV NPV

Pessimistic 10,000 6.811 68110 (21890)

Most likely 15,000 6.811 102165 12165

Optimistic 21,000 6.811 143031 53031

Project – B

Net Investment (Rs) 90,000

CFAT estimates: PVAIF12%, 15 years PV NPV

Pessimistic 13,500 6.811 91948.5 1948.5

Most likely 15,000 6.811 102165 12165

Optimistic 18,000 6.811 122598 32598

The NPV calculations of both the projects suggest that the projects are equally desirable on the basis of
the most likely estimates of cash flows. However, the Project – A is riskier than Project – B because its
NPV can be negative to the extent of Rs. 21,890 but there is no possibility of incurring any losses with
project B as all the NPVs are positive. As the two projects are mutually exclusive, the actual selection of
the projects depends on decision maker’s attitude towards the risk. If he is ready to take risk, he will
select Project A, because it has the potential of yielding NPV much higher than (Rs. 53031) Project B. But
if he is risk averse, he will select project B.

Merits:

• The sensitivity analysis has the following advantages:

• It compels the decision maker to identify the variables affecting the cash flow forecasts
which helps in understanding the investment project in totality.

• It identifies the critical variables for which special actions can be taken.

• It guides the decision maker to concentrate on relevant variables for the project.
Demerits:

The sensitivity analysis suffers from following limitations:

• The range of values suggested by the technique may not be consistent. The terms
‘optimistic’ and ‘pessimistic’ could mean different things to different people.

• It fails to focus on the interrelationship between variables. The study of variability of

one factor at a time, keeping other variables constant may not much sense. For example, sales
volume may be related to price and cost. One cannot study the effect of change in price keeping
quantity constant.

2) Scenario analysis

In sensitivity analysis, typically one variable is varied at a time. If variables are interrelated, as they are
most likely to be, it is helpful to look at some plausible scenarios, each scenario representing a
consistent combination of variables.

Procedure:

The steps involved in scenario analysis are as follows:

1. Select the factor around which scenarios will be built. The factor chosen must be the largest
source of uncertainty for the success of the project. It may be the state of the economy or interest rate
or technological development or response of the market.

2. Estimate the values of each of the variables in investment analysis (investment outlay, revenues,
costs, project life, and so on) for each scenario.

3. Calculate the net present value and/or internal rate of return under each scenario.

Illustration:

A company is evaluating a project for introducing a new product. Depending on the response of the
market - the factor which is the largest source of uncertainty for the success of the project - the
management of the firm has identified three scenarios:

Scenario 1: The product will have a moderate appeal to customers across the board at a modest
price.

Scenario 2: The product will strongly appeal to a large segment of the market which is highly price-
sensitive.

Scenario 3: The product will appeal to a small segment of the market which will be willing to pay a
high price.
Scenario analysis

NPV Calculation for Three Scenario

(Rs in million)

Scenario 1 Scenario 2 Scenario 3

Initial investment 400 400 400

Unit selling price (Rs) 50 30 80

Demand (Units) 40 80 20

Sales Revenue 2000 2400 1600

VC (Rs 12/- pu) 960 1920 480

Fixed costs 100 100 100

Depreciation 40 40 40

Pre-tax profit 900 340 980

Tax @ 35% 315 119 343

PAT 585 221 637

Net cash flow (PAT + Dep) 625 261 677

Project life 20 years 20 years 20 years

NPV @ 20% (Rs) 3043.487 1270.96 3296.70548

Best and Worst-case analysis:

In the above illustration, an attempt was made to develop scenarios in which the values of variables
were internally consistent. For example, high selling price and low demand typically go hand in hand.
Firms often do another kind of scenario analysis are considered: Best case and worst-case analysis. In
this kind of analysis, the following scenarios are considered:

Best scenario: High demand, high selling price, low variable cost, and so on.

Normal scenario: Average demand, average selling price, average variable cost, and so on.

Worst Scenario: Low demand, low selling price, high variable cost, and so on.

The objective of such scenario analysis is to get a feel of what happens under the most favorable or the
most adverse configuration of key variables, without bothering much about the internal consistency of
such configurations.
Evaluation:

• Scenario analysis may be regarded as an improvement over sensitively analysis because it

considers variations in several variables together.

• It is based on the assumption that there are few well-delineated scenarios. This may not be true
in many cases. For example, the economy does not necessarily lie in three discrete states, recession,
stability, and boom. It can in fact be anywhere on the continuum between the extremes. When a
continuum is converted into three discrete states some information is lost.

• Scenario analysis expands the concept of estimating the expected values. Thus, in a case where
there are 10 inputs the analyst has to estimate 30 expected values (3 x 10) to do the scenario analysis.

3) Simulation analysis

Sensitivity analysis and Scenario analysis are quite useful to understand the uncertainty of the
investment projects. But both the methods do not consider the interactions between variables and also,
they do not reflect on the probability of the change in variables. The power of the computer can help to
incorporate risk into capital budgeting through a technique called Monte Carlo simulation. The term
“Monte Carlo” implies that the approach involves the use of numbers drawn randomly from probability
distributions. It is statistically based approach which makes use of random numbers and preassigned
probabilities to simulate a project’s outcome or return. It requires a sophisticated computing package to
operate effectively. It differs from sensitivity analysis in the sense that instead of estimating a specific
value for a key variable, a distribution of possible values for each variable is used.

The simulation model building process begins with the computer calculating a random value
simultaneously for each variable identified for the model like market size, market growth rate, sales
price, sales volume, variable costs, residual asset values, project life etc. From this set of random values,
a new series of cash flows is created and a new NPV is calculated. This process is repeated numerous
times, perhaps as many as 1000 times or even more for very large projects, allowing a decision-maker to
develop a probability distribution of project NPVs. From the distribution model, a mean (expected) NPV
will be calculated and its associated standard deviation will be used to gauge the project’s level of risk.
The distribution of possible outcome enables the decision-maker to view a continuum of possible
outcomes rather than a single estimate.

Merits:

 It facilitates the analysis and appraisal of highly complex, multivariate investment proposals with
the help of sophisticated computer packages.
 It can cope up with both independence and dependence amongst variables. It forces decision-
makers to examine the relationship between variables.
Demerits:

 The model requires accurate probability assessments of the key variables. For example,
it may be known that there is a correlation between sales price and volume sold but
specifying with mathematical accuracy the nature of the relationship for model purposes
may be difficult.
 Constructing simulated financial models can be time-consuming, costly and requires
specialized skills, therefore. It is likely to be used to analyze very important, complex,
and large-scale projects.
 It focuses on a project’s standalone risk. It ignores the impact of diversification, i.e., how
a project’s stand-alone risk will correlate with that of other projects within the firm and
affect the firm’s overall corporate risk.
 Simulation is inherently imprecise. It provides a rough approximation of the probability
distribution of net present value (or any other criterion of merit).
 A realistic simulation model, likely to be complex, would most probably be constructed
by a management scientist, not the decision maker. The decision maker, lacking
understanding of the model, may not use it.

4) Decision tree approach

Sometimes cash flow is estimated under different managerial options with the help of decision-tree
approach. A decision tree is a graphic presentation of the present decision with future events and
decisions. The sequence of events is shown in a format that resembles the branches of a tree.

Steps in constructing decision tree:

The first step in constructing a decision tree is to define a proposal. It may be concerning either a new
product or an old product entering a new market. It may also be an abandonment option or a
continuation option, expansion option or no-expansion option, etc.

Second step is identifying various alternatives. For example, if a firm is launching a new product, it must
chalk out the demand possibilities and, on that basis, it identifies different alternatives-whether to have
a large factory or a medium-size or only a small plant. Each of the alternatives will have varying
consequences on the cash flow.

The third step is to lay out the decision tree showing the different alternatives through different
branches. And finally, the estimates of cash flow with probabilities in each branch are made. The results
of the different branches are calculated that show desirability of a particular alternative over the others.

For example, a company is considering a new machine having estimated cash flows as follows. The
machine is having a life of 2 years. The cost of machine is Rs. 2,000,000 and a company’s required rate of
return is 12%. If a company wants to use decision tree approach, recommend whether the machine
should be bought or not.
Merits:

 Decision tree analysis gives the clarity of sequential investment decisions.

 It gives a decision maker to visualize assumptions and alternatives in graphic form which is
easier to understand than the analytical form. It helps in eliminating the unprofitable branches
and determines optimum decision at various decision points.

Demerits:

 The decision tree becomes more and more complicated if he includes more and more
alternatives. It becomes more complicated if the analysis includes interdependent variables
which are dependent on one another.
 It becomes very difficult to construct decision tree if the number of years expected life of the
project and the number of possible outcomes for each year are large.
 5) Break even analysis

In sensitivity analysis one may ask what will happen to the project if sales decline or costs increase or
something else happens. A financial manager will also be interested in knowing how much should be
produced and sold at a minimum to ensure that the project does not 'lose money'. Such an exercise is
called break even analysis and the minimum quantity at which loss is avoided is called the break-even
point. The breakeven point may be defined in accounting terms or financial terms.

Financial Break-even analysis:

The focus of financial break-even analysis is on NPV and not accounting profit. The level of sales
where NPV will be equal to zero.

To illustrate how the financial break-even level of sales is calculated, let us go back to the above
project. The annual cash flow of the project depends on sales as follows:

1. Variable costs : 60% of sales

2. Contribution : 40% of sales

3. Fixed costs : Rs. 3.15 million

4. Depreciation : Rs. 5.85million

5. Pre-tax profit : (0.4 x sales) – Rs. 9 million

6. Tax (@ 35 %) : 0.35(0.4 sales - Rs. 9 million)

7. Profit after tax : 0.65 (0.4 sales - Rs. 9 million)

8. Cash flow (4 + 7) : Rs. 5.85 million +0.65 (0.4 sales - Rs.9 million)

: = 0.26 Sales

Since the cash flow lasts for 10 years, its present value at a discount rate of 10% is:

PV (cash flows) = 0.325 sales x PVIFA 10 years, 10%

= 0.26 Sales x 6.145

 = Rs. 1.5977 Sales

The project breaks even in NPV terms when the present value of these cash flows equals the initial
investment of Rs. 60 million. Hence, the financial break-even occurs when

PV (cash flows) = Investment

1.5977 Sales = Rs. 60 million

Sales = Rs. 37.55398 million

Thus, the sales for the project must be Rs. 37.6 million per year for the investment to have a zero NPV.
Note that this is significantly higher than Rs. 22.5 million which represents the accounting break-even
sales.

There are statistical techniques that one can use to measure risk in investment appraisal;

 Probability assignment
 Expected net present value
 Standard deviation
 Coefficient of variation

Replacement analysis
Refers to decisions which involves replacing an old machine with a newer one.

It is done because of the following reasons;

1. Changes in technology
2. Rendering the current machinery obsolete
3. The desire to maximize the company’s production and efficiency
4. Expensive running and maintenance cost of the old machinery
During replacement analysis, the following cash-flow is important;

1. Incremental total initial outlay

2. Incremental terminal cash flow
3. Incremental net operating cash flow
Incremental total initial outlay

This is the amount of money in present value that is required by the company in order to implement
replacement decisions, and is compiled as follows;

Purchase cost xx

Add; incidental cost xx

Installation xx

Insurance xx

Freight xx

Import duty xx xx

Effective cost xxx

Add; working capital xx

Overhaul cost xx

Add; gain/ less loss on tax recapture xx xx

Xxx

Less; market value of old machine (xx)

Incremental total initial outlay xxx

Note

 Gain/ loss on tax recapture refers to the tax effect which normally occurs due to disposal of the
old machinery.
 Gain/loss of tax recapture = (gain/loss of disposal of the old machine) x (tax rate)
 Net book value = (cost) – (accumulated depreciation)
  Accumulated depreciation = (cost- salvage) ÷ (usefull life)

Incremental terminal cash flow

Refers to cashflow that is expected to be generated at the end of economic life of the project. It is
determined as follows;

Working capitals xx

Add; Increment salvage value

Salvage of new machine xx

Salvage value old machine (xx) xx

Incremental terminal cash flow xxx

Note;

Working capital refers to the amount of money required for day to day running of the machine before it
becomes self-sustaining. It forms part of the initial outlay at the beginning, however, it will be recovered
at the end and therefore it forms part of terminal cash flow.

Incremental net operating cash flows

This refers to the expected benefits generated by the machine during the normal trading operations, e.g
increase on production and savings on cost.

INOS is computed as follows;

a) Depreciation method
Calculated as follows;

Incremental sales revenue xx

Less; variable cost (xx)

Incremental contribution xxx

Less; fixed cost (xx)

IEBOT & DEP XXX

Less; increment depreciation (xx)

IEBT XXX

Less; tax (xx)

Increment EAT XXX

Add back depreciation xx

INOCF XXX

Incremental depreciation = (depreciation of the new machinery) – (depreciation of the old machine)

b) depreciation tax shield method

Calculated as follows;

Incremental sales revenues xx

Less; variable cost (xx)

Incremental contribution XXX

Less; fixed cost (xx)

IEBOD & T XXX

Less; tax (xx)

IEAT XXX

Add; I.D tax shield xx

INOCF XXX

Incremental depreciation tax shield refers to benefits in form of tax savings that will accrue to the
company in case incremental depreciation is treated as wear and tear for tax purposes.

Incremental depreciation tax shield = (increased depreciation) X (tax rate)

CAPITAL RATIONING

This refers to a situation whereby the funds are inadequate to undertake all the viable projects by the
organization. Profitability index method is applied during ranking of the projects basing on profitability.

Capital rationing is classified into 4 categories namely;

 Soft capital rationing- this is caused by internally generated factors of the company. It is self-
imposed capital rationing by the management of the company. Examples, management may opt
not to raise more equity so as to avoid dilution in the earning per share, a self-imposed
budgetary limit where the management puts a ceiling on the maximum amount to be spent on
investments.

 Hard capital rationing-this is externally imposed by the market and its caused by factors beyond
the control of the company’s management. It occurs when the company has exhausted its
borrowing limits and is unable to raise funds externally. Examples, economic factors e.g. high
inflation, high competition for funds by different companies resulting into an increase in the cost
of borrowing.

 Single period capital rationing- this is the insufficiency of capital during the current period
alone.
 Multi period rationing- this is the insufficiency of capital during the current period as it extends
to the subsequent period.

Evaluating of projects under capital rationing.

STEP 1- the projects are ranked using profitability index.

STEP 2- allocation of available capital using the rank.

ADJUSTED PRESENT VALUE

This is the value of a project to an unlevered firm (NPV) plus the present value of the financing side
effects (NPVF);

APV= NPV + NPVF

There are four side effects of financing;

 The tax subsidy

 The costs of issuing new securities
 The costs of financial distress
 Subsidies to debt financing

Example: consider a project of the XYZ company. It wants to invest 1000$ with the cashflows as below.
The cost of equity is 10%. The company decides to finance the project with 600$ of debt at 8%. The
corporation tax rate is 40%. Calculate the APV.

PERIOD CASHFLOW DISCOUNT RATE 10% INFLOW

0 1000 - -
1 125 0.9091 113.6375
2 250 0.8264 206.6
3 375 0.7513 281.7375
4 500 0.6830 341.5
TOTAL 943.475

NPV= 943.475-1000

=$-56.53

Tax shield= 0.40*0.08*600

=$ 19.20 per year

APV =NPV+ NPVF debt tax shield

CASHFLOW DISCOUNT RATE 8% INFLOW

19.20 0.9259 17.78

19.20 0.8573 16.46
 19.20 0.7938 15.24
19.20 0.7349 14.11
TOTAL 63.59

APV= ($56.53) +$63.59

=$7.09

The project will be rejected by an all equity firm but accepted with debt.

REFERENCES

1. Pandey I M, Financial Management, Vikas Publishing House Pvt Ltd, pg 253

2. Lasher William R., Practical Financial Management (2nd edition), South-Western College
Publishing, pg. 333
3. Mc MENAMIN JIM, Financial Management (An Introduction), OXFORD University Press