Course ID: MBA 511.
Course Name: Financial Management.
Section: 4.
Topic: Comprehensive Final Case Assignment.
Submitted to: Dr. Imtiaz Ahmed Nevin.
Submitted by: Syed Muhammad Nadeem Kadery.
ID: 2130604.
Date of submission: 13th December 2023.
Table of Contents
Letter of Transmittal............................................................................... 2
1. Specific Cost of Each Source of Financing ...................................... 3
a. Cost of Debt ...................................................................................... 3
b. Cost of Preferred Stock ..................................................................... 3
c. Cost of Common Stock ..................................................................... 3
2. Weighted Average Cost of Capital (WACC) .................................. 4
3. Capital Budgeting Decisions ............................................................. 4
a. Payback Period .................................................................................. 5
b. Net Present Value (NPV) .................................................................. 6
c. Internal Rate of Return (IRR) ........................................................... 7
d. Profitability Index ............................................................................. 9
4. Best Route Decision If Projects are Independent and Mutually
Exclusive ................................................................................................... 9
5. DHK-CTG Route is Risky Due to The Possible Entry of New
Competitor ............................................................................................. 10
6. Appendix ........................................................................................... 14
Page | 1
Letter of Transmittal
13th December 2023,
Dr. Imtiaz Ahmed Nevin,
Assistant Professor
Department of Finance,
MBA 511 - Financial Management,
Graduate, School of Business and Entrepreneurship,
Independent University, Bangladesh.
Dear Dr., Nevin,
I hereby submit my report entitled “Comprehensive Final Case Assignment” as a mandatory
fulfilment of the MBA 511 Financial Management course requirement.
The purpose of this report is to calculate for both the projects:
1. Cost of source of funding
2. Weighted Average Cost of Capital
3. Payback Period, Net Present Value, Internal Rate of Return and Profitability indexes
4. Determining the better project under different circumstances, and
5. Risk adjusted Discount rate calculation.
The report shows a detailed calculation along with a detailed analysis of the projects under
different circumstances and finally the calculation of risk adjusted discount rate and decision based
on the final calculation. I hope that this request will merit your approval.
Sincerely yours,
Syed Muhammad Nadeem Kadery,
2130604.
Page | 2
1. Specific Cost of Each Source of Financing
a. Cost of Debt
First, we need to calculate the Yield to Maturity using the formula:
= Annual Interest + ((Principal Payment – Price of the bond)/No. of years to maturity)
____________________________________________________________________________
0.6 x (Price of Bond) + 0.4 (Principal payment)
= 100 + ((1000-1200/10)
_________________________
0.6 (1200) + 0.4 x1000
= 7.14% is the Yield to maturity
Now, calculating the cost of debt
= Yield (1-tax rate)
As, we know from the question tax rate is 40%
= 7.14% (1 - 0.4)
= 4.28% is the Cost of Debt
b. Cost of Preferred Stock
=> Kp = ((Dp/(Pp-F)
=> Kp= ((10/(100-2.5))
=> Kp= 10.26% Cost of Preferred Stock
c. Cost of Common Stock
=> Kn= ((D1/(Po-F)) + g
=> Kn= ((6/ (80-3)) + 0.06
=> Kn= 13.79% Cost of Common Stock
Page | 3
2. Weighted Average Cost of Capital (WACC)
To calculate the WACC, we will use the formula:
= [(Proportion of debt) x (After Tax cost of Debt)]
+ [(Proportion of preferred stock) x (Cost of Preferred Stock)]
+ [(Proportion of common stock) x (Cost of Common Stock)]
= [(0.3) x (0.0428)] + [(0.15) x (0.1026)] + [(0.55) x (0.1379)]
= 10.41% is the Weighted Average Cost of Capital (WACC)
3. Capital Budgeting Decisions
Year Net Cash Flow Net Cash Flow
DHK-CTG DHK-RAJ
0 (BDT 51,00,000) (BDT 36,00,000)
1 Your IUB ID Your IUB ID
2 Your IUB ID +10000 Your IUB ID +25000
3 Your IUB ID +15000 Your IUB ID +15000
4 Your IUB ID +20000 Your IUB ID +30000
5 Your IUB ID +25000 Your IUB ID +10000
As, my ID is 2130604, Thus I will now replace my ID in the following table:
Year Net Cash Flow Net Cash Flow
DHK-CTG DHK-RAJ
0 (BDT 51,00,000) (BDT 36,00,000)
1 2130604 2130604
2 2130604 +10000 2130604 +25000
3 2130604 +15000 2130604 +15000
4 2130604 +20000 2130604 +30000
5 2130604 +25000 2130604 +10000
Page | 4
We will have the following cash flows for the following projects:
Year Net Cash Flow Net Cash Flow
DHK-CTG DHK-RAJ
0 (BDT 51,00,000) (BDT 36,00,000)
1 2130604 2130604
2 2140604 2155604
3 2145604 2145604
4 2150604 2160604
5 2155604 2140604
a. Payback Period
The Payback Period is the amount of time required to recover the initial investment.
To calculate the payback period, we will us the following formula:
= [YFR-1] + ((Investment – CCF of Previous YFR)/CF of YFR)
Payback period for DHK-CTG Project
Year Net Cash Flow Cumulative Cash Flow
DHK-CTG DHK-CTG
1 2130604 2130604
2 2140604 4271208
3 2145604 6416812
4 2150604 8567416
5 2155604 10723020
= [ 3-1] + ((51,00,000- 4271208) / 6416812)
= 2.13 Years is the Payback period for DHK-CTG Project
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Payback Period for DHK-RAJ Project
Year Net Cash Flow Cumulative Cash Flow
DHK-RAJ DHK-RAJ
1 2130604 2130604
2 2155604 4286208
3 2145604 6431812
4 2160604 8592416
5 2140604 10733020
= [ 2-1] + ((36,00,000- 2130604) / 4286208)
= 1.34 Years is the Payback period for DHK-RAJ Project
b. Net Present Value (NPV)
Net Present Value is the present value of all future benefits. Thus, we will calculate the present
value of all the cash flows.
The formula to calculate the Net Present value is as follows: (((FV/((1+i) ^n)))
The Net Present Value for DHK-CTG Project is as follows:
= (((2130604/ ((1+0.1041) ^ 1))) + (((2140604 / ((1+0.1041) ^ 2)))
+ (((2145604/ ((1+0.1041) ^ 3))) + (((2150604/ ((1+0.1041) ^ 4)))
+ (((2155604 / ((1+0.1041) ^ 5)))
= BDT 80,40,819.30
The project investment is BDT 51,00,000
Therefore,
= BDT 80,40,819.30 - BDT 51,00,000
= BDT 29,40,819.30 NPV for DHK-CTG Project
Page | 6
The Net Present Value for DHK-RAJ Project is as follows:
= (((2130604/ ((1+0.1041) ^ 1))) + (((2155604/ ((1+0.1041) ^ 2)))
+ (((2145604/ ((1+0.1041) ^ 3))) + (((2160604/ ((1+0.1041) ^ 4)))
+ (((2140604/ ((1+0.1041) ^ 5)))
= BDT 80,50,711.17
The project investment is BDT 36,00,000
Therefore,
= BDT 80,50,711.17 - BDT 36,00,000
= BDT 44,50,711.17 NPV for DHK-RAJ Project
c. Internal Rate of Return (IRR)
Discount rate is 10.41%
= To calculate IRR, we must use the following formula:
= L + (A/B) * (H-L)
Where:
L= Lower Rate, H= Higher Rate, A= NPV at Lower Rate
B= Difference between NPV at Lower Rate & NPV at Higher Rate
Lower rate is 5.41%
= (((2130604/ ((1+0.0541) ^ 1))) + (((2140604 / ((1+0.0541) ^ 2)))
+ (((2145604/ ((1+0.0541) ^ 3))) + (((2150604/ ((1+0.0541) ^ 4)))
+ (((2155604 / ((1+0.0541) ^ 5)))
= BDT 91,78,000.29 – 51,00,000
= BDT 40,78,000.29 is the NPV at lower rate
Page | 7
Higher rate is 35.41%
= (((2130604/ ((1+0.3541) ^ 1))) + (((2140604 / ((1+0. 3541) ^ 2)))
+ (((2145604/ ((1+0. 3541) ^ 3))) + (((2150604/ ((1+0. 3541) ^ 4)))
+ (((2155604 / ((1+0. 3541) ^ 5)))
= BDT 47,18,220.81- 51,00,000
= BDT -381779.19 is the NPV at higher rate
IRR:
L + (A/B) * (H-L)
= 0.0541 + (40,78,000.29/4459779.48) (0.3541-0.0541)
= 32.84% is the IRR for DHK-CTG Project
IRR for DHK-RAJ project is as follows:
Lower rate is 5.41%
= (((2130604/ ((1+0.0541) ^ 1))) + (((2155604/ ((1+0.0541) ^ 2)))
+ (((2145604/ ((1+0.0541) ^ 3))) + (((2160604/ ((1+0.0541) ^ 4)))
+ (((2140604/ ((1+0.0541) ^ 5)))
= BDT 91,87,588.78 -36,00,000
= BDT 5588073.78 is the NPV at lower rate
Higher rate is 60.41%
= (((2130604/ ((1+0.6041) ^ 1))) + (((2155604/ ((1+0.6041) ^ 2)))
+ (((2145604/ ((1+0.6041) ^ 3))) + (((2160604/ ((1+0.6041) ^ 4)))
+ (((2140604/ ((1+0.6041) ^ 5)))
= BDT 32,13,653.17- 36,00,000
= BDT -386,346.83 is the NPV at higher rate
Page | 8
IRR= L + (A/B) * (H-L)
=0.0541 + (5588073.78/5974420.61) * (0.6041-0.0541)
= 56.85 % is the IRR for DHK-RAJ project
d. Profitability Index
To Calculate Profitability Index, we will use the following formula:
PI = (Total Present Value of Future Cash Flows/ Initial Investment)
PI = (80,40,819.29 / 51,00,000)
PI = 1.58 is the Profitability Index of DHK-CTG Project
DHK-RAJ
PI = (80,50,711.17 / 36,00,000)
PI= 2.24 is the Profitability Index of DHK-RAJ Project
4. Best Route Decision If Projects are Independent and Mutually
Exclusive
Parameters/Project DHK-CTG DHK-RAJ
Payback Period 2.13 Years 1.34 Years
Net Present Value BDT 2940819.30 BDT 4450711.17
Internal Rate of Return 32.84% 56.85%
Profitability Index 1.58 Times 2.24 Times
If the Projects are independent:
• The aviation sector in Bangladesh should first invest in DHK-RAJ Project in terms of
payback period as it is 1.34 years, then it can invest in DHK-CTG Project which has a
payback period of 2.13 years.
• Moreover, in terms of NPV DHK-RAJ project has a higher NPV of BDT 44,50,711.17 thus
the sector should invest in this project, then it can invest in DHK-RAJ project with a NPV
of BDT 29,40,819.30.
Page | 9
• In addition to that, in terms of IRR of DHK-RAJ project is higher at 56.85%, thus the sector
should invest in this project, then it can invest in DHK-CTG project as it has an IRR of
32.84%.
• Finally, the Profitability Index of DHK-RAJ project is also higher at 2.24 times thus the
sector should invest in this project first and then it should invest in the DHK-CTG Project
which has a Profitability Index of 1.58 times.
If the Projects are mutually exclusive:
• In terms of Payback period the DHK-RAJ project should be invested in as it has a lower
payback period of 1.34 years compared to the payback period of DHK-CTG project of 2.13
years.
• In terms of Net Present Value, the sector should invest in DHK-RAJ project as it has a
higher NPV of BDT 4450711.17 compared to the lower NPV of BDT 2940819.30 of DHK-
CTG project.
• In terms of IRR the sector should invest in DHK-RAJ project as it has a higher IRR of
56.85% compared to the lower IRR of 32.84% of the DHK-CTG project.
• Finally in terms of the Profitability Index the DHK-RAJ project should be invested in as it
has a higher PI of 2.24 times compared to the lower PI of 1.58 times of the DHK-CTG
project.
5. DHK-CTG Route is Risky Due to The Possible Entry of New
Competitor
Discount Factor is 10.41 + 7.410 = 17.41%
Payback period won’t change as in Payback period we don’t use discount rate. Thus,
Payback period for DHK-CTG Project:
Page | 10
Year Net Cash Flow Cumulative Cash Flow
DHK-CTG DHK-CTG
1 2130604 2130604
2 2140604 4271208
3 2145604 6416812
4 2150604 8567416
5 2155604 10723020
= [ 3-1] + ((51,00,000- 4271208) / 6416812)
= 2.13 Years is the Payback period for DHK-CTG Project
The Net Present Value for DHK-CTG Project is as follows:
= (((2130604/ ((1+0.1741) ^ 1))) + (((2140604 / ((1+0.1741) ^ 2)))
+ (((2145604/ ((1+0.1741) ^ 3))) + (((2150604/ ((1+0.1741) ^ 4)))
+ (((2155604 / ((1+0.1741) ^ 5)))
= BDT 6791045.18
The project investment is BDT 51,00,000
Therefore,
= BDT 6791045.18 - BDT 51,00,000
= BDT 1691045.18 NPV for DHK-CTG Project
To calculate IRR we use lower rate of 10.41%:
= (((2130604/ ((1+0.1041) ^ 1))) + (((2140604 / ((1+0.1041) ^ 2)))
+ (((2145604/ ((1+0.1041) ^ 3))) + (((2150604/ ((1+0.1041) ^ 4)))
+ (((2155604 / ((1+0.1041) ^ 5)))
= BDT 80,40,819.30
Page | 11
The project investment is BDT 51,00,000
Therefore,
= BDT 80,40,819.29 - BDT 51,00,000
= BDT 29,40,819.30 NPV at lower rate for DHK-CTG Project
NPV at Higher rate of 40.41%
= (((2130604/ ((1+0.4041) ^ 1))) + (((2140604 / ((1+0.4041) ^ 2)))
+ (((2145604/ ((1+0.4041) ^ 3))) + (((2150604/ ((1+0.4041) ^ 4)))
+ (((2155604 / ((1+0.4041) ^ 5)))
= BDT 43,26,581.16
The project investment is BDT 51,00,000
Therefore,
= BDT 43,26,581.16 - BDT 51,00,000
= BDT – 773418.84 is the NPV at higher rate
IRR
IRR= L + (A/B) * (H-L)
= .1041 + (2940819.30/3714238.13) * (.4041-1041)
= 34.16% is the IRR for the DHK-CTG Project
Profitability Index for DHK-CTG Project
= (6791045.18 / 51,00,000)
= 1.30% is the Profitability Index of DHK-CTG Project
Page | 12
Decision
Parameters/Project DHK-CTG DHK-RAJ
Payback Period 2.13 1.34 Years
Net Present Value BDT 1691045.18 BDT 4450711.17
Internal Rate of Return 34.16% 56.85%
Profitability Index 1.33 Times 2.24 Times
As we can see from the above Table that the entry of the new competition, will increase the WACC
from 10.41% to 17.41% and will lower the figures of parameters compared to when the WACC
was 10.41%. Moreover, the parameters are still higher for DHK-RAJ project with lower payback
period, higher NPV, higher IRR and finally higher PI.
If the projects are independent, then the sector can first invest in the DHK-RAJ project and then
in the DHK-CTG Project.
If the projects are mutually exclusive, then without doubt the aviation sector must invest in DHK-
RAJ project as this project will bring in better profits.
Page | 13
6. Appendix
Cost of Debt
Answer to no. 1
Specific Cost Of
each Funding Yield 0.0714
Kd Y(1-tax rate) Tax rate 0.4
Kd 4.28% Interest Payment 100
Cost of Preferred Stock
Kp Dp/(Pp-F) Dp 10
Kp 10.26% Pp 100
F 2.5
Cost of Common Stock
Kn [D1/(Po-F)]+g D1 6
Kn 13.79% Po 80
g 0.06
F 3
Weighted Average Cost of Capital
Answer to no.2 Weighted Average Cost of Capital
WACC 10.41%
Answer to no.3
Year DHK-CTG DHK-RAJ
0 5100000 3600000
1 2130604 2130604
2 2140604 2155604
3 2145604 2145604
4 2150604 2160604
5 2155604 2140604
Page | 14
Payback Period DHK-CTG
Year DHK-CTG CCF DHK-CTG
1 2130604 2130604
2 2140604 4271208
3 2145604 6416812
4 2150604 8567416
5 2155604 10723020
Titles Years
Payback Period (DHK-CTG) 2.13
Payback Period DHK-RAJ
Year DHK-RAJ CCF DHK-RAJ
1 2130604 2130604
2 2155604 4286208
3 2145604 6431812
4 2160604 8592416
5 2140604 10733020
Title Years
Payback Period DHK-RAJ 1.34
NPV DHK-CTG
Title Rate
Discount Rate 10.41%
Year DHK-CTG
1 1929720.13
2 1755979.79
3 1594132.22
4 1447194.19
5 1313792.96
Page | 15
Title NPV of DHK-CTG
NPV 2940819.30
NPV DHK-RAJ
Title Rate
Discount Rate 10.41%
Year DHK-RAJ
1 1929720.13
2 1768284.59
3 1594132.22
4 1453923.43
5 1304650.79
Title NPV of DHK-RAJ
NPV 4450711.17
IRR DHK-CTG
PV of Cash Flow PV of Cash Flow
DHK-CTG DHK-CTG
Year (5.41%) (35.41%)
1 2021254.15 1573446.57
2 1926516.38 1167440.77
3 1831909.99 864166.36
4 1741940.02 639672.23
5 1656379.76 473494.88
Lower Rate 5.41%
Higher Rate 35.41%
NPV at Lower Rate 4078000.29
NPV at Higher Rate -381779.19
IRR 32.84%
Page | 16
IRR DHK-RAJ
PV of Cash Flow PV of Cash Flow
Year DHK-RAJ (%) DHK-RAJ (%)
1 2021254.15 1328223.93
2 1940016.19 837733.93
3 1831909.99 519822.72
4 1750039.79 326324.30
5 1644853.66 201548.30
Lower Rate 5.41%
Higher Rate 60.41%
NPV at Lower Rate 5588073.78
NPV at Higher Rate -386346.83
IRR 56.85%
PI DHK-CTG & DHK-RAJ
Profitability Index DHK-CTG 1.58
Profitability Index DHK-RAJ 2.24
NPV DHK-CTG (New Discount Rate)
Title Rate
Discount Rate 17.41%
Year DHK-CTG
1 1814669.96
2 1552838.02
3 1325666.57
4 1131722.88
5 966147.74
Title NPV of DHK-CTG
NPV 1691045.18
Page | 17
IRR DHK-CTG (New Discount Rate)
PV of Cash Flow PV of Cash Flow
DHK-CTG DHK-CTG
Year (10.41%) (40.41%)
1 1929720.13 1517416.14
2 1755979.79 1085776.04
3 1594132.22 775095.92
4 1447194.19 553309.71
5 1313792.96 394983.35
Lower Rate 10.41%
Higher Rate 40.41%
NPV at Lower Rate 2940819.30
NPV at Higher Rate -773418.84
IRR 34.16%
PI DHK-CTG (New Discount Rate)
Profitability Index (DHK-CTG) 1.33
Page | 18
