Financial Calculation of Wonder Kidz Education Pvt Ltd

QUESTION

 WONDER KIDZ WORKSHEET 1. Calculate the overall cost of capital of the project used for analyzing the cash profitability. Cost of equity = 0 Bansal has invested no funds of his own. Cost of debt = i(1-t) i=average interest, t=tax rate Calculate: Cost of debt %: Over all weighted cost of capital: 2. As a fiscal consultant, do you think the project is financially viable? To support your answer, calculate the net present value (NPV). Years Cash Profitability (₹) (from case Exhibit 3) PVF PV (₹) 1 2 3 4 5 Total PV: Less ₹ 624,450.00 NPV 3. Evaluate the project using other capital budgeting techniques such as payback period, discounted payback period, internal rate of return (IRR), and profitability index (PI). Recommend a final decision regarding investment. Non-Discounted Payback Period: (Look at when the initial investment will be recovered compared to the target start-up period of business.) Discounted Payback Period: (Look at the time of the cash outflow of the business and the overall cost of capital) Internal Rate of Return: (Remember, IRR is defined ad th erate in which the NPV of the project equals zero. An Irr of more than the cost of capital suggests the project is financially feasible, whereas an IRR of less then the cost of capital indicates the project may not be able to sufficiently generate cash flows and may lead to a loss.) Profitability Index: (PI = PV of Future Cash Flows / Initial Investment 4. What will be the changes in profitability and NPV if the franchisee offers a discount on the fee? Perform a sensitivity analysis and identify the maximum discount that can be offered. (Note: I put the analysis in the sheet for you. Please try different amounts for the discount. At what point does the project become unprofitable?) Year 1 Year 2 Year 3 Total Students 35 50 80 New Enrollments 35 25 40 Old Enrollments 0 25 40 Fees collected from new students (1 time and annual) Note: 1,000 discount in year 1 and 500 discount in yYear 2—experiment with different discounts) 17,500 18,000 18,500 Fees collected from old studnets (annual) 0 15,500 16,000 Total Fees collected (without caution money) 612,500 837,500 1,380,000 Total Expenses from Exhibit 3 516,000 675,000 966,000 Operational Profit 96,500 162,500 414,000 Add: Interest on caution money at 8% 4,200 6,000 9,600 Less: Interest on capital at 15% 90,000 90,000 90,000 Earnings before tax 10,700 78,500 333,600 Less 20% Tax rate 2,140 15,700 66,720 Earnings after cash (Cash Flows) 8,560 62,800 266,880 5. Critically evaluate the proposed profitability projections and comment on them. (Use the answers to questions 1-4 and your knowledge of corporate /non-profit finance to explain if Bansal should or should not go forward with the project.)

 Year 1 Year 2 Year 3 Year 3 Year 3 Total Students 35 50 80 80 80 New Enrollments 35 25 40 40 40 Old Enrollments 0 25 40 40 40 Fees collected from new students 18,800 18,800 18,800 18,800 18,800 Fees collected from old studnets (annual) 0 16,300 16,300 16,300 16,300 Total Fees collected (without caution money) 658,000 877,500 1,404,000 1,404,000 1,404,000 Total Expenses from Exhibit 3 516,000 675,000 966,000 966,000 966,000 Operational Profit 142,000 202,500 438,000 438,000 438,000 Add: Interest on caution money at 8% 4,200 6,000 9,600 9,600 9,600 Less: Interest on capital at 15% 90,000 90,000 90,000 90,000 90,000 Earnings before tax 56,200 118,500 357,600 357,600 357,600 Less 20% Tax rate 11,240 23,700 71,520 71,520 71,520 Earnings after cash (Cash Flows) 44,960 94,800 286,080 286,080 286,080 NPV of the Future Earnings ₹ 663,481.42 Initial Investment ₹ 624,450.00 NPV ₹ 39,031.42

 18,800 16,300

 Old Enrollment Fees ₹ 39,031 ₹ 12,800 ₹ 13,300 ₹ 13,800 ₹ 14,300 ₹ 14,800 ₹ 15,300 ₹ 15,800 ₹ 16,300 ₹ 16,800 ₹ 17,300 New Enrollment Fees ₹ 15,300 ₹ 15,800 ₹ 16,300 ₹ 16,800 ₹ 17,300 ₹ 17,800 ₹ 18,300 ₹ 18,800 ₹ 19,300 ₹ 19,800

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