Reference no: EM133306450

Case : Capital budgeting for BPSC

BPSC is a fast-growing electricity supply company. The company is situated in Southern Bangladesh. Its sales are expected to grow about three times from 'BDT 360 million in 2020 to '1 100 million in 2021. The company is considering commissioning a 35 km pipeline between two areas to carry the gas to a state electricity board. The project will cost 500 million. The pipeline will have a capacity of 2.5 MMSCM. The company will enter into a contract with the state electricity board (SEB) to supply gas. The cash flow of SEB is expected to be 140 million per annum. The pipeline will also be used for the transportation of LNG to other users in the area. This is expected to bring an additional cash flow of '60 million per annum. The company management considers the useful life of the pipeline to be six years. The financial manager estimates a cash profit to sales ratio of 20 per cent per annum for the first four years of the project's operations and 17 per cent per annum for the remaining life of the project. The project has no salvage value. The project being in a backward area, is exempt from paying any taxes. The company requires a rate of return of 15 per cent from the project.

1. What is the project's payback period, discounted payback period and net present value?

2. Should the project be accepted? Which capital budgeting method do you find more suitable to evaluate the project? Why?