Case Study on “Anwal Gas Traders: Capital Budgeting for

Expansion Project”

Gedu College of Business Studies

Gedu, Chhukha.

A Case Study Submitted by:

Rajesh Monger (03200262)

Rinzin Dolkar (03200273)
Robin Rai (03200276)
Sangay Zangmo (03200295)
Rigzin Pema Namgyel (03200268)

Bachelor of Commerce, 5th Semester, Finance ‘C’

24/08/2022
 DECLARATION

Module Code: FIN304 Type of Course Work: Group Assignment

Module Title: Capital Budgeting Module Tutor: Sir Hita Nath Dhakal
Date of Submission: 24 August 2022

We hereby declare that this academic work is our own and those referred ideas from other
sources have been appropriately acknowledged. The material in this submission has not
been previously submitted for assessments. We understand that if found otherwise, my
academic work will be cancelled and no marks will be awarded besides legal
consequences.

Rajesh Monger (03200262) Rinzin Dolkar (03200273) Robin Rai (03200276)

Sangay Zangmo (03200295) Rigzin Pema Namgyel (03200268)

FOR MODULE TUTOR

Sl. Marking Criteria Marks Marks

No Assigned obtained
1 Identification of the problem addressed in the case study 2
2 Analysis and finding 3
3 Overall presentation 2
4 Q&A 3
5
Total
Feedback:

Signature of Module Tutor

Contents
Introduction ................................................................................................................................ 1

Methodology .............................................................................................................................. 1

Limitations.................................................................................................................................. 1

Synopsis .................................................................................................................................... 2

1. Problem statement of the case study .................................................................................. 3

2. LPG distribution process ..................................................................................................... 3

3. Capital Budgeting techniques for 1st scenario ..................................................................... 4

I. Cash flow estimations...................................................................................................... 4

II. Calculation of Required Rate of Return through Weighted Average Cost of Capital
(WACC) ................................................................................................................................. 7

III. Cash outflows .............................................................................................................. 7

IV. Asset valuation after 10 years ...................................................................................... 8

V. Cash inflow...................................................................................................................... 9

VI. Calculations of NPV, IRR, Payback period, and profitability index ...............................10

4. Capital Budgeting for Scenario 2........................................................................................14

5. Capital Budgeting of Scenario 3 .........................................................................................17

Conclusion ................................................................................................................................20

References ...............................................................................................................................21
Introduction

The case study “Anwal Gas Traders: Capital Budgeting for Expansion Project” was developed
by Imran Yousaf, Zhichuan (Frank) Li, and Aaqib Nawaz for the sole purpose of classroom
discussion (Yousaf, Li, & Nawaz, W25080, 2021). The case study is an effective material
through which the concepts of capital budgeting and its techniques is displayed in a practical
situation. The case study is about a gas trading company exploiting the opportunities in the
market and developing plans to invest in the new project. Therefore, as the business college
students, the authors of the project have solved and calculated three vital scenarios of the case
through various capital budgeting knowledge as well as through various resources such as
books and other web sources.

Methodology

The case has been provided by the tutor and the analysis and calculations have been done
based on and in reference to the spreadsheet for the case study by Yousaf, Li, & Nawaz,
(2021). The spread sheet is available in the Course Hero website (Course Hero, 2021). The
calculations and analysis have been done based on the spreadsheet and numerous scholars
have solved the case study in different ways

Limitations

The case study has been solved based on the technique adopted by the authors of case and
new and different methods to solve the case study are not limited. Different authors solved the
case in different ways. Therefore, we don’t claim that our answers are absolutely correct, but the
methods and calculations used is in line with capital budgeting and its techniques.

1
Synopsis

In February 2021, Malik Ahmed Nawaz, the company's owner, was contemplating whether to
invest in expansion as suggested by his son Malik Asad Nawaz, the managing director of Anwal
Gas Traders, a liquefied petroleum gas distribution business based in Sakesar, Khushab
District, in the province of Punjab, Pakistan. It would mark the business's first sizable growth
since its 1998 establishment. The business would integrate backward to capitalize on the
potential of the market based on information provided by a consultant firm using capital
budgeting methodologies. The owner had to decide whether the investment was worthwhile and
how different outcomes would influence his choice.
As of 2020, Anwal Gas Trader was a small, privately held LPG distributor with 19 distribution
licenses. They work with a variety of LPG products in Pakistan, and they have a sizable
customer base. Despite the COVID-19 pandemic, they maintained a 12% net profit margin.
Malik Asad put out a project expansion that, by merging backward to become an LPG marketing
and distribution company, would resolve the company's low storage problems. By doing this, the
corporation would avoid using an LPG distributor and sub-distributor and get the LPG straight
from the production site to its storage tanks. Even though Malik Ahmed was certain that the
expansion project would be successful, he still wished for his son Malik Asad to conduct
additional financial analysis before using his expertise in college. He carried up a feasibility
analysis for the expansion and calculated every expense the business would incur in starting
this project.

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1. Problem statement of the case study

The company is facing an LPG shortage due to delays by the supplier, especially when
demand is high. Due to lack of enough storage, the company was unable to meet consumer
demand and was forced to rely on its supplier, which had a bad impact on the company's
reputation and put future customers at risk. Therefore the company was debating whether to
invest in growth in February 2021. Since the company's foundation in 1998, it would be the
first big expansion. The business would integrate backward to take advantage of anticipated
market potential based on information provided by a consultant firm using capital budgeting
methodologies. Malik Asad's father approved of the plan but insisted on seeing a clear
picture of the financial accounts, including net present value, the internal rate of return, and
the profitability index. Therefore, the owner wanted to decide if this was a worthwhile
investment and how different outcomes would impact his choice.

2. LPG distribution process

The procedure for distribution of LPG begins at the LPG production facility, where the
liquefied petroleum gas is created. After the gas is being produced, the LPG marketing and
distribution company heavily promotes them to build a bigger market for their goods. The
products are subsequently given out to several LPG distributors and sub-distributors, among
them Anwal Gas Trader. In order to finally reach the end user, these distributors now sell
through numerous LGP retail agents or retail sales shops.

3
 3. Capital Budgeting techniques for 1st scenario
I. Cash flow estimations
In the proposal for the company to expand and build new storage units, Malik Asad used his university knowledge to forecast
and estimate the cash flows for the installation as well as cash flows for the next 10 years of the project.
The cash flows have been calculated and displayed in the tabular form as follows:

Year Annual cost Annual Sales Selling and Distribution Utility Miscellaneous Salary Annuity of EBT
Expenses Cost Expenses loan

1 208,553,280 277,293,120.00 8,318,794 2,136,000 180,000 7,536,000 22,981,866 27,587,180.40

2 216,978,833 285,667,372.22 8,570,021 2,242,800 189,000 7,912,800 22,981,866 26,792,052.55

3 225,744,777 294,294,526.87 8,828,836 2,354,940 198,450 8,308,440 22,981,866 25,877,217.71

4 234,864,866 303,182,221.58 9,095,467 2,472,687 208,373 8,723,862 22,981,866 24,835,101.08

5 244,353,407 312,338,324.67 9,370,150 2,596,321 218,791 9,160,055 22,981,866 23,657,734.40

6 254,225,285 321,770,942.07 9,653,128 2,726,137 229,731 9,618,058 22,981,866 22,336,737.27

7 264,495,986 331,488,424.52 9,944,653 2,862,444 241,217 10,098,961 22,981,866 20,863,297.45

8 275,181,624 341,499,374.94 10,244,981 3,005,567 253,278 10,603,909 22,981,866 19,228,150.40

9 286,298,962 351,812,656.07 10,554,380 3,155,845 265,942 11,134,104 22,981,866 17,421,557.82

10 297,865,440 362,437,398.28 10,873,122 3,313,637 279,239 11,690,809 22,981,866 15,433,285.17

4
Working Note
a.
For example:

Note: Expected sales volume and cost of material for the initial or fist year had been stated in the case study. The
expected sales volume and cost of material was projected to increase by 2% every year and calculations of the annual
cost in the above table have been done based on the expected increase for the remaining nine years.
b. Annual sales

For example:

Note: Price per unit for the product for the first year was stated in the case study. The expected price per unit was
projected to increase by 1% every year and calculations of the annual sale in the above table have been done based on
the expected increase for the remaining nine years.
c. Sales and distribution expenses, utility costs and miscellaneous expenses were also projected in the case study and an
increase of 3% in sales and distribution expenses, 5% increase in utility costs and miscellaneous expenses has been
computed in the above table.
d. Salary has also been calculated with 5% annual increase and annuity of the loan of 22,981,866 was calculated on the
loan amount 47,550,000 for 10 years.

5
e. Annuity of loan
The annual equal installment of the loan has been paid having considered the time value of money. Therefore, the
Present Value Interest Factor (PVIF)
The Present Value Interest Factor for a One-Dollar Annuity Discounted at k percent for n periods:
PVIF = [1-1/(1+k)n]/k
Given in the case study
n= 10 years
K= 16%
PVIF = [1-1/(1+0.16)10]/0.16 = 4.833
Therefore

= 4.833 x 47,550,000
= 229,818,660
Further
Annuity payment of debt

f. Earnings before tax

6
 II. Calculation of Required Rate of Return through Weighted Average Cost of Capital
(WACC)

E = Market value of the firm’s equity = 47,550,000

D = Market value of the firm’s debt = 47,550,000
V = Total value of capital = 95,100,000
E/V = Percentage of capital that is equity = 0.50
D/V = Percentage of capital that is debt = 0.50
Re = Cost of equity (required rate of return) =
Rd = Cost of debt = 0.16
T = Tax rate =0.29

Therefore, the required rate of return is 16.64% after the calculations with the above
mentioned formula. The calculations is as follows:

III. Cash outflows

Initial investment = 95,100,000
Debt = 47,550,000 at 16% interest rate for 10 years
Annuity payment = 22,981,866
Total repayment value = 229,818,660

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IV. Asset valuation after 10 years
Year Asset Base Value Depreciation
1 56,600,000 3,630,000 52,970,000
2 52,970,000 3,630,000 49,340,000
3 49,340,000 3,630,000 45,710,000
4 45,710,000 3,630,000 42,080,000
5 42,080,000 3,630,000 38,450,000
6 38,450,000 3,630,000 34,820,000
7 34,820,000 3,630,000 31,190,000
8 31,190,000 3,630,000 27,560,000
9 27,560,000 3,630,000 23,930,000
10 23,930,000 3,630,000 20,300,000

Salvage Value
315,150,000 is the salvage value as stated in the case study
As the asset base value in the 10th year is less than the salvage value, there is gain on
salvage value. That is
315,150,000 – 23,930,000 = 11,220,000
As it is a gain, tax should be imposed as usual; therefore, tax on gain will be
0.29 x 11,220,000 = 3,253,800

8
V. Cash inflow

Year EBT Taxes Depreciation CFAT PVIF PVIF Interpolation Present Value
(16%) (17%) (16.64%)

1 27,587,180.40 8,000,282 3,630,000 23,216,898 0.8621 0.8547 0.8574 19,905,086

2 26,792,052.55 7,769,695 3,630,000 22,652,357 0.7432 0.7305 0.7351 16,651,008

3 25,877,217.71 7,504,393 3,630,000 22,002,825 0.6407 0.6244 0.6302 13,866,926

4 24,835,101.08 7,202,179 3,630,000 21,262,922 0.5523 0.5337 0.5404 11,489,650

5 23,657,734.40 6,860,743 3,630,000 20,426,991 0.4761 0.4561 0.4633 9,464,067

6 22,336,737.27 6,477,654 3,630,000 19,489,083 0.4104 0.3898 0.3973 7,742,154

7 20,863,297.45 6,050,356 3,630,000 18,442,941 0.3538 0.3332 0.3406 6,282,102

8 19,228,150.40 5,576,164 3,630,000 17,281,987 0.3050 0.2848 0.2921 5,047,548

9 17,421,557.82 5,052,252 3,630,000 15,999,306 0.2630 0.2434 0.2504 4,006,890

10 15,433,285.17 4,475,653 3,630,000 14,587,632 0.2267 0.2080 0.2148 3,132,694

Total 97,588,124

Working note
Interpolation: It is Discount rate or the internal rate of return which is between two individual rates in the present value rates.
However, to simplify the present value, rate has been taken as 16.64% which Is the required rate of return calculated with the
information given about WACC.

9
VI. Calculations of NPV, IRR, Payback period, and profitability index
a. Net Present Value (NPV)
Total present value = 97,588,124
PV of salvage value = 0.2148 x 35,150,000 = 7,548,463
Less Tax on gain = 3,253,800
NPV = ((97,588,124 + 7,548,463– 3,253,800) – 91,500,000) = 6,782,787.56
According to Gitman & Zutter, (2012), when NPV is used to make accept–
reject decisions, the decision criteria are as follows:
• If the NPV is greater than 0, accept the project.
• If the NPV is less than 0, reject the project.
b. IRR
Formula for IRR

Where:
L = Lower discount rate at which net present value is positive
H = Higher discount rate at which net present value is negative
A = Net present value at lower discount rate
B = Net present value at higher discount rate

PV Cash inflow PV Cash inflow

CFAT PVIF (18%) PVIF(19%)
(18%) (19%)

23,216,898 0.8475 0.8403 19675337.36 19509998.39

22,652,357 0.7182 0.7062 16268570.32 15996297.79

22,002,825 0.6086 0.5934 13391598.32 13056824.06

21,262,922 0.5158 0.4987 10967178.5 10603154.65

20,426,991 0.4371 0.4190 8928826.212 8559917.907

19,489,083 0.3704 0.3521 7219371.183 6862931.23

18,442,941 0.3139 0.2959 5789700.925 5457596.852

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 17,281,987 0.2660 0.2487 4597668.031 4297520.704

15,999,306 0.2255 0.2090 3607140.681 3343324.213

14,587,632 0.1911 0.1756 2787178.221 2561622.911

Total 93,232,569.75 90,249,188.71

less: Initial investment excluding salvage

value and including tax savings ₹ 90,805,337 ₹ 90,805,337

NPV 2,427,233.04 (556,148.00)

= 0.1881 = 18.81%

Working Note

Initial investment = 95,100,000 – 7,548,463 + 3,253,800 = 90,805,337

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c. Payback Period

( )

Where;
N = Number of years before the final recovery
B = Balance amount yet to be recovered
C = Cash-flow during the year of final recovery
Year CFAT Cumulative Cash flow
1 23216898.08 23216898.08
2 22652357.31 45869255.39
3 22002824.58 67872079.97
4 21262921.77 89135001.73
5 20426991.43 109561993.2
6 19489083.46 129051076.6
7 18442941.19 147494017.8
8 17281986.79 164776004.6
9 15999306.05 180775310.6
10 14587632.47 195362943.1

Initial investment = 95,100,000

( )

= 4 years and 1 month

When the payback period is used to make accept–reject decisions, the
following decision criteria apply:
• If the payback period is less than the maximum acceptable payback period,
accept the project.
• If the payback period is greater than the maximum acceptable payback
period, reject the project. The length of the maximum acceptable payback
period is determined by management (Gitman & Zutter, 2012)

12
d. Profitability Index

The decision rule to follow when evaluating investment projects using the PI
is to invest when the PI is greater than 1 (Graham, Smart, Adam, &
Gunasingham, 2017)

13
4. Capital Budgeting for Scenario 2

The consultant advises that the government could increase the sector’s tax from 29
per cent to 35 percent. The resulting price increase would be only 3 per cent
annually.
Given data

Particulars Amount

Initial investment, including WC (Rs) 95,100,000

WACC (%) 14

Tax (%) 35

Salvage value 35,150,000

Increase in cost (%) 2

Increase in price 3

Annual sales 212,160

S&D (%) 3

Increase in Utility, micellenous and salary (%) 5

Required rate of return (%) 17.6

Annuity of loan 22,981,866

14
 The calculations and projection for scenario 2 is same as the calculation done in the scenario 1. The only change that has
occurred is due to the changes in tax rates and prices of products. The cash flow remains the same as scenario 1 and the
cash inflows are as follows:

Year EBT Taxes Depreciation CFAT PVIF (17%) PVIF (18%) Interpolation (17.6%) Present Value

1 27,587,180.40 9,655,513 3,630,000 21,561,667 0.8547 0.8475 0.8504 18,335,070

2 32,279,128.80 11,297,695 3,630,000 24,611,434 0.7305 0.7182 0.7231 17,796,923

3 37,294,725.99 13,053,154 3,630,000 27,871,572 0.6244 0.6086 0.6149 17,138,975

4 42,653,835.37 14,928,842 3,630,000 31,354,993 0.5337 0.5158 0.5229 16,396,571

5 48,377,466.45 16,932,113 3,630,000 35,075,353 0.4561 0.4371 0.4447 15,598,360

6 54,487,838.53 19,070,743 3,630,000 39,047,095 0.3898 0.3704 0.3782 14,767,391

7 61,008,447.83 21,352,957 3,630,000 43,285,491 0.3332 0.3139 0.3216 13,922,050

8 67,964,138.35 23,787,448 3,630,000 47,806,690 0.2848 0.2660 0.2735 13,076,843

9 75,381,176.38 26,383,412 3,630,000 52,627,765 0.2434 0.2255 0.2326 12,243,067

10 83,287,329.27 29,150,565 3,630,000 57,766,764 0.2080 0.1911 0.1979 11,429,364

150,704,615

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PV of Salvage value 6,954,555

Less tax on gain 3,927,000

Gross PV 153,732,171

NPV 58,632,170.59

IRR 30.7160

PBP 2 years 8 months

PI 1.62

All the capital budgeting techniques such as NPV, IRR, PBP and PI saw a substantial increase indicating that:
1. Increase in NPV was mainly due to the increase in the required rate of return and cash inflows of the firm. An increase in NPV
would be desirable for the firm.
2. According to Ganti, (2022), higher the internal rate of return, the more desirable an investment is to undertake.
3. Shorter the payback period, the more desirable it is for the company
4. Higher is accepted for profitability index as well.
The reason for such desirable outcome in scenario 2 despite the rise in taxes was because the amount of cash inflows that is
generated through an increase in the product prices exceeds way beyond the outflow which is caused by increase in tax rate.
Therefore, it could be concluded that the scenario 2 will not change the company’s decision but could affect the decision in terms of
planning and forecast of future cash flows.

16
5. Capital Budgeting of Scenario 3

The finance department advises a local bank interest rate of 19 per cent and a weighted
average cost of capital (WACC) of 15 per cent.
Given data

Particulars Amount

Initial investment, including WC (Rs) 95,100,000

WACC (%) 14

Tax (%) 29

Salvage value 35,150,000

Increase in cost (%) 2

Increase in price 1

Annual sales 212,160

S&D (%) 3

Increase in Utility, miscellaneous and salary (%) 5

Required rate of return (%) 16.51

Annuity of loan (Rs) 27,078,221

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Cash inflows

Interpolation
Year EBT Taxes Depreciation CFAT PVIF (16%) PVIF (17%) (16.51%) Present Value

1 23,490,825.00 6,812,339 3,630,000 20,308,486 0.8621 0.8547 0.8583 17,431,001

2 22,695,697.55 6,581,752 3,630,000 19,743,945 0.7432 0.7305 0.7367 14,545,596

3 21,780,862.71 6,316,450 3,630,000 19,094,413 0.6407 0.6244 0.6324 12,074,376

4 20,738,746.08 6,014,236 3,630,000 18,354,510 0.5523 0.5337 0.5428 9,962,537

5 19,561,379.40 5,672,800 3,630,000 17,518,579 0.4761 0.4561 0.4659 8,162,117

6 18,240,382.27 5,289,711 3,630,000 16,580,671 0.4104 0.3898 0.3999 6,631,181

7 16,766,942.45 4,862,413 3,630,000 15,534,529 0.3538 0.3332 0.3433 5,333,099

8 15,131,795.40 4,388,221 3,630,000 14,373,575 0.3050 0.2848 0.2947 4,235,914

9 13,325,202.82 3,864,309 3,630,000 13,090,894 0.2630 0.2434 0.2530 3,311,772

10 11,336,930.17 3,287,710 3,630,000 11,679,220 0.2267 0.2080 0.2172 2,536,423

84,224,016

18
 PV of Salvage value 7,633,667

Less tax on gain 3,253,800

Gross PV 88,603,883

NPV -6,496,117

IRR 30.915

PBP 4years 5 months

PI 0.93

In case of scenario 3, the capital budgeting techniques indicate that:

1. NPV is negative, thus the acceptance rule of NPV has not fulfilled as NPV is less than
0 so the project should be rejected.
2. IRR is similar to scenario 2, whereby its desirable by the firm.
3. PBP is the longest amongst all three scenarios indicating that a long period of time is
require recovering or retaining the initial investment.
4. Profitability index is also less than 1, thus the acceptance rule is not fulfilled, indicating
that the firm should not take or undertake the project under such scenario (Eugene,
Brigham, Michael, & Ehrhardt, 2016).
Therefore it can be concluded that under such scenario, the firm should not accept the project
as majority of the capital budgeting techniques indicate that the scenario will not be profitable for
the firm.

19
Conclusion

The case study “Anwal Gas Traders: Capital Budgeting for Expansion Project” is about a
distribution company which is planning to expand its business through the development of a
storage units and distribution channels to insure that the business operations are broadened
and to mitigate the increasing cost due to wholesalers and small storage units. Through this
case study, three important scenarios have been calculated and analyzed using different capital
budgeting techniques. The scenarios showed that the company should accept or invest in the
new project in case of scenario 1 and 3 as their NPV was positive as well as the PI was greater
than 1. However, in scenario 2, it was analyzed that the company should not invest under such
scenario because the NPV was negative and PI is also less than 1. Therefore, through this case
study, the authors of the study were able to implement and learn about the capital budgeting
and its applications in such scenarios.

20
References

Course Hero. (2021, August 16). FM case study test 2 (1).xlsx. Retrieved from Course Hero:
https://www.coursehero.com/u/file/134062433/FM-case-study-test-2-1xlsx/#question
Eugene, F., Brigham, Michael, C., & Ehrhardt. (2016). Financial Management: Theory &
Practice (15th ed.). Boston: MA: Cengage Learning.
Ganti, A. (2022, March 29). Internal Rate of Return (IRR) Rule. Retrieved from Investopedia:
https://www.investopedia.com/terms/i/internal-rate-of-return-
rule.asp#:~:text=Essentially%2C%20the%20IRR%20rule%20is,project%20generates%2
0for%20the%20company.
Gitman, L. J., & Zutter, C. J. (2012). Principles of Managerial Finance (13th ed.). Boston: MA:
Pearson.
Graham, J. R., Smart, S. B., Adam, C., & Gunasingham, B. (2017). Introduction to Corporate
Finance (2nd ed.). (C. Learning, Ed.) Sydney, Australia: Asia Pacific.
Yousaf, I., Li, Z. F., & Nawaz, A. (2021). Anwal Gas Traders: Capital Budgeting for Expansion
Project. Ivey Business School Foundation.
Yousaf, I., Li, Z. F., & Nawaz, A. (2021, August 16). Anwal Gas Traders: Capital Budgeting for
Expansion Project- Student Spreadsheet. W25082. Ivey Publishing.

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