Case Description This case is adapted from a case study developed by Meric, Dunne, Li and Meric (2010). Interested students can read the original case from the following source: Meric, I., Dunne, K., Li, S. F., & Meric, G. (2010). Variety Enterprises Corporation: Capital Budgeting Decision. Review of Business & Finance Case Studies, 1(1), 15-25. The capital investment decision is one of the most important financial decisions in business firms. In this case, Dashen Bank Share Company (DBSC) is considering whether to invest in a system to modernize its local money transfer system. To determine if the project is feasible, DBSC must first determine the weighted average cost of capital (WACC) to finance the project. The simple payback period, discounted payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR) techniques are used to study the feasibility of the project. MIRR is a relatively new capital investment appraisal technique, which assumes that the reinvestment rate of the projects intermediary cash flows is the banks cost of capital. The stand-alone risk of the project is evaluated with the sensitivity and scenario analyses techniques assuming that the new system would not affect the current market risk of the bank. The case will give students an opportunity to use the theoretical feasibility assessment tools and techniques known to them through class lectures and presentations, personal readings and group assignment in a real-world setting. Keywords: Investment appraisal, capital budgeting, weighted average cost of capital, cash flow, payback period, net present value, internal rate of return, modified internal rate of return, sensitivity analysis, scenario analysis Case Information DBSC is planning to invest in an internet-based special system to deliver local money transfer services to its customers. The existing local money transfer system is predominantly manual which, among other things, is time consuming and subject to different errors resulting in high customer dissatisfaction and attrition. A pre-feasibility study done before months which cost the bank Br.25,000, has recommended that the existing system must be replaced by a modern one if the bank is to maintain its leadership in the banking sector. Accordingly, the bank commissioned a Br.65,000 study on the feasibility of the new system. The study shows that the invoice price of the new system is Br.500,000 subject to 15% 2 non-refundable VAT. It would require Br.40,000 in shipping costs and Br.80,000 in installation costs. The system will be depreciated using a fixed annual rate of 20% on its original cost. DBSC plans to use the system for 5 years and then after sell fixed facilities of the system for Br.70,000 which is sufficient enough to cover the Br.15,000 expected cost of disposing the system. The bank expects the system to increase the number of customers for its local money transfer services by 100,000 representing 80% of the capacity of the new system with an average fee per customer of Br.5 and cost of Br.3 per customer, excluding depreciation. Management forecasts that both the service fee and cost per customer will increase by 10% per year due to inflation. DBSCs net operating working capital would have to increase by 25% of fees earned to deliver the transfer service. The bank is subject to 30% income tax. Effects of the new system in the net cash flows of other units of the bank are considered immaterial, thus, ignored from this analysis. DBSCs WACC Tibeb, a recent MBA graduate of the Addis Ababa University, is conducting the investment appraisal for the project. The bank hired him only a few weeks ago as the head of the newly formed Planning and Business Development Department. In order to evaluate the feasibility of the investment in the new system, Tibebs first task is to estimate DBSCs WACC. He plans to use the financial data in Exhibit-1 below to estimate the WACC.

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