Scribd Logo
Upload

Welcome to Scribd!

  • 29 views

    FIN Home Assigment Answers

    Uploaded by

    Ikra Memon
    This document contains two questions regarding capital budgeting analysis. For question 1, it analyzes two mutually exclusive projects X and Y based on their payback periods, NPVs, and IRRs. It concludes that project Y should be selected since it has the higher positive NPV of $1,811. For question 2, it performs a capital budgeting analysis for a 3-year project. It calculates the projected income statement, cash flows, and discounts the cash flows at the required rate of 10% to find the NPV of $12,727. It concludes the project should be accepted.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd

    FIN Home Assigment Answers

    Uploaded by

    Ikra Memon
    29 views5 pages
    This document contains two questions regarding capital budgeting analysis. For question 1, it analyzes two mutually exclusive projects X and Y based on their payback periods, NPVs, and IRRs. It concludes that project Y should be selected since it has the higher positive NPV of $1,811. For question 2, it performs a capital budgeting analysis for a 3-year project. It calculates the projected income statement, cash flows, and discounts the cash flows at the required rate of 10% to find the NPV of $12,727. It concludes the project should be accepted.

    Copyright

    © © All Rights Reserved

    Available Formats

    XLSX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document contains two questions regarding capital budgeting analysis. For question 1, it analyzes two mutually exclusive projects X and Y based on their payback periods, NPVs, and IRRs. It concludes that project Y should be selected since it has the higher positive NPV of $1,811. For question 2, it performs a capital budgeting analysis for a 3-year project. It calculates the projected income statement, cash flows, and discounts the cash flows at the required rate of 10% to find the NPV of $12,727. It concludes the project should be accepted.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    29 views5 pages

    FIN Home Assigment Answers

    Uploaded by

    Ikra Memon
    This document contains two questions regarding capital budgeting analysis. For question 1, it analyzes two mutually exclusive projects X and Y based on their payback periods, NPVs, and IRRs. It concludes that project Y should be selected since it has the higher positive NPV of $1,811. For question 2, it performs a capital budgeting analysis for a 3-year project. It calculates the projected income statement, cash flows, and discounts the cash flows at the required rate of 10% to find the NPV of $12,727. It concludes the project should be accepted.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 5

    FIN2001 FINANCIAL MANAGEMENT

    Home Assignment 4 (Topic 8 & 9)

    Q1 Two mutually exclusive projects


    Cost of Capital: 10%
    YEAR CASHFLOW (X) DISCOUNTED CASHFLOW (X) CASHFLOW (Y)
    0 $ (42,500) $ (42,500) $ (34,000)
    1 $ 28,000 $ 25,455 $ 6,500
    2 $ 16,500 $ 13,636 $ 14,000
    3 $ 6,600 $ 4,959 $ 24,400
    NPV $ 1,550
    IRR 12.61%

    Part A: Payback period for each project

    Project X 1.88 years


    Project Y 2.55 years

    Part B: NPV of each project

    Project X $ 1,549.59
    Project Y $ 1,811.42

    Part C: Conclusions

    Answer: Both projects are mutually exclusive, so we can select only one project. Both projects have positive NPVs, with IRR g
    Payback period of project X is lower than that of the Project Y, mainly because project X is generating higher cashflow
    So, as per the NPV criterion, Project Y will be choosen due to its higher positive NPV because NPV is more realistic ap
    NPV method is preferable because IRR is unreliable in case of mutully exlcusive cases like this and with non-conventi
    Decision: Project Y will be choosen due to higher positive NPV of $1,811
    DISCOUNTED CASHFLOW (X)
    $ (34,000)
    $ 5,909
    $ 11,570
    $ 18,332
    $ 1,811
    12.47%

    ojects have positive NPVs, with IRR greater than its cost of capital i.e., 10%
    project X is generating higher cashflows in the later years not in the earlier years like Project X.
    NPV because NPV is more realistic approach in determining the future feasibility of a project
    cases like this and with non-conventional cashflows.
    Q2:
    Data:
    Initial fixed investment cost: $4.2 million
    Years 3 years
    Depreciation method Striaght line
    Initial investment in NWC $420,000
    Annual Sales $3,500,000
    Annual cost of sales $1,680,000
    Tax rate 20%
    Required return 10%

    Solution:

    Part A:
    Operating cash flow (OCF): EBIT+Depreciation-Taxes

    PROJECTED INCOME STATEMENT

    Annual Savings (Sales-Cost) $1,820,000


    Depreciation per year $1,400,000
    PBT $420,000
    Tax rate 20%
    Tax $84,000
    Net Income $336,000
    OCF (Net Income+Depreciation) $1,736,000

    Part B:
    Net cashflows for 0-3 years

    Total Initial Investment: Fixed Investment cost + NWC


    Total Initial Investment: $4,620,000

    Year 0 Year 1 Year 2 Year 3


    Annual Savings $1,820,000 $1,820,000 $1,820,000
    Depreciation cost 1400000 1400000 1400000
    PBT $420,000 $420,000 $420,000
    Tax cost (@20%) $84,000 $84,000 $84,000
    Net Income $336,000 $336,000 $336,000
    OCF $1,736,000 $1,736,000 $1,736,000
    Terminal Cash flow $420,000

    Net Cashflow ($4,620,000) $1,736,000 $1,736,000 $2,156,000

    Part C:
    Project's NPV and conclusion
    Net Cashflow Discounted Cashflows @ 10%
    Year 0 ($4,620,000) ($4,620,000)
    Year 1 $1,736,000 $1,578,182
    Year 2 $1,736,000 $1,434,711
    Year 3 $2,156,000 $1,619,835

    NPV $12,727

    Conclusion for this project: This project should be accepted as it is bringing higher positive cashflows (NPV) of $12,727 to
    shflows (NPV) of $12,727 to the company and will generate above average returns

    You might also like