[VUSR] 65153 MGT201 Assignment No.1 April 2012

MGT201

Assignment No.1 April 2012

Question#1

NPV= -IO+sum of CFt/(1+i)t ---------------------- HO page # 41

here

-IO= 700000

CF= 162000 n 173600 n 185550 n 189850 n 192980

I = 8% = 0.08

T = 1 ,   2 ,3  4,   5

 

NPV= -700000+ 162000/(1+0.08)^1  + 173600/(1+0.08)^2    +  185550/(1+0.08)^3  + 189850/(1+0.08)^4  + 192980/(1+0.08)^5

 

NPV=   now calculate

 

Question#2

PI = {sum CFt/(1+i)^t}/IO  -------------------------- HO page #42

 

PI = {sum 163000/(1=0.09)+167456/(1+0.09)^2 + 172850/(1+0.09)^3 + 177940/(1+0.09)^4 + 181550/(1+0.09)^5}/830000

PI =

 

Question#3 ----------------------- HO page # 40

 

Payback period for 1^st project

Investment = 700,000

So 700,000-(cash inflows )

    162000+173600+185550+189850=711000

so payback period is about $ years

 

Payback period for 2^nd  project

Investment = 830000

So 830000-(cash inflows)

163000+167456+172850+177940+181550=862807

so payback period is about 5 years 

Suppose, you have been appointed as a financial analyst at a company named ABC Incorporation, which requires you to think over and analyze two projects so that a wise investment decision can be made for future expansion of the business. The details of both projects are as follows:
Project 1 requires an initial investment of Rs. 700,000. Expected cash inflows of the project for next five years are Rs. 162,000, Rs. 173,600, Rs. 185,550, Rs. 189,850 and Rs. 192,980.
Required rate of return for this investment is 8%.
Project 2 requires an initial investment of Rs. 830,000. Expected cash inflows of the project for next five years are Rs. 163,000, Rs. 167,456, Rs 172,850, Rs. 177,940 and Rs. 181,550. Required rate of return for this project is 9%.

Q; 01- Analyze the feasibility of project 1 by using 'Net Present Value' method?
Answer-
Calculation: this can be calculated simply by using this technique.162000/1.08+173600/(1.08^2)+185550/(1.08^3)+189850/(1.08^4)+192980/(1.08^5)-700000
= 17013
Q:-II. Analyze the feasibility of project 2 with the help of 'Profitability Index'.
Answer-
Calculation: this can be calculated simply by using this technique.
(830000+163000/(1.09)+167456/(1.09^2)+172850/(1.09^3)+177940/(1.09^4)+181550/(1.09^5)+830000)/830000 = 0.8048

Answer: 'Payback Period' of each project and analyze which project will recover the invested money in less time.

Solution:

Solution for the project I				Solution for the project II
Years	Investment	Cash Flow	C.C.in flow	Years	Investment	Cash Flow	C.C.in flow
0	(700000)	-	(700000)	0	830000	-	(830000)
1		162000	(538000)	1		163000	(667000)
2		173000	(364400)	2		167456	(499544)
3		185550	(178850)	3		172850	(326694)
4		189850	11000	4		177940	(148754)
5		192980	203980	5		181550	32796

Calculation of Pay Back Periods
Project I = 3Years + 178850/189850*12
= 3Years and 11Months or 3.94 years
Same Method for Second Project
Project II = 4Years + 1478754/181550*12
=4 Years 10Months or 4.82 years
Always accept the project which gives investment back as soon as possible but disadvantage of that technique is that it ignore profitability In above case Project I will be accepted if mutually exclusive.

________________________________________________________________________________

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Regards, 

Umair Saulat

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