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 1st project
Investment = 700,000
So 700,000-(cash inflows )
162000+173600+185550+189850=711000
so payback period is about $ years
Payback period for 2nd 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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