Financial management (final exam) Essay Example | Topics and Well Written Essays - 1000 words

Financial management (final exam) - Essay ExampleTherefore, the results of both techniques will be contrary because of the differences between the assumptions of both techniques. Question 2 Part A a) tolerate A Years 0 1 2 3 4 sign Investment (20,000,000) Cash Flows 3,000,000 7,000,000 9,000,000 15,000,000 snub Factor (8%) 1.0000 0.9259 0.8573 0.7938 0.7350 throw outed Cash Flows (20,000,000) 2,777,778 6,001,372 7,144,490 11,025,448 Net Present Value 6,949,087 Project B Years 0 1 2 3 4 Initial Investment (20,000,000) Cash Flows 10,000,000 8,000,000 5,000,000 5,000,000 discount rate Factor (8%) 1.0000 0.9259 0.8573 0.7938 0.7350 discounted Cash Flows (20,000,000) 9,259,259 6,858,711 3,969,161 3,675,149 Net Present Value 3,762,280 Based on the above results it can be clearly observed that Project A has generated higher NPV therefore, it should be accepted. b) Project A Profitability Index = PV of Future Cash Flows Initial Investment = 26949087/20000000 = 1.35 Project B Profit ability Index = PV of Future Cash Flows Initial Investment = 14503021/20000000 = 0.73 Since the Profitability Index of Project A is greater than 1, therefore this project should be accepted. c) IRR based on Trial & Error Method Years 0 1 2 3 4 Initial Investment (20,000,000) Cash Flows 3,000,000 7,000,000 9,000,000 15,000,000 Discount Factor (17.5%) 1.0000 0.8511 0.7243 0.6164 0.5246 Discounted Cash Flows (20,000,000) 2,553,191 5,070,167 5,547,904 7,869,367 Net Present Value 1,040,630 Years 0 1 2 3 4 Initial Investment (20,000,000) Cash Flows 3,000,000 7,000,000 9,000,000 15,000,000 Discount Factor (18.5%) 1.0000 0.8439 0.7121 0.6010 0.5071 Discounted Cash Flows (20,000,000) 2,531,646 4,984,956 5,408,632 7,607,078 Net Present Value 532,312 Years 0 1 2 3 4 Initial Investment (20,000,000) Cash Flows 3,000,000 7,000,000 9,000,000 15,000,000 Discount Factor (19.5%) 1.0000 0.8368 0.7003 0.5860 0.4904 Discounted Cash Flows (20,000,000) 2,510,460 4,901,875 5,273,984 7,355,626 Net Pr esent Value 41,945 Years 0 1 2 3 4 Initial Investment (20,000,000) Cash Flows 3,000,000 7,000,000 9,000,000 15,000,000 Discount Factor (19.58%) 1.0000 0.8362 0.6992 0.5847 0.4889 Discounted Cash Flows (20,000,000) 2,508,629 4,894,727 5,262,453 7,334,191 Net Present Value 0 d) Since the IRR of is 19.58% therefore it should be accepted because it is earning more than the double of the cost of ceiling of the friendship. e) Advantages of NPV NPV provides the total emolument in the form of currency amount. NPV is easy to calculate and understand. NPV is an absolute measure and provides the results of the project in isolation. Advantages of IRR IRR provides the answer in part form. IRR provides the net excess percentage over cost of capital. IRR is relative measure, which makes it comparable to other projects. Part B Steps in Capital Budgeting Typical steps in the process of capital budgeting are 1. Brainstorming the most important step in capital budgeting process is to generate go od ideas for investments, which comes from brainstorming. 2. Capital Budget Planning In this step, the company