Financial Management MGT201
Assignment 1
ABC Corporation, a maker of electronics equipments, is considering selling the rights to market its products to a well_known advertising firm.
The proposed deal calls for annual year end payments of Rs.15,000 in years 1 through 7 and
payments of Rs.30,000 and Rs.25,000 at the end of 8th and 9th year respectively . A final payment of Rs. 10,000 would be due at the end of year 10.
1. If ABC Corporation applies a required rate of return of 12% to them, what is the present value of this series of payments?
Solution:
Year Cash Flows Present Value of Cash Flows
PV = FV / (1+i)^n
1 15,000 13,392.86
2 15,000 11,957.91
3 15,000 10,676.70
4 15,000 9,532.77
5 15,000 8,511.40
6 15,000 7,599.47
7 15,000 6,785.24
8 30,000 12,116.50
9 25,000 9,015.25
10 10,000 3,219.73
Present Value of series of payments 92,807.83
2. A second company has offered ABC Corporation a payment of Rs.30,000 now and
another final payment of Rs.80,000 at the end of year 3 for the rights to market the
products. Which offer should ABC Corporation accept?
Year Cash Flows Present Value of Cash Flows
PV = FV / (1+i)^n
1 30,000 30,000.00 (As this payment was
made immediately, therefore
carries no interest)
3 80,000 56,942.42
Present Value of series of payments 86,942.42
ABC corporation must accept the proposal whose Present Value of Series of Payment is higher
i.e. 92,807.83
........
ABC Corporation, a maker of electronics equipments, is considering selling the rights to market
its products to a well-known advertising firm.
The proposed deal calls for annual year end payments of Rs.15,000 in years 1 through 7 and
payments of Rs.30,000 and Rs.25,000 at the end of 8th and 9th year respectively . A final payment of Rs. 10,000 would be due at the end of year 10.
Answer
Year Cash Flows Present Value of Cash Flows
PV = FV / (1+i)^n
1 15,000 15000/(1+0.12)^1 = 13,392.86
2 15,000 11,957.91
3 15,000 10,676.70
4 15,000 9,532.77
5 15,000 8,511.40
6 15,000 7,599.47
7 15,000 6,785.24
8 30,000 12,116.50
9 25,000 9,015.25
10 10,000 3,219.73
Present Value of series of payments 92,807.83
2. A second company has offered ABC Corporation a payment of Rs.30,000 now and
another final payment of Rs.80,000 at the end of year 3 for the rights to market the
products. Which offer should ABC Corporation accept
Year Cash Flows Present Value of Cash Flows
PV = FV / (1+i)^n
30,000
30,000.00 this payment gave urgent so there is no include no of year
PV = FV / (1+i)^n
3 80,000 =56,942.42
=30000
present value of series of payment =86,942.42
ABC corporation must accept the proposal whose Present Value of Series of Payment is high
92,807.83
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