ACC501 Assignment No. 2 solution

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“Business Finance (ACC501)”

Assignment No. 02 Marks: 10

Company ABC is considering an investment in a new project. The company has an option of two projects A & B. The project A will require an initial outlay of Rs.100,000 and project B will require Rs.120,000. The discount rate for both projects is 12% and both projects are expected to generate following cash flows at the end of years:

Year Project A Project B

Rs. Rs.

1 50,000 60,000

2 40,000 40,000

3 50,000 50,000

Calculate net present value of both projects and suggest which project is more feasible. Show complete calculation with formulas.

Schedule

Opening Date and Time January 24, 2011 At 12:01 A.M. (Mid-Night)

Due Date and Time January 27, 2011 At 11:59 P.M. (Mid-Night)
....................
Calculate net present value of both projects and suggest which project is more feasible.
Show complete calculation with formulas.
Solution
Project A opening investment=100000
Project B opening investment =120000
R=12% =12/100=0.12
Formula= NPV=F.V/(1+r)^t
Finding net present value for project A
=50000/(1+0.12) + 40000/(1+0.12)^2 + 50000/(1+0.12)^3
=50000/1.12 + 40000/1.25 + 50000/1.40
=44642.8571 + 31887.7551 + 35589.0124
Expected cash flow=112119.6246
Expected cash flow – cost
112119.6246-100000
Net present value is 12119.6246
Finding Net present value for Project B
=60000/(1+0.12) + 40000/(1+0.12)^2 + 50000/(1+0.12)^3
=60000/1.12 + 40000/1.25 + 50000/1.40
=53571.4286 + 31887.7551 + 35589.0124
Expected cash flow=121048.1961
Expected cash flow – cost
121048.1961-120000
Net present value is 1048.1961
Project A is more feasible
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SOLUTION

PROJECT (A)

PROJECT A INITIAL INVESTMENT IS 100000
R = 12%
R =12/100 =.12

FORMULAS
PV =FV/ (1+R)^T
NPV =EXPECTED CASH FLOW - COST
NOW FIRST WE FIND PV
FORMULA FOR PV IN T PERIOD IS
PV =FV/(1+R)^T
PV =50000/(1+.12)+40000/(1+.12)^2 + 50000/(1+.12)^3
PV =50000/1.12 +40000/1.12)^2 + 50000/(1.12)^3
PV =50000/1.12 + 40000/1.25 + 50000/1.40
PV =44642.8571 +31887.7551 +35589.0124
PV =112119.6246 EXPECTED CASH FLOW

NOW NPV IS
NPV = EXPECTED CASH FLOW- COST
NPV =112119.6246 – 100000
NPV =12119.6246

PROJECT (B)
PROJECT B INITIAL INVESTMENT IS 120000
R = 12%
R =12/100 =.12
FORMULA
PV =FV/(1+R)^T
NOW FIRST WE FIND PV
FORMULA FOR PV IN T PERIOD IS
PV =FV/ (1+R)^T
PV =60000/(1+.12) + 40000/(1+.12)^2 + 50000/(1+.12)^3
PV =60000/1.12 + 40000/1.25 + 50000/1.40
PV =53571.4286 + 31887.7551 +35589.0124
PV =121048.1961 EXPECTED CASH FLOW

NOW NPV IS
NPV = EXPECTED CASH FLOW- COST
NPV =121048.1961 – 120000
NPV =1048.1961
PROJECT A IS MORE FEASIBLE THAN THE PROJECT B