Blog: Mgt411 Assignment No. 1 solution

Schedule

Opening Date and Time April 15 , 2011 At 12:01 A.M. (Mid-Night)

Due Date and Time April 20 , 2011 At 11:59 P.M. (Mid-Night)

Only in the case of Assignment,after the above mentioned due date is usually available to overcome uploading difficulties which may be faced by the students on last date. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience.

Question # 1: 

(Marks: 08)

Mr Ahmad, the director of Supreme Textile Limited, is deciding to install a new plant for fiber spinning. Mr Ahmad has a choice to install a plant that will transform the raw cotton into yarn, project costs Rs 2,000,000/- and will generate revenue of Rs 550,000 for the next five years. Assume the company’s discount rate/cost of borrowing is 9%. Calculate IRR for above project by using trial and error method.

Question # 2: 

(Marks: 08)

Find the present value of a coupon bond, having face value Rs 1000/-, coupon rate of 12.5% per annum with 7 years maturity. During current economic conditions the investor’s required rate of return is 5%.

Requirement: Calculate Present value of Coupon Bond.

Question # 3 (Marks: 04)

Prevailing interest rate in the country is 14%, if expected inflation rate is 11% calculate the real interest rate by using fisher equation.

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SOLUTION
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Solution 1 
Assume the company’s discount rate/cost of borrowing is 9%. 
Calculate IRR for above project by using trial and error method. 
The IRR is calculated by a trial and error process 
1. The NPV is calculated using discount rate r. 
2. If the NPV is close to zero then r is the IRR. 
3. If the NPV is positive r is increased. 
4. If the NPV is negative r is decreased. 
First we calculate the NPV using the discount rate which is 9% given in question 
NPV = CF0 + CF1/ (1+r) + CF2/ (1+r) 2 + CF3/ (1+r) 3 +CF4/ (1+r) 4 + CF5/ (1+r) 5 
0= -2000000+550000/ (1.09) +550000(1.09)2+550000(1.09) 3 +550000(1.09)4 +550000(1.09)5 
0= -2000000+504587+462924+424700+389633+357462 
0= 139306 
It is Positive so we increased our r 9% to 12% and use 12% instead of 9% 
NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 +CF4/(1+r)4 + CF5/(1+r)5 
0= -2000000+550000/ (1.12) +550000(1.12)2+550000(1.12) 3 +550000(1.12)4 +550000(1.12)5 
0= -2000000+491071+438456+391479+349534+312085 
0= -17375 

Now it is Negative so we decrease rate. Let’s try 11.648 
NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 +CF4/(1+r)4 + CF5/(1+r)5 
0= -2000000+550000/ (1.11648) +550000(1.11648)2+550000(1.11648) 3 +550000(1.11648)4 +550000(1.648)5 
0= -2000000+492620+441226+395193+353964+317035 
0= -2000000+2000038 
This rate is NEARLY suitable at IRR 11.648 
So IRR is 11.648 
Solution 2 
PV of Coupon Bond =C [(1-(1/1+i) n)/i] +m/(1+i)n 
C= Coupon payment 
I= Rate of return = 5% 
M= Face value =1000 
N= periods = 7 years 
C= = Coupon Rate* Face value 
= 12.5%*1000=125 
Now putting value in Formula 
PV of Coupon Bond =125[(1-(1/1+.05)7)/.05]+1000/(1+.05)7 
PV of Coupon Bond =125[(1-(1/1.4071)/.05]+1000/1.4071 
PV of Coupon Bond =125[(1-.7107)/.05] +711 
PV of Coupon Bond =125[0.2893/.05] +711 
PV of Coupon Bond =125[5.786]+711 
PV of Coupon Bond = 723+711 
PV of Coupon Bond =1434.25 

Solution 3 

interest rate by using fisher equation. 

R=14%-11% 
R=3%

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Semester “Spring 2011”

“Money & Banking (MGT411)”

Question # 1: (Marks: 08)

Mr Ahmad, the director of Supreme Textile Limited, is deciding to install a new plant for fiber spinning. Mr Ahmad has a choice to install a plant that will transform the raw cotton into yarn, project costs Rs 2,000,000/- and will generate revenue of Rs 550,000 for the next five years.

Assume the company’s discount rate/cost of borrowing is 9%.

Calculate IRR for above project by using trial and error method.

The IRR is calculated by a trial and error process

1. The NPV is calculated using discount rate r.

2. If the NPV is close to zero then r is the IRR.

3. If the NPV is positive r is increased.

4. If the NPV is negative r is decreased.

First we calculate the NPV using the discount rate which is 9% given in question

NPV = CF0 + CF1/ (1+r) + CF2/ (1+r) 2 + CF3/ (1+r) 3 +CF4/ (1+r) 4 + CF5/ (1+r) 5

0= -2000000+550000/ (1.09) +550000(1.09)2+550000(1.09) 3 +550000(1.09)4 +550000(1.09)5

0= -2000000+504587+462924+424700+389633+357462

0= 139306

It is Positive so we increased our r 9% to 12% and use 12% instead of 9%

NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 +CF4/(1+r)4 + CF5/(1+r)5

0= -2000000+550000/ (1.12) +550000(1.12)2+550000(1.12) 3 +550000(1.12)4 +550000(1.12)5

0= -2000000+491071+438456+391479+349534+312085

0= -17375

Now it is Negative so we decrease rate. Let’s try 11.648

NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 +CF4/(1+r)4 + CF5/(1+r)5

0= -2000000+550000/ (1.11648) +550000(1.11648)2+550000(1.11648) 3 +550000(1.11648)4 +550000(1.648)5

0= -2000000+492620+441226+395193+353964+317035

0= -2000000+2000038

This rate is NEARLY suitable at IRR 11.648

So IRR is 11.648

Question # 2: (Marks: 08)

Find the present value of a coupon bond, having face value Rs 1000/-, coupon rate of 12.5% per annum with 7 years maturity. During current economic conditions the investor’s required rate of return is 5%.

Requirement: Calculate Present value of Coupon Bond.

PV of Coupon Bond =C [(1-(1/1+i) n)/i] +m/(1+i)n

C= Coupon payment

I= Rate of return = 5%

M= Face value =1000

N= periods = 7 years

C= = Coupon Rate* Face value

= 12.5%*1000=125

Now putting value in Formula

PV of Coupon Bond =125[(1-(1/1+.05)7)/.05]+1000/(1+.05)7

PV of Coupon Bond =125[(1-(1/1.4071)/.05]+1000/1.4071

PV of Coupon Bond =125[(1-.7107)/.05] +711

PV of Coupon Bond =125[0.2893/.05] +711

PV of Coupon Bond =125[5.786]+711

PV of Coupon Bond = 723+711

PV of Coupon Bond =1434.25

Question # 3 (Marks: 04)

Prevailing interest rate in the country is 14%, if expected inflation rate is 11% calculate the real

interest rate by using fisher equation.

R=i+