Blog: Mgt201 GDB No. 1 solution

Semester “Fall 2010”

“Financial Management (MGT201)”

This is to inform that Graded Discussion Board (GDB) has opened according to the following schedule

Schedule

Opening Date and Time
November 03, 2010 At 12:01 A.M. (Mid-Night)

Closing Date and Time
November 05, 2010 At 11:59 P.M. (Mid-Night)

Note: No extra or bonus/grace period is available for attempting GBD.

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XYZ enterprises is planning for capital expenditure and for this purpose, it is considering two mutually exclusive projects. Each requires an initial investment of Rs.50,000. The president of XYZ Enterprises has set the maximum acceptable payback period of 4 years. After tax cash inflows associated with each project are as follows:

Cash inflows
Year
Project A
Project B

1
10,000
Rs.12,000

2
14,000
12,000

3
18,000
12,000

4
10,000
12,000

5
11,000
12,000


a) Determine the payback period of Project A and state whether it is acceptable?

b) Determine the payback period of Project B and state whether it is acceptable?

Solution

Project A
Io=50000
CF1=10000
CF2=14000
CF3=18000
CF4=10000
CF5=11000
=3+2000/10000
=3.2
Payback period for Project A investment is (3.2) years
Project B
Io=50000
CF1=12000
CF2=12000
CF3=12000
CF4=12000
CF5=12000
=4+2000/10000
=4.166
Payback period for Project B investment is (4.166) years

So the project A is acceptable because its payback period is less then the project B

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FINANCIAL MANAGMENT

XYZ enterprises is planning for capital expenditure and for this purpose, it is considering two mutually exclusive projects. Each requires an initial investment of Rs.50,000. The president of XYZ Enterprises has set the maximum acceptable payback period of 4 years. After tax cash inflows associated with each project are as follows:

            Cash inflows

Year       

Project A        Project B

1:10,000          Rs.12,000

2:14,000            12,000

3:18,000           12,000

4:10,000           12,000

5:11,000           12,000

a)     Determine the payback period of Project A and state whether it is acceptable?

Cash flow in 1 year = 10,000

Cash flow in 2 year = 14,000

Cash flow in 3 year = 18,000

Cash flow in 4 year = 10,000

Cash flow in 5 year = 11,000

10,000 + 14,000 + 18,000 + 8,000* = 50,000

Pay back period is 3year 9 months and 18 days. Yes according to wish of president of XYZ it is acceptable.

*   10,000 / 12(Months) = 833.33

 833.33 X 9.6(Months) = 7999.968

        .06 x 30 = 18.25

        18 days

b)            Determine the payback period of Project B and state whether it is acceptable?

Cash flow in 1 year = 12,000

Cash flow in 2 year = 12,000

Cash flow in 3 year = 12,000

Cash flow in 4 year = 12,000

Cash flow in 5 year = 12,000

12,000 +12,000 +12,000 +12,000 +2,000* = 50,000

Pay back period of the B is 4year 2 Months. No according to wish of president of XYZ it is not acceptable.

*12,000 / 12(Months)

1000/per month

If someone required excel sheet for prove, may email us.

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