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Assessment Task – Tutorial Questions Assignment
Unit Code: HC2091
Unit Name: Business Finance
Q1.
1. The two investment criteria that can assist to make a decision with respect to accepting and rejecting a project are (1) Net Present Value (NPV) (2) Internal Rate of Return (IRR). As per the rule of capital budgeting decision if the NPV is positive the project should be accepted while it must be rejected if the NPV is negative.
On the other hand the IRR or Internal rate of return is the expected discount rate at which the Net present value would become zero. Therefore, if the IRR increase the NPV become negative and the project becomes worthless. Likewise an IRR greater than WACC suggest the profitable endeavour of the project.
2.
    Information
    Project A
    PV @ 12%
    PV of Cash Flows
    Cost
    5550000
     
     
    Future Cash Flows
     
     
     
    Year 1
    1230000
    0.893
    1098214
    Year 2
    2210000
    0.797
    1761798
    Year 3
    1200600
    0.712
    854563
    Year 4
    1150000
    0.636
    730846
    Year 5
    1120000
    0.567
    635518
    
    
    PV of Cash Flow
    5080940
    
    
    Cost
    5550000
    
    
    NPV
    -469060
    
    
    
    
    Information
    Project B
    PV @ 12%
    PV of Cash Flows
    Cost
    6640000
     
     
    Future Cash Flows
     
     
     
    Year 1
    2830000
    0.893
    2526786
    Year 2
    1300000
    0.797
    1036352
    Year 3
    1750000
    0.712
    1245615
    Year 4
    1180000
    0.636
    749911
    Year 5
    1150000
    0.567
    652541
    
    
    PV of Cash Flow
    6211205
    
    
    Cost
    6640000
    
    
    NPV
    -428795
Both the projects should be rejected as both of them are reflecting a negative Net Present Value (NPV) on the investment in Project A as well as Project B.
Q2.
a) The time required to save $25000 the formula used is:
Future value = Present value x (1 + Periodic Interest rate) ^numbers of periods
Here, FV = $25000
PV = $5000
Periodic Interest = 10% compounded annually
$25000 = $5000 x (1 + 10%) ^ number of periods
5 = 1.10 ^ number of periods
Log 5 = Number of periods x 1.10
No. of periods = Log 5/ 1.10 = 16.8863 years
b) Future value = Present value x ( 1 + Periodic Interest rate )^numbers of periods
FV = Target Value = $25000
No of periods = 5 years
Periodic interest rate = 10% compounded annually
$25000 = Investment required x (1 + 10%) ^ 5
Investment = 25000 / 1.61051
Investment = $15523
c) Future value = Present value x ( 1 + Periodic Interest rate )^numbers of periods
PV = Investment = $6000
No. of periods = 7 x 12/3 = 28 quarters
Periodic interest rate = 12% compounded quarterly = 12% x 3/12 = 3% quarterly
Accumulated value = $6000 X (1 + 3%) ^ 28
Accumulated Value = $6000 X 2.28793 = $13727.57
d) (i) Effective interest rate = [( 1 + Nominal Interest rate / Yearly numbers of periods )^Yearly numbers of periods]
Nominal interest rate = 10%
Yearly periods = 12/6 = 2 period yearly
Effective interest rate = [(1 + 10% / 2) ^2] – 1
Effective interest rate = 0.1025 or 10.25%
(ii) Effective interest rate = [(1 + Nominal Interest rate / Yearly numbers of periods) ^Yearly numbers of periods]
Nominal interest rate = 9.87%
Yearly periods = 12/1 = 12...