# Corporate Finance Assignment 1

Pages: 10 (633 words) Published: January 23, 2013
FM8A

Corporate Finance Assignment

Wei Jiang CT0171246

Question 1.
a) Calculate the net initial outlay for this project in MMK
= \$95,000

= \$100,000

+ \$2,000
×

+ \$3,000

880
\$1

= \$100,000

= 88,000,000

b) Calculate after-tax cash flows in MMK for years 1 through 4. Thanlyn Limited
Statement of Operating Cash Flow for Year 1 to Year 4
Year 1
Year 2
Year 3
Year 4
MMK
MMK
MMK
MMK
100,000,000 100,000,000 100,000,000 100,000,000
40,000,000
40,000,000
40,000,000
40,000,000
W1
18,900,000
18,900,000
18,900,000
18,900,000
41,100,000
41,100,000
41,100,000
41,100,000
W2
9,152,000
9,152,000
9,152,000
9,152,000
31,948,000
31,948,000
31,948,000
31,948,000
W3
6,389,600
6,389,600
6,389,600
6,389,600
25,558,400
25,558,400
25,558,400
25,558,400
18,900,000
18,900,000
18,900,000
18,900,000
44,458,400
44,458,400
44,458,400
44,458,400

Sales
less: Costs
less: Depreciation
EBIT
less: Interests
Profit before tax
Tax
Net Profit
Operating cash flow

W1: Depreciation =
=

\$

,

×

/\$

,

,

= 18,900,000

W2: Interests = IO × interest rate = 88,000,000MMK × 10.4% = 9,152,000MMK W3: Tax = profit before tax × tax rate = 31,948,000 × 20% = 6,389,600MMK

c) Calculate the project’s Net Present Value (in MMK) and explain if the project should be accepted.
=

1+

−88,000,000 44,458,400
44,458,400
44,458,400
+
+
+
1 + 0.104
1 + 0.104
1 + 0.104
1 + 0.104
44,458,400
+
= 51,715,490.51
1 + 0.104
=

The project should be accepted because the NPV is positive. This means the project is expected to add value to the firm and will increase the wealth of the owners.

1

FM8A

Corporate Finance Assignment

Wei Jiang CT0171246

Question 2

0
1
2
3
4
5
6
7
8
9
10

Cash
Accumulated
Flow (\$)
Cash Flow (\$)
-3600000
-3600000
500000
-3100000
625000
-2475000
625000
-1850000
625000
-1225000
625000
-600000
625000
25000
530000
555000
530000
1085000
530000
1615000
385000
2000000
=5+

600000
625000

= 5.96

Accept the project based on payback period, because the payback period is 5.96 years, smaller than the cutoff period of 6 years.
=

1+

−3600000
500000
625000
625000
625000
+
+
+
+
1 + 0.14
1 + 0.14
1 + 0.14
1 + 0.14
1 + 0.14
625000
625000
530000
530000
530000
+
+
+
+
+
1 + 0.14
1 + 0.14
1 + 0.14
1 + 0.14
1 + 0.14
385000
+
= \$ − 614797
1 + 0.14
=

Reject the project because NPV is negative, because the negative NPV means the project is expected to decrease value for the firm.
1+

=0

−3600000
500000
625000
625000
625000
625000
+
+
+
+
+
1+
1 + 0.
1+
1+
1+
1+
625000
530000
530000
530000
385000
+
+
+
+
+
1+
1+
1+
1+
1+
=0

= 0.09335 = 9.335%

2

FM8A

Corporate Finance Assignment

Wei Jiang CT0171246

Reject the project because IRR is 9.335%, which is smaller than the required return 14%. This means the return for this project cannot meet the required return rate for the risk of this project.

=

1+

625000
625000
625000
625000
500000
+
+
+
+
1 + 0.14
1 + 0.14
1 + 0.14
1 + 0.14
1 + 0.14
625000
530000
530000
530000
385000
+
+
+
+
+
1 + 0.14
1 + 0.14
1 + 0.14
1 + 0.14
1 + 0.14
=
−3600000

= 0.8292

Reject the project because the profitability index is 0.8292 which is smaller than one. This means that the expected future cash flows has less present value than the initial outlay, the project is expected to decrease value for the firm.

3