Finance: Net Present Value and the Written Assignment

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  ...Capital Budgeting I Tutorial: Chapter 1, 2 Chapter 1 Introduction to Corporate Finance Question 3: Investment and financing decisions Vocabulary test. Explain the differences between: a. Real and financial assets. b. Capital budgeting and financing decisions c. Closely held and public corporations d. Limited and unlimited liability. Answer a. Financial assets, such as stocks or bank loans, are claims held by investors. Corporations sell financial assets to raise the cash to invest in real assets such as plant and equipment. Some real assets are intangible. b. Capital budgeting means investment in real assets. Financing means raising the cash for this investment. c. The shares of public corporations are traded on stock exchanges and can be purchased by a wide range of investors. The shares of closely held corporations are not publicly traded and are held by a small group of private investors. d. Unlimited liability: Investors are responsible for all the firm’s debts. A sole proprietor has unlimited liability. Investors in corporations have limited liability. They can lose their investment, but no more. Chapter 2 How to calculate Present values Question 6: Perpetuities An investment costs $1,548 and pays $138 in perpetuity. If the interest rate is 9%, what is the NPV? Answer NPV = −1,548 + 138/.09 = −14.67 (cost today plus the present value of...

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• Finance Net Present Value and Rate Essay

  ...Time Value of Money Exercise 1. If you invest $1000 today at an interest rate of 10% per year, how much will you have 20 years from now, assuming no withdrawals in interim? 2. a. If you invest $100 every year from the next 20 years starting one year from today and you earn interest of 10% per year, how much will you have at the end of the 20 years? b. How much must you invest each year if you want to have $50000 at the end of the 20 years? 3. What is the present value of the following cash flows at an interest rate of 10% per year? (Hints: don’t need to use the financial keys of your calculator, just dome common sense) a. $100 received five years from now b. $100 received 60 years from now c. $100 received each year beginning one year from now and ending 10 years from now d. $100 each year beginning one year from now and continuing forever 4. You want to establish a “wasting” fund, which will provide your with $1000 per year for four years, at which time the fund will be exhausted. How much must you put in the fund now if you can earn 10% interest per year? 5. You take a one-year installment loan of $1000 at an interest rate of 12% per year (1% per month) to be repaid in 12 equal monthly payments. a. What is the monthly payment? b. What is the total amount of interest paid over the 12-month term of the loan? 6. You are taking out a $100000 mortgage loan to be repaid over 25...

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• Essay about Assignment Net Present Value and Capital

  ...[pic] AMITY SCHOOL OF DISTANCE LEARNING Post Box No. 503, Sector-44 Noida – 201303 FINANCIAL MANAGEMENT Assignment A Marks 10 Answer all questions. 1. a. Should the titles of controller and treasurer be adopted under Indian context? Would you like to modify their functions in view of the company practice in India? Justify your opinion? b. A firm purchases a machinery for Rs. 8,00,000 by making a down payment of Rs.1,50,000 and remainder in equal instalments of Rs. 1,50,000 for six years. What is the rate of interest to the firm? 2. a.Explain the mechanism of calculating the present value of cash flows..What is annuity due? How can you calculate the present and future values of an annuity due? Illustrate b.”The increase in the risk-premium of all stocks,irrespective of their beta is the same when risk aversion increases” Comment with practical examples 3. a.How leverage is linked with capital structure? Take example of a MNC and analyse. b. The following figures relate to two companies (10) P LTD. Q LTD. (In Rs. Lakhs) Sales 500 1,000 Variable costs 200 300 ---- ------- Contribution 300 700 Fixed costs 150 400 ---- ------- 150. 300 Interest 50 100 ---- ------- Profit before Tax 100 200...

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• Finance Net Present Value and Financial Statements Essay

  ...Description of unit This unit is designed to give learners a broad understanding of the ways in which finance is managed within a business organisation. Learners will learn how to evaluate the different sources of finance, compare the ways in which these are used and will learn how to use financial information to make decisions. Included will be consideration of decisions relating to pricing and investment, as well as budgeting. Finally, learners will learn techniques for the evaluation of financial performance. Summary of learning outcomes To achieve this unit a learner must: 1 Explore the sources of finance available to a business 2 Analyse the implications of finance as a resource within a business 3 Make financial decisions based on financial information 4 Analyse and evaluate the financial performance of a business. Content 1 Sources of finance Range of sources: sources for different businesses, long term such as share capital, retained earnings, loans, third-party investment, short/medium term such as hire purchase and leasing, working capital stock control, cash management, debtor factoring Implications of choices: legal, financial and dilution of control implications, bankruptcy Choosing a source: advantages and disadvantages of different sources, suitability for purpose eg matching of term of finance to term of project 2 Finance as a resource...

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• Net Present Value Essay

  ...debt to tangible net worth. 5. A measure of profitability and not short-term liquidity is the a. Accounts receivable turnover ratio. b. Sales to working capital ratio. c. Total asset turnover ratio. d. Acid-test ratio. 6. Return on investment (ROI) is a term often used to express income earned on capital invested in a business unit. A company’s ROI would be increased if a. Sales increased by the same peso amount as express and total assets increased. b. Sales remained the same and expenses were reduced by the same peso amount that total assets increased. c. Sales decreased by the same peso amount that expenses increased. d. Sales and expenses increased by the same percentage that total assets increased. (CMA adapted) 7. When a balance sheet amount is related to an income statement amount in computing a ration; a. The balance sheet amount should be converted to an average for the year. b. The income statement amount should be converted to an average for the year. c. Both amounts should be converted to market value. d. Comparisons with industry ratios are not meaningful. (PhilCPA adapted) 8. Ratios are used for many purposes in financial statement analysis. In order to determine the return on investment for a company, the numerator of the fraction used should be a. Net income. b. Income before nonrecurring items. c. Income before nonrecurring items and before income taxes. d. Income before...

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• Essay on Net Present Value and Project

  ...Tesca team we were able to create a comprehensive capital budget and cash flow analysis for the proposed refrigerator project. Through our analysis we found that the cost of capital of the project to be 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive Net Present Value of $5,997,505.31 with an IRR of 13.21%, a profitability index of 8.84, and an approximate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values. This information seemed to be very promising for the project in general. However, our continued analysis showed the project to be very sensitive to the sales price per unit of the refrigerator. We used the average demand scenario to produce a sensitivity analysis and found that with just a 5% decrease in the sales price of the refrigerator the NPV quickly dipped into a negative value thus showing the project to be extremely sensitive to the sales price of the refrigerator. Our scenario analysis also exposed a strong probability of the project giving a negative Net Present Value and giving a probable low Internal Rate of Return of only 4.01%. This is mainly due to the projects sensitivity to the sales price of...

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• Net Present Value IRR And The Essay

  ...Net Present Value, IRR, and the Payback Period Infomercial Entertainment, Inc. In the good of days—before cable TV, fax machines, and multimedia personal computers—the phrase,"…and now a word from our sponsor…”usually meant just that, Television commercials were continued to thirty-and sixty—second messages, grouped together to occupy only two or three minutes of viewing time. Occasionally, if you stayed up late enough sitting in front of the tube, you'd see thirty minute segments on riveting topics like “How to Turn $10 Into$10 Million by Investing in Real Estate That Nobody Wants.” Since few people—except for a few former savings and loan executives--managed to stay awake through these half-hour programs, the shows attracted little interest. The era of the infomercial, those thirty-minute paid video advertisements devoted to selling a particular idea or product, didn't really begin until after the 1992 presidential campaign. Following Ross Perot's unsuccessful bid for public office, however, things started looking up for this new marketing venue. If Perot could use the half-hour segments on late night TV to capture l 9 percent of the popular vote, surely other advertisers could use the infomercial as a way to communicate their message to a sleepy, yet receptive, audience. Indeed, in the wake of the election, many Fortune-500 corporations selling consumer products were eager to take the plunge and go head-to-head with Letterman on...

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• Net Present Value Npv Essay

  ...Examples Of Net Present Value (NPV), ROI and Payback Analysis Introduction Terms and Definitions Net Present Value - Method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time. Discount Rate - Also known as the hurdle rate or required rate of return, is the rate that a project must achieve in order to be accepted rather than rejected. Return on Investment – Expected income divided by the amount originally invested Payback Analysis – The number of years needed to recover the initial cash outlay. Formulas Net Present Value = (t=1..n A * (1+r)-t OR (t=1..n A/ (1+r)t Where A = Cash flow r = Required rate of return t = year of cash flow n = the nth year Return On Investment = (Discounted Benefits – Discounted Costs) / Discounted Costs Payback Period = Years taken to repay initial outlay . Eg. Project Z Outlay = $ 4000 Yearly cash flows = $2000...

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