184153241 ADL 13 Financial Management V

Topics: Net present value, Time value of money, Discounted cash flow Pages: 28 (5875 words) Published: November 11, 2014
Financial Management
Assignment - A
Question 1a: 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?

Answer to 1a:
Controller & Treasurer are independent & they have their own Perspectives & Drivers as detailed below: Controller
Responsibilities
include,
Double
entry
accounting, financial reporting, Fraud measure,
detective controls, Financial restatement,
Compliance with statutory requirements like
Rules, Accounting standards, GAAP, IFRS etc.,
Controller works & forecasts the events for a
long term. Main focus – income statement
Ex: Cash involved event
Controller looks from compliance angle (how to
record, what GAAP provides etc.,)

Treasurer
Responsible for Liquidity management (very
important function), Risk Management, More
focus on financial statements, follows leading
practices & responsible for the future
performance of company (projects cash flows)
Treasurer works/ forecasts the events regularly
(daily / weekly) – focus – Balance sheet & future
capital structure, capital expenditure etc.,
Treasurer concentrates more on cash availability
focus – i.e. how to bring in the required cash etc,

Therefore, from the above it is clear that, controller & treasurer have different roles to play. However, majority of the Indian companies works with Financial Controller who himself takes care of the treasury department / Portfolio.

Therefore, as far as from Indian context, it can be concluded that, controller is also responsible for treasury jobs & there is no separate treasurer / treasury department exists Question 1b: firm purchases a machinery for Rs. 8, 00,000 by making a down payment of Rs.1,50,000 and remainder in equal installments of Rs. 1,50,000 for six years. What is the rate of interest to the firm? Answer to Q1b:

Particulars
Cost of Machinery
Down Payment
made by firm
Financed through
borrowings

Ref

Year 0

(a)

800,000

(b)
c = (ab)

150,000
650,000

d=6*15
0,000

900,000

Total interest paid
over 6 year period

e=dc

250,000

Rate of Interest
= total interest
/ total
borrowings

f=e/c

38.46%

Repayment in equal
instalments every
year
(maximum of six
years)

Year 1

Year 2

Year 3
Rs.

Year 4

Year 5

Year 6

150,000

150,000

150,000

150,000

150,000

150,000

Rate of interet
per annum

g=f/6
yrs

6.41%

6:5:4:3:
2:1

21

Break of interest
cost / principal
repayment:
1) interest cost (can
be apportioned in
the ratio of
no of years
repayment - i.e.
earlier the years
more
the interest cost &
vice versa)

2) Principal
Outstanding
adjustment

Yearwise Interest
rates:
- Principal
Outstanding at year
end
(prinicpal o/s at
year beginning Principal
repayment)

RATE OF
INTEREST
EVERY YEAR

(ratio)

6

5

4

3

2

1

(6+5+4+3+2
+1)

h

250000

71429
(250,000
*6/21)

59524
(250,000
*5/21)

47619
(250,00
0*4/21)

35714
(250,00
0*3/21)

23810
(250,000*
2/21)

11905
(250,00
0*1/21)

i=d-h

650000

78571

90476

102381

114286

126190

138095

j

650000

571429

480952

378571

264286

138095

0

(480952
- i)

(378571
- i)

(650000i)
h/
princip
al o/s
at year
beginni
ng)

11.0%
(h /
650000)

(571429i)

10.4%
(h /
571429)

9.9%

9.4%

(h /
480952)

(h /
378571)

(264286i)

9.0%
(h /
264286)

Question 2a: 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
Answer 2a:
Calculating Present Value of Cash flows:
Money has time value. For ex: Rs.1000 received today is not the same worth after a year (actually it is less)
Present value of cash flows: It indicates the value of expected worth at current value. (Discounts...
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