Problems and Solutions of Financial Management

Topics: Net present value, Internal rate of return, Investment Pages: 3 (910 words) Published: August 3, 2013
Date of Submission: 25th July 2013

Prepared For:
Dr. Sujit Saha
Former Professor & Director (Training)
Bangladesh Institute of Bank Management
Course Instructor, East West University

Prepared By:
Nur Uddin Sabuj
ID # 2011-3-90-013
School of Business
Master of Bank Management
Course Title: Financial Management
Course Code: MBM 507

Integrated Problem 9-23

a) Capital budgeting is the process of analyzing additions to fixed assets. Capital budgeting is important because, more than anything else, fixed asset investment decisions chart a company’s course for the future. Conceptually, the capital budgeting process is identical to the decision process used by individuals making investment decisions. These steps are involved: 1. Estimate the cash flows—interest and maturity value or dividends in the case of bonds and stocks, operating cash flows in the case of capital projects. 2. Assess the riskiness of the cash flows.

3. Determine the appropriate discount rate, based on the riskiness of the cash flows and the general level of interest rates. This is called the project cost of capital in capital budgeting. 4. Find (a) the PV of the expected cash flows and/or (b) the asset’s rate of return. 5. If the PV of the inflows is greater than the PV of the outflows (the NPV is positive), or if the calculated rate of return (the IRR) is higher than the project cost of capital, accept the project. b) Projects are independent if the cash flows of one are not affected by the acceptance of the other. Conversely, two projects are mutually exclusive if acceptance of one impacts adversely the cash flows of the other; that is, at most one of two or more such projects may be accepted. Put another way, when projects are mutually exclusive it means that they do the same job. For example, a forklift truck versus a conveyor system to move materials, or a bridge versus a ferry boat. Projects with normal or conventional cash flows have...
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