StudentShare solutions
Triangle menu

Basic Senior Year Financial Questions - Assignment Example

Not dowloaded yet

Extract of sample
Basic Senior Year Financial Questions

The cost of capital and the tax rate are 12% and 30% respectively. Required: The net present value (NPV) of the investment Solution: (a) Project appraisal $ ‘000’ Year 0 1 2 3 4 5 Inflows - 800 750 900 1,200 1,100 Outflows - (65) (80) (50) (55) (70) Depreciation - (280) (280) (280) (280) (280) Inflow before tax - 455 390 670 865 750 Less tax @ 30% - (136.5) (117) (201) (259.5) (225) + dep. Back - 280 280 280 280 280 Cash flows - 598.5 553 749 885.5 805 I0 (1,400) - - - - - (1,400 598.5 553 749 885.5 805 PVIF 12%n 1.000 0.893 0.797 0.712 0.636 0.567 P.V (1,400) 534.5 440.7 533.3 563.2 456.4 Overall NPV = 1,128.1 The decision rule for NPV for accepting the project Under this method, a company should accept an investment venture if N.P.V. is positive i.e. if the present value of cash outflows exceeds that of cash inflows or at least is equal to zero (NPV ?0). This will rank project ventures giving the uppermost rank to that particular venture with highest NPV because this will give the maximum cash inflow or capital gain to the company. Net present value recognizes time value of money and such appreciates that a shilling now is more valuable than a shilling tomorrow and the two can only be compared if they are at their present value. Internal rate of return (IRR) This is another modern method of discounting cash flow because the technique uses the principle of NPV. It is defined as the rate which the present value of cash outflows of an investment equates the initial capital invested. IRR = Pv (cash inflows) = Pv (cash outflows) or IRR is the cost of capital when NPV = 0. It is also called internal rate of return because it depends wholly on the outlay of investment and proceeds associated with the project and not a rate determined outside the venture. A = inflow for each period C = Cost of investment The value r can be found by: i) Trial and error ii) By interpolation iii) By extrapolation i) Trial and error method a) Select any rate of interest at random and use it to compute NPV of cash inflows. b) If rate chosen produces NPV lower than the cost, choose a lower rate. c) If the rate chosen in (a) above gives NPV greater than the cost, choose a higher rate. Continue the process until the NPV is equal to zero and that will be the IRR. Example A project costs 16,200/= and is expected to generate the following inflows: $ Year 1 8,000 Year 2 7,000 Year 3 6,000 Compute the IRR of this venture. Solution 1st choice 10% = 17,565.74 > cost, choose a higher rate. 2nd choice 14% = 16,453.646 3rd choice 15% = 16,194.625 IRR lies between 14% and 15%. ii) Interpolation method Difference PV at rate of 14% = 16,453.646 253.646 PV required = 16,200.000 -5.375 PV at rate of 15% = 16,194.625 Therefore, r denotes required rate of return Therefore, r = 14% + (15% - 14%) x = 14% + 0.98% = 14.98% The acceptance rule of Internal Rate of Return (IRR) IRR will accept a venture if its IRR is higher than or equal to the minimum required rate of return which is usually the cost of finance also known as the cut off rate or hurdle rate, and in this case IRR will be the highest rate of interest a firm would be ready to pay to finance a project using borrowed funds and without being financially worse off by paying back the loan (the principal and accrued interest) out of the cash flows generated by that project. Thus, ...Show more

Summary

Name Tutor Institution Subject Code Net Present Value Net present value is a discounting method of analyzing the viability of a given investment by taking into consideration the time value of money (Megginson, et al page 261). For instance, XYZ Limited has approached you for advice on an equipment to be purchased for use in a five year project…
Author : marinahagenes
Basic Senior Year Financial Questions essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the assignment on your topic
"Basic Senior Year Financial Questions"
with a personal 20% discount.
Grab the best paper

Related Essays

Senior Philosophy Seminar
The two primary lines would be AC and CE. The four lines are AB, AC, CD, and CE for discussion purposes. AC is the visible world, while CE is the intelligible world. AB is shadows and reflections, or illusions. BC is physical things, or beliefs. CD is mathematical reasoning, whereas CE is philosophical reasoning.
12 pages (3000 words) Assignment
Paternal Influences on Ethical Decision Making of Senior Leaders in the Health Care Industry
The spectacle of executives being led away in handcuffs may become one of the images that define the corporate misdemeanors of modern times. The corporate scandals in North America including
18 pages (4500 words) Assignment
Basic Senior Year Financial Questions
Under this method, a company should accept an investment venture if N.P.V. is positive i.e. if the present value of cash outflows exceeds that of cash inflows or at least is equal to zero (NPV ≥0). This will rank project ventures giving the uppermost rank to
6 pages (1500 words) Assignment
World recession and aftermath of the financial crash + questions
According to research, in severe financial crises the crucial indicators such as housing prices and unemployment take longer to hit their lowest points. Several economic strategies have been
6 pages (1500 words) Assignment
Financial Accounting Questions
The debtors often provide incentive to the companies by offering them a discount in case of the early payment whereas, they tend to charge interest
1 pages (250 words) Assignment
Financial Accounting questions
If the asset is disposed off at the book value, then it does not result to any gain or loss. Goodwill helps to keep old customers loyal to the business while at the same time attracting new customers through word-of-mouth recommendations and publicity.
2 pages (500 words) Assignment
Senior manager's letter
on ethics and ethical issues surrounding the employees and the customers and general and this has not only raised issues but is leading to negative reviews of the company and the lack of discipline. The other issue is in regards to work performance generally where some of the
1 pages (250 words) Assignment
Senior Citizen
I spent time with my grandchildren and therefore my daughter as well as her husband. I have friends that I knew from the company I used to work for and we play golf together. When I was younger I different types of friends but most of them were related to the
3 pages (750 words) Assignment
Senior Survey/Program Reflection
This additionally gave me an insight on how different factors in people’s lives relate to their deportment. Through this program, I was able to gain plethoric insight into the cognitive and affective
1 pages (250 words) Assignment
Financial Management Discussion Questions: Consumer Protection and Hedge Funds
Specifically, loans covered by the TILA, the borrower or client have a right to a recession that allows for a duration of three days to reevaluate and withdraw from the loan process without incurring any cost. The provision is strategic in
2 pages (500 words) Assignment
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation