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Advanced Financial Management (BWFF2043)
Universiti Utara Malaysia
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SECOND INDIVIDUAL ASSIGNMENT
Question 1 Assuming that the cost of capital of the firm is 12%, determine the payback period, the NPV and the IRR of the following projects:
a) An initial outlay of RM 100,000 resulting in a cash flow of RM 19,930 at the end of each year for the next 10 years.
Payback Period = initial investment/annual cash flows = 100,000/19, = 5 years
NPV : [19,930 PVIFA (¿ ¿−12 % RM, 100,000 10
= [ 19,930 (5) ] - RM100,
= RM 12,608.
IRR
PV= RM100,000 PMT=19,
PV=PMT (PVIFA IRR,10)
100,000 = 19,930(PVIFA IRR,10)
(PVIFA IRR,10) = 100,00019,
(PVIFA IRR,10) = 5.
From PVIFA table, 5 is between 14% (5) & 15% (5) At 14% - PV =19,930 (5) = RM103,956. At 15% - PV =19,930 (5) = RM100,024.
IRR= 14% + [{103,956,956−−100,024,000 ] × (15 %−14 %)]
= 14% + ((1×0)100)
= 14% + 1%
= 15%
b) An initial outlay of RM 100,000 resulting in a cash flow of RM 20,450 at the end of each year for the next 20 years.
Payback Period = initial investment/annual cash flows = 100,000/20, = 4 years
NPV : [ 20450 PVIFA (¿ ¿−12 % RM, 100,000 20
= [ 20450 (7)] - RM100,
= RM 52,749.
IRR
PV= RM100,000 PMT=20,
PV=PMT (PVIFA IRR,20)
100,000 = 20,450 (PVIFA IRR,20)
(PVIFA IRR,20) = 100,00020,
(PVIFA IRR,20) = 4.
From PVIFA table, 4 is between 18% (5) & 20% (4) At 18% - PV = 20,450 (5) = RM109,462. At 20% - PV = 20,450 (4) = RM99,583.
IRR= 18% + [{109,462,462−−99,583,000 ] × (20 %−18 %)]
= 18% + ((0×0)100)
= 18% + 1%
= 19%
D) An initial outlay of RM 100,000 resulting in cash flow of RM 28,430 at the end of each year for next 5 years. Payback Period = initial investment/annual cash flows = 100,000/28, = 3 years
NPV : [28,430 PVIFA (¿ ¿−12 % RM 100,000 , 5
= [28,430 (3)] - RM100,
= RM 2,484.
IRR
PV= RM100,000 PMT=28,
PV=PMT (PVIFA IRR,5)
100,000 =28,430 (PVIFA IRR,5)
(PVIFA IRR,5) = 100,00028,
(PVIFA IRR,5) = 3.
From PVIFA table, 3 is between 11% (3) & 14% (3) At 11% - PV = 28,430 (3) = RM105,074. At 14% - PV = 28,430 (3) = RM97,603.
IRR= 11% + [{105,074,074−−97,603,000 ] × (14 %−11 %)]
= 11% + ((0×0)100)
= 11% + 2%
= 13%
Question 2 Determine the payback period, net present value and internal rate of return of the following projects. The cost of capital of the firm is 15%.
a) An initial outlay of RM 100,000 in a cash flow of RM 20,000 at the end of year 1, RM 50,000 at the end of year 2 and RM80,000 at the end of year 3
Payback Period = A + ( BC )
= 2 + (30,00080,000) = 2 years
NPV = 20,000 (PVIF 15%,1) + 50,000(PVIF15%,2) + 80,000(PVIF15%,3) – 100,
= 20,000(0) + 50,000(0) + 80,000(0) – 100,
= RM7,
IRR
TRIAL AND ERROR APPROACH
IRR SOLUTION (TRY18%)
RM100,000 = 20,000(PVIF18%,1) + 50,000 (PVIF18%,2) + 80,000(PVIF18%,3)
RM 100,000 = 20,000(0) + 50,000 (0) + 80,000 (0)
RM100,000 < RM101,548 = RM1548 (RATE(18%) is too low)
IRR SOLUTION (TRY20%)
RM100,000 = 20,000(PVIF20%,1) + 50,000 (PVIF20%,2) + 80,000(PVIF20%,3)
RM 100,000 = 20,000(0) + 50,000 (0) + 80,000 (0)
RM100,000 > RM97,682 = (RM2318) (RATE(20%) is too high)
IRR= 28% + [{102,560102,560−−100,00097,999 ] × (32 %−28 %)]
= 30%
c) An initial outlay of RM 100,000 resulting in a cash flow of RM20,000 at the end of year 1 through 5 and RM 50,000 at the end of year 6
Payback Period = A + ( BC )
= 5 +
0
50,
¿
= 5 years
NPV = 20,000 (PVIF 15%,1) + 20,000 (PVIF 15%,2) + 20,000 (PVIF 15%,3) + 20,000 (PVIF 15%,4) +
20,000 (PVIF 15%,5) + 50,000(PVIF15%,6) – 100,
= 20,000 (0) + 20,000 (0) + 20,000 (0) + 20,000 (0) +
20,000 (0) + 50,000(0) – 100,
= (RM11,341)
TRIAL AND ERROR APPROACH
IRR SOLUTION (TRY10%)
RM100,000 = 20,000 (PVIF 10%,1) + 20,000 (PVIF 10%,2) + 20,000 (PVIF 10%,3) + 20,000 (PVIF 10%,4) +
20,000 (PVIF 10%,5) + 50,000(PVIF10%,6)
RM100,000= 20,000 (0) + 20,000 (0) + 20,000 (0) + 20,000 (0) +
20,000 (0) + 50,000(0)
RM100,000 < RM104,039 = RM4,039 (RATE(10%) is too low)
IRR SOLUTION (TRY12%)
RM100,000 = 20,000 (PVIF 12%,1) + 20,000 (PVIF 12%,2) + 20,000 (PVIF 12%,3) + 20,000 (PVIF 12%,4) +
20,000 (PVIF 12%,5) + 50,000(PVIF12%,6)
RM 100,000 =20,000 (0) + 20,000 (0) + 20,000 (0) + 20,000 (0) +
20,000 (0) + 50,000(0)
RM100,000 > RM97,426 = (-RM2574) (RATE(12%) is too high)
IRR= 10% + [{104,039104,039−−100,00097,426] × (12 %−10 %)]
= 11%
a) Calculate the NPV of each project PROJECT X NPV= 10,000 (PVIF 15%,1) + 15,000(PVIF15%,2) + 20,000(PVIF15%,3) +25,000(PVIF15%,4) + 30,000(PVIF15%,5) – 50, =10,000 (0) + 15,000(0) + 20,000(0) +25,000(0) + 30,000(0) – 50, = RM12,398. PROJECT Y
NPV= [32,000 PVIFA (¿ ¿−15 % RM 100,000 , 5
= [ 32,000 (3) ] - RM100,
= RM 7,270.
PROJECT Z
(PVIFA IRR,5) = 100,00032,
(PVIFA IRR,5) = 3.
From PVIFA table, 3 is between 18% (3) & 20% (2) At 18% - PV = 32,000 (3) = RM100,070. At 20% - PV = 32,000 (2)) = RM95,699.
IRR= 18% + [{100,070,070−−95,699,000 ] × (20 %−18 %)]
= 18% + ((0×0)100)
= 18% + 0%
= 18%
PROJECT Z
PV= RM450,000 PMT=200,
PV=PMT (PVIFA IRR,3)
450,000 = 200,000 (PVIFA IRR,5)
(PVIFA IRR,3) = 450,000200,
(PVIFA IRR,3) = 2.
From PVIFA table, 2 is between 15% (2) & 16% (2) At 15% - PV = 200,000 (2) = RM456, At 16% - PV = 200,000(2)) = RM449,
IRR= 15% + [{456,640456,640−−450,000449,180] × (16 %−15 %)]
= 15% + ((0×0)100)
= 15% + 0%
= 15%
c) Calculate the payback period for each of the project. What would you advise if the firm’s maximum desired payback period is 3 years? PROJECT X
Payback Period = A + ( BC )
= 3 + (25,0005,000)
= 3 years PROJECT Y Payback Period = initial investment/annual cash flows = 100,000/32, = 3 years PROJECT Z Payback Period = initial investment/annual cash flows = 450,000/200, = 2 years
I advice to reject project X and Y because the payback period is longer. Payback period is less than 3 or equal to 3 the firm’s maximum desired payback period. The shorter payback period is preferable while comparing this three project. If maximum payback period is 3, accept project Z.
d) Based on the NPV and IRR above, analyze the acceptability of each project if:
i) Project X and Y are mutually exclusive
Based on the NPV and IRR above, accept project X and reject project Y. Because, Project X has high NPV compare to project Y. If mutually exclusive projects, only one project will be accepted which is highest NPV.
ii) All three projects are independent
If all three projects are independent, all three projects are accepted. Because all the three projects have positive NPV. Besides that, accepting or rejecting one project has no impact for the other projects.
= 3 years
b) Calculate the NPV for each of the machines.
MACHINE EE
NPV= 0(PVIF 8%,1) + 0(PVIF8%,2) + 96,900(PVIF8%,3) +96,900(PVIF8%,4) – 110,
= 0 (0) + 0 (0) + 96,900(0) +96,900(0) – 110,
= RM38,140.
MACHINE ZEE
NPV= 41,700(PVIF 8%,1) + 41,700(PVIF8%,2) + 26,200(PVIF8%,3) +26,200(PVIF8%,4) – 110,
= 41,700 (0) + 41,700 (0) + 26,200(0) +26,200 (0) – 110,
=RM4,
c) Determine the IRR of each proposal.
MACHINE EE
TRIAL AND ERROR APPROACH
IRR SOLUTION (TRY16%)
RM110,000 = 0(PVIF 16%,1) + 0(PVIF16%,2) + 96,900(PVIF16%,3) +96,900(PVIF16%,4)
= 0 (0) + 0 (0) + 96,900(0) +96,900(0)
RM110,000 < RM115,601= RM5601 (RATE(16%) is too low)
IRR SOLUTION (TRY18%)
RM110,000 = 0(PVIF 18%,1) + 0(PVIF18%,2) + 96,900(PVIF18%,3) +96,900(PVIF18%,4)
= 0 (0) + 0 (0) + 96,900(0) +96,900(0)
RM110,000 > RM108,954 = (RM1,045) (RATE(18%) is too high)
IRR= 16% + [{115,601,601−−108,954,000 ] × (18 %−16 %)]
= 17%
MACHINE ZEE
IRR SOLUTION (TRY9%)
RM110,000= 41,700(PVIF 9%,1) + 41,700(PVIF9%,2) + 26,200(PVIF9%,3) +26,200(PVIF9%,4)
= 41,700 (0) + 41,700 (0) + 26,200(0) +26,200 (0)
RM110,000 < RM112,146 = RM2,146 (RATE(9%) is too low)
5 6206202363758248896
Course: Advanced Financial Management (BWFF2043)
University: Universiti Utara Malaysia
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