Financial management (final exam) Essay Example | Topics and Well Written Essays - 1000 words

pecuniary management (final exam) - Essay ExampleTherefore, the results of both techniques will be different because of the differences between the assumptions of both techniques. irresolution 2 Part A a) Project A Years 0 1 2 3 4 Initial investiture (20,000,000) Cash Flows 3,000,000 7,000,000 9,000,000 15,000,000 Discount Factor (8%) 1.0000 0.9259 0.8573 0.7938 0.7350 Discounted Cash Flows (20,000,000) 2,777,778 6,001,372 7,144,490 11,025,448 force out Present mensurate 6,949,087 Project B Years 0 1 2 3 4 Initial investment (20,000,000) Cash Flows 10,000,000 8,000,000 5,000,000 5,000,000 Discount Factor (8%) 1.0000 0.9259 0.8573 0.7938 0.7350 Discounted Cash Flows (20,000,000) 9,259,259 6,858,711 3,969,161 3,675,149 salary Present Value 3,762,280 Based on the higher up results it can be clearly observed that Project A has generated higher NPV then, it should be accepted. b) Project A Profitability business leader = PV of Future Cash Flows Initial enthronisation = 269490 87/20000000 = 1.35 Project B Profitability Index = PV of Future Cash Flows Initial Investment = 14503021/20000000 = 0.73 Since the Profitability Index of Project A is greater than 1, therefore this project should be accepted. c) IRR based on Trial & Error Method Years 0 1 2 3 4 Initial Investment (20,000,000) Cash Flows 3,000,000 7,000,000 9,000,000 15,000,000 Discount Factor (17.5%) 1.0000 0.8511 0.7243 0.6164 0.5246 Discounted Cash Flows (20,000,000) 2,553,191 5,070,167 5,547,904 7,869,367 Net Present Value 1,040,630 Years 0 1 2 3 4 Initial Investment (20,000,000) Cash Flows 3,000,000 7,000,000 9,000,000 15,000,000 Discount Factor (18.5%) 1.0000 0.8439 0.7121 0.6010 0.5071 Discounted Cash Flows (20,000,000) 2,531,646 4,984,956 5,408,632 7,607,078 Net Present Value 532,312 Years 0 1 2 3 4 Initial Investment (20,000,000) Cash Flows 3,000,000 7,000,000 9,000,000 15,000,000 Discount Factor (19.5%) 1.0000 0.8368 0.7003 0.5860 0.4904 Discounted Cash Flows (20,000,000) 2,510,460 4,901,875 5,273,984 7,355,626 Net Present Value 41,945 Years 0 1 2 3 4 Initial Investment (20,000,000) Cash Flows 3,000,000 7,000,000 9,000,000 15,000,000 Discount Factor (19.58%) 1.0000 0.8362 0.6992 0.5847 0.4889 Discounted Cash Flows (20,000,000) 2,508,629 4,894,727 5,262,453 7,334,191 Net Present Value 0 d) Since the IRR of is 19.58% therefore it should be accepted because it is earning more than the double of the cost of capital of the company. e) Advantages of NPV NPV provides the total benefit in the form of coin amount. NPV is easy to calculate and understand. NPV is an absolute measure and provides the results of the project in isolation. Advantages of IRR IRR provides the answer in percentage form. IRR provides the net excess percentage over cost of capital. IRR is relative measure, which makes it comparable to other projects. Part B stairs in Capital Budgeting Typical steps in the process of capital budgeting are 1. Brainstorming the virtually important step in capit al budgeting process is to generate good ideas for investments, which comes from brainstorming. 2. Capital Budget intend In this step, the company