You are on page 1of 4

-1-

CORPORATE FINANCE
ASSIGNMENT
MBA-2 (FINANCE )

LONDON SCHOOL OF COMMERCE


UNIVERSITY OF WALES INSTITUTE CARDIFF

STUDENT NAME – MOHAMMAD NOOR

STUDENT ID –L0745GGMH0210

LECTURER –DR. Gerald Pollio

Corporate finance MBA 2, L0745GGMH0210 1


Mohammad Noor
-2-

Drive 4 Less,UK
(1) PATROL CAR OPTION

Petrol option with subsidy


Enacted

year Initial outlay cash flows DCF@10% present value


0 20,000
1 6000 0.909 5454
2 6000 0.826 4956
3 6000 0.751 4506
4 9000 0.683 6147

present value 21063

Net present value(EN) 1,063

(2)

Petrol option without subsidy


enacted

initial
year outlay (£) Cash flows( £) DCF@10% Present value
0 20,000
1 6000 0.909 5454
2 6000 0.826 4956
3 6000 0.751 4506
4 10,000 0.683 6830

present value 21746

Net present value(NEN ) 1,746

Expected NPV of petrol option

Expected NPV = NPV (EN)* 40% + NPV (NEN)* 60%


= 1063*40% + 1746*60%
= 425.20+1047.60
= 1472.80

Corporate finance MBA 2, L0745GGMH0210 2


Mohammad Noor
-3-

HYBRID CAR OPTION

(3)
Hybrid car subsidy
enacted

Year Intitial outlay(£) Cash flows(£) DCF@10% Present value(£)


0 25,000
1 10,000 0.909 9090
2 10,000 0.826 8260
3 10,000 0.751 7510
4 15,000 0.683 10245

present value 35105

Net present value 10,105

(4)

hybrid car subsidy not enacted

Year Present
Initial outlay(£) Cashflows(£) DCF@10% value £
0 25,000
1 4,000 0.909 3636
2 4,000 0.826 3304
3 4,000 0.751 3004
4 7,000 0.683 4781

present value 14725

Net present value -10,275

Expected NPV of hybrid option

Expected NPV = NPV (EN)* 40% + NPV (NEN)* 60%


= 10,105*40% +(-10,275) *60%

= 4042-6165

Corporate finance MBA 2, L0745GGMH0210 3


Mohammad Noor
-4-

= -2123
(3) DISCUSSION -

BASED on the analysis , it is clear that petrol car option producing positive expected
return of the investment which is £1472.80. Patrol car option generating positive NPV
whether the subsidy introduced or not by the government. In the petrol car option salvage
value of the car after four years was not clearly defined for both subsidised and non
subsidised option. Nevertheless, the assumption was made on a basis that, if subsidy is
enacted the salvage value of the patrol car will go down. As business will be more
inclined to buy a product which is heavily subsidised so the amount £3000 was added to
the value of fourth year cash flow of subsidy enacted patrol option and subsequently
£4000 for without subsidy option for petrol car. In the support of the evidence we can
see that hybrid car NPV with subsidy enacted option generate a cash flow way higher
than petrol car. But the expected NPV of hybrid car is lower than the expected NPV of
petrol because if subsidy is not enacted Hybrid car option is very expensive because the
initial outlay is higher for hybrid car at the same time the cash flow generated by is also
lower means it gives an unfavourable NPV .

It can be concluded that hybrid car investment is only viable drive4less UK if they have
assurance that government is certainly introducing subsidy for hybrid cars other wise it
would not be a well-judged investment. The company can only commit to Hybrid car
option if the are 100% certain of the fact that government is introducing subsidy, since
lower cash flow coupled with low salvage value means the NPV will always be negative
for non subsidised Hybrid car investment ,thus expected NPV of hybrid cars.

Corporate finance MBA 2, L0745GGMH0210 4


Mohammad Noor