North South University

Dept of Finance
Homework
Spring 2020 Semester
Course: FIN 254 Introduction to Financial Management

Name: Rabib Ahmed

ID: 1831880630

Section number: 08

Come to One Potato Two Potato, the attractive slogan of a tiny shop in Pakistan with French fries
being their favorite. Two foodie friends always dreamt of having their own business, so other could
enjoy the fries. As both of them were students, they thought of delaying the plan. Later, they
studied an introductory course of finance and start to apply the theories of budgeting to their plan.

So, in order to take decision, there is an evaluation criterion which is addressed as Capital
Budgeting Techniques. There are two different criteria for evaluating any investment decision.
Firstly, there is a Discounted Cash Flow technique which includes the calculation of Net Present
Value, Internal Rate of Return and Profitability Index and after that there is a Non-Discounted
Cash Flow technique which involves Payback Period and accounting Rate of Return.

At first, they learned about the cash flow and the cost of buying the necessary assets along with
other expenses. They forecasted the initial investment would be 100,000 RS and will need 12,500
RS to cover the monthly expenses. They also forecasted their revenue to be 25 RS per plate with
a total of 100 plates sold per day. This would lead to a net cash inflow of 30,000rs in the first year,
which will rise by 15% per year for following three years.

With these data, they calculated the profitability using net present value and internal rate of return.
The net present value of the cash flow was 16,757 RS at a cost of capital of 10% for an internal
rate of return 17%. Moreover, both of them also wanted to know how many years would it take
them to regain their investment. They calculated the payback period which was lower than
expected which gave them more motivation. Based on all the data, they were ready to start their
project without any further delays.