FM 2 END TERM EXAM

BD20065

QUESTION 1

Calculating Net Present Value:

PROJECT A:

Pessimistic

Cash Outflow = 30000

Present Value of Cash Inflows (Pessimistic):

=1200/ [(1 + 0.1)^1 + (1+ 0.1)^2 + (1+ 0.1)^3 + (1+ 0.1)^4 + (1+ 0.1)^5......................................(1+ 0.1)^20)]

=10216.3

NPV= 10216.3 - 30000

=-19783.7

Most Likely

Cash Outflow = 30000

Present Value of Cash Inflows (Pessimistic):

=4000/ [(1 + 0.1)^1 + (1+ 0.1)^2 + (1+ 0.1)^3 + (1+ 0.1)^4 + (1+ 0.1)^5......................................(1+ 0.1)^20)]

= 34054.25

NPV= 34054.25 - 30000

= 4054.255

Optimistic

Cash Outflow = 30000

Present Value of Cash Inflows (Pessimistic):

=7000/ [(1 + 0.1)^1 + (1+ 0.1)^2 + (1+ 0.1)^3 + (1+ 0.1)^4 + (1+ 0.1)^5......................................(1+ 0.1)^20)]

=59594.946

NPV= 59594.946 - 30000

= 29594.946
PROJECT B:

Pessimistic

Cash Outflow = 30000

Present Value of Cash Inflows (Pessimistic):

=3700/ [(1 + 0.1)^1 + (1+ 0.1)^2 + (1+ 0.1)^3 + (1+ 0.1)^4 + (1+ 0.1)^5......................................(1+ 0.1)^20)]

=31500.19

NPV= 31500.19 - 30000

= 1500.186

Most Likely

Cash Outflow = 30000

Present Value of Cash Inflows (Pessimistic):

=4000/ [(1 + 0.1)^1 + (1+ 0.1)^2 + (1+ 0.1)^3 + (1+ 0.1)^4 + (1+ 0.1)^5......................................(1+ 0.1)^20)]

= 34054.25

NPV= 34054.25 - 30000

= 4054.255

Optimistic

Cash Outflow = 30000

Present Value of Cash Inflows (Pessimistic):

=4500/ [(1 + 0.1)^1 + (1+ 0.1)^2 + (1+ 0.1)^3 + (1+ 0.1)^4 + (1+ 0.1)^5......................................(1+ 0.1)^20)]

=38311.04

NPV= 38311.04 - 30000

= 8311.037
NPV TABLE:

                                        PROJECT A              PROJECT B

PESSIMISTIC                    -19783.7                    1500.186

MOST LIKELY                     4054.255                  4054.255

OPTIMISTIC                       29594.946                8311.037

We need to now calculate average NPV: 

Avg NPV for Project A: 4621

Avg NPV for Project B: 4621

Since the average NPV for both projects is the same, we will choose the project with the highest positive
inflow to maximise our profits. Here for Project A that stands true.

Hence we can go ahead with Project A

QUESTION2

Calculating the cash flows:

                                                                      @65%               @70%               @75%

Revenues                                                      2400                   2400                  2400

Operating costs                                          (1560)                 (1680)               (1800)

Depreciation                                                  (200)                   (200)                (200)

PBT                                                               640                        520                    400

Tax                                                                (224)                     (182)                 (140)

PAT                                                              416                          338                  260

Add depreciation                                         200                           200                  200       

Final Cash Flow                                          616                           538                  460                              

Calculation Net Present Values:

                                                                  BEST                    POINT EST               WORST

Cash Outflow                                            (2000)                      (2000)                     (2000)

Cash Inflow                                                   616                          538                        460

Cost of capital (k)                                           14%                         14%                      14%

NPV                                                           395.419                     92.103                      (211.213)

QUESTION 3

The tax rate is not given, hence we will assume a tax rate @ 0% for both

PROPOSAL 1

Window ACs:

Cash flows:

1 - 150000

2 - 20000

3 - 20000

4 - 25000

5 - 25000

6 - (25000-10000) = 15000

The present value of all the cash flows = Rs 240802

PROPOSAL 2

Spilt ACs:

Cash flows:

1 - 200000

2 - 18000

3 - 18000

4 - 22000

5 - 22000

6 - 22000

7 - 26000

8 - 26000

9 - 26000

10 - (26000-15000) = 11000

The present value of all the cash flows = Rs 326607

Time adjusted life of:

Window ACs = 1/1.1 + 1/1.1^2 ..... 1/1.1^6 = 4.355

Split ACs = 1/1.1 + 1/1.1^2 ..... 1/1.1^10 = 6.144

Average NPV for Window ACs = 55290

Average NPV for Window for Split ACs = 326607.14/6.144 = 53153.81

Hence we should go ahead with Proposal i.e. the Split ACs