NAME: ADISIE BIRHANE

ID: 102239
SECTION: ONE

Hope University College

MBA Program

School of Post Graduate Studies

Individual Assignment for the Course Advanced Financial Management (20%)

1. Compare and Contrast financial analysis of a project and socio-economic analysis

of a project.
Answer: Both estimate the net-benefits of a project investment based on the
difference between the with-project and the without-project situations. However,
the financial analyses of the project compare benefits and costs to the enterprise,
while the economic analyses compare the benefits and costs to the whole
economy. While financial analysis uses market prices to check the balance of
investment and the sustainability of project, economic analysis uses economic
price that is converted from the market price by excluding tax, profit, subsidy,
etc. to measure the legitimacy of using national resources to certain project.
Financial and economic analyses also differ in their treatment of external effects
(benefits and costs), such as favorable effects on health.

2. You are a financial analyst for Damon Electronics Company. The director of
capital budgeting has asked you to analyze two proposed capital investments,
Projects A and B. Each project has a cost of $29,000, and the cost of capital for
each project is 10 percent. The projects’ expected net cash flows are as follows:

EXPECTED NET CASH FLOWS

YEAR PROJECT A PROJECT B
0 ($29,000) ($29,000)
1 14,400 4300
2 12,300 9800
3 9200 15,200
4 5100 16,800

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 a) Calculate each project’s payback period, net present value (NPV),
profitability index and internal rate of return (IRR) for the two projects
Answer: payback for Project A is 2yrs and 3month because
29,000=14,400+12,300+2300+14900
Payback period for Project B 3yrs because 29,000=4300+9800+14900
NetpresentvalueforprojectA=
(14,400/(1.10)^1+12,300/(1.10)^2+9200/(1.10)^3+5100/(1.10)^4)-
29,000=4651.64
NetpresentvalueforprojectB=
4300/(1.10)^1)+9800/(1.10^2)+15200/(1.10^3)+16800/(1.10^4)-29,000=5902.86
b) Which project or projects should be accepted if they are independent?
Explain
Answer: both will be selected because both projects have positive net
present value
c) Which project should be accepted if they are mutually exclusive? Explain
Answer: Project A will be accepted because it’s payback period is less than
project B
3. Mr. Tesfahun is considering a project that will produce cash inflows of $2,100 a
year for 4 years. The project has a 12 percent required rate of return and an initial
cost of $5,000. What is the discounted payback period? 

Answer:

Initial investment=$5000

Total cash flow = $2100 for 4 years is $6378.43

RRR= 12%

PBP=?

PBP=Io/CF, PBP= 5000/6378.43 =0.78 years

Let the trial error of 24%, the CF is $5048.98 and let we use 25% the cf is the
amount of $4559.36

Then the difference 0f the two is 5000-5048.37=-48.37

5000-4959.36 =40.64

Summation of the two is absolute value of 48.37+40.64 = 89.01

Divide the lowest with the total 40.64/89.01=0.46

Then IRR of the project is 24+0.46 =24.46% which is greater than the required rate
of return.

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 4. You're trying to determine whether to expand your business by building a new
manufacturing plant. The plant has an installation cost of $12 million, which will
be depreciated straight-line to zero over its 4-year life. The plant has projected
net income of $1,095,000, $902,000, $1,412,000, and $1,724,000 over these 4 years.
What is the average accounting return? What will be your decision in this
regard? 

Answer: Average accounting return is one of the capital budgeting techniques

that does not use the time value of money concept to evaluate the project. AAR is
calculated by deducting the average cash inflow with average cash outflow.

Given

Installation cost=$12,000,000

Net income (year 1) =$1,095,000

Net income (year 2) =$902,000

Net income (year 3) =$1,412,000

Net income (year 4) =$1,724,000

Average net income = Total net income / Number of years

= (1,095,000+902,000+1,412,000+1,724,000)/4

=1283.25 per year

Average Accounting Return (AAR) = [Average net income / Average investment] x 100

Average investment =(12,000,000+0)/2=6,000,000

Therefore, Average Accounting Return (AAR) =1283.25/6,000,000*100

=21.38%

Decision The project will be accepted because This method will accept all those projects
whose ARR is higher than the minimum rate established by the management and reject
those projects which have ARR less than the minimum rate.

Projects which have an ARR equal to or greater than a pre-specified cutoff rate of return
─ which is usually between 15% and 30% ─ are accepted otherwise, rejected.

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5. The demand for a product in each of the last seven months is shown below.

Month Demand
January $2300
February $2900
March $3300
April $4000
May $4100
June $4300
July $4900
August

a) Calculate a two-month moving average for each month. What would be your
forecast for the demand in month August?
Answer:
Moving average for feb. =(2300+2900)2=2,600
Moving average for march =(2900+3300)/2=3,100
Moving average for April = (3300+4000)/2=3,650
Moving average for may=(4000+4100)/2=4,050
Moving average for June= (4100+4300)/2=4,200
Moving average for July = (4300+4900)2=4,600
The forecast for august month is just the moving average for the month before that
i.e. the moving average for July month= 4,600 this is also Moving average for
August

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 b) Assume the forecast for January was $2300. If you use a smoothing constant of 0.6,
what would be the forecast for August using exponential smoothing?
Answer: Applying exponential smoothing with a smoothing constant of 0.6 we get:

M1 = Y1 = 2300
M2 = 0.6Y2 + 0.4M1 = 0.6(2300) + 0.4(2900) = 2,540
M3 = 0.6Y3 + 0.4M2 = 0.6(3300) + 0.4(2540) = 2,996
M4 = 0.6Y4 + 0.4M3 = 0.6(4000) + 0.4(2996) = 3,594.4
M5 = 0.6Y5 + 0.4M4 = 0.6(4100) + 0.4(3594.4) = 3,899.36
M6=0.6Y6+0.4M5=0.6(4300) + 0.4(3899.36)= 4,139.74
M7=0.6Y7+0.4M6=0.6(4900) + 0.4(4139.74)=4595.89
As before the forecast for august month is just the moving average for July month =
august month =M7 = 4,595.89
To compare the two forecasts we calculate the mean squared deviation (MSD). If we
do this we find that for the moving average

MSD = [(2600 - 3300)² + (3100 - 4000)²+ (3650 - 4100)²+ (4050 - 4300)²+ (4200 -
4900)²]/5 = 411,000
and for the exponentially smoothed average with a smoothing constant of 0.6

MSD = [(2300 - 2900)² + (2540- 3300)² + (2296 - 4000)²+ (3594 - 4100)²+ (3899 -
4300)²+ (4140 - 4900)²]/6 = 805,942
Overall then we see that two month moving average appears to give the best one
month ahead forecasts as it has a lower MSD. Hence we prefer the forecast of 4,600
that has been produced by two month moving average.

c) Find the Least Squares Regression line and determine the demand for the month
August using trend projection method.

Answer:

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 Trend projection method
Y= a +bx
a=Ӯ-bxmean and
b =(£xy- nxy)/(£x2-nx2)
= 3685.71-33.15×3.5
= (88,800-7×3.5×3685.71)/(131-7×3.5×3.5)
= 3801.735
= 33.15

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