Business Finance

5/12/2020 Tutorial Questions

Sachin Yadav
Student ID: EAB2898
Contents

Question 1:.....................................................2
Question 2:...................................................3
Question 3:.................................................3
Question 4:................................................5
Question 5:..............................................6
References.............................................................................................................................................7
Question 1:
A: [ CITATION Eva \l 3081 ] Australian Securities Exchange is place where, Buyers and Sellers offers a
competitive bid to each other. Stock traders represents the price at which buyer willing to pay and
the lowest price that a seller is willing to accept, this place is also known as auction market in
general.

Australian Securities Exchange is an example of auction market.

B:

Sole Traders Partnership Company

Definition Sole Trader is primitive A Legal entity established Partnership is a form if

form of business as a by a group of individuals business organization in
individual operates a to Engage in and operate which at least minimum two
small business with the a business- commercial or individual comes together
limited Capital, and industrial-enterprise is and forms a organization by
responsible alone for its known as Company. unite their capital in to
success or failure. minimize risk and expand
business with shareable
profit
Merits i. [ CITATION i. As there is i. As Company can
Mon \l 3081 ]I minimum issue share so it
t is very easy two partner has large capital
and simple to so the loss potential
form and can be ii. Limited Risk as
organize a dividable so company is
sole trader’s minimum separate legal
business. risk. entity so every
There are no ii. [ CITATION legal process will
legal You \l 3081 ] be on company’s
formalities. Taxation rates applicable name not
ii. It is a small to partnership are lower shareholder’s
organization. than proprietorship and name
It can be company forms of
managed business ownership.
easily by the
owner
himself
Demerits i. As there is i. As i. Lack of secrecy
only one man partnership as company has
the does not has to register
managerial separate legal various
ability is entity that’s statements to
limited. why there is registrar.
ii. As it is a small Unlimited ii. There are so may
unit, it is not liability legally process
possible to ii. Short life and restrictions
 introduce span as it can that company
division of be end if has to face.
labour in the partner do
management. not want to
continue.

Question 2:
A: Gift worth after 10 years= $ 100000

Discount rate of gift= 5%

At age 20 Value factor discount @5% for 10 years = 0.6139

Gift value at 20 age = 1000000*0.6139=$61390

B: Present Value = $ 200000

Future Value= $ 35000

Future value= present value {(1+interest rate)}5

Then r=(FV/PV)1/t-1

r = (35000/20000)1/5 -1

r = (1.75)1/5-1

change into percentage

r = (1.118427-1) *100

r = 11.8427%

Then rate of return =11.8427%

Question 3:
A:

Payment per year =$7500

Time=8

Interest Rate=6%

Amounts that she should pay = P * [1 - (1+r)^-n / r]

= 7,500 * [ 1 - (1+ 0.06)^-8 / 0.06]

= 7500 * [ 1 - (1/1.06)^8 / 0.06]

= 7,500 * [ 1 - 0.6274 / 0.06]

= 7,500 * [0.3726 / 0.06]

= 7,500 * 6.21

= $ 46573.45

B: Asset 1.

Annual interest rate =9%

Then Effective annual return rate = (1+i)^n-1

= (1+0.09)^1-1

=(1.09-1) = 0.09 or 9%

Asset 2.

Semi-annual compound interest rate= 8.9%

n=2 (as interest rate is semi-annually)

then = (1+0.089/2)^2 -1 = (1+ 0.0445)^2 - 1

= 1.091 -1 = 0.091 or 9.1%

Asset 3.

Monthly compound interest rate = 8.95%

n=12 ( as compound interest rate is monthly)

then Then Effective annual return rate = (1+0.0895/12)^12 -1

= (1+ 0.0075)^12 - 1

= 1.094 -1

= 0.094 or 9.4%

On comparing all three Assets, Asset 3 is best for investment as its return rate is more than other
assets.
Question 4:
Year Project A Project B P.V Factor P.V of P.V of
12% for 4 project A Project B
years
0 -95200 -162000 1 -95200 -162000

1 47800 68000 0.893 42685.40 60724

2 37200 65600 0.797 29648.40 52283.20

3 41400 61000 0.712 29476.80 43432

4 29200 54600 0.636 18571.20 34725.60

Total cash 120381.80 191164.80

inflows
after tax
Total cash -95200 -162000
out flow
after tax

A. Profit Index (PI) = Total cash inflows after tax / total discounted cash outflows
Project A = 120381/95200 = 1.26
Project B = 191165/162000 = 1.18

B. Net Present Value (NVP) = Total Cash inflow after tax - Total cash out flow after
tax

Project A = 120381- 95200 = 25181

Project B 191165 – 162000 = 29165

C.
PI decision rule says that if PI > 1.0 we can accept the proposal but if PI < 1.0 its worthless to
accept Proposal, In given case also PI > 1.0 in both project so it’s acceptable according to PI
Decision rule.
 According to NVP decision rule is also acceptable as in both project NVP is positive, as rule
says that if NVP is positive then its acceptable project vice versa if NVP is negative then is
worthless to accept.

Question 5:
A. [ CITATION ALI19 \l 3081 ] Incremental cash flow is the additional operating cash flow that
an organization receives from taking on a new project. A positive incremental cash flow
means that the company's cash flow will increase with the acceptance of the project. A
positive incremental cash flow is a good indication that an organization should invest in a
project
Example i. Kelvin’s project ASA require $ 25000 as initial investment. Make a revenue of $
50000 and expense $ 15000
Relevant incremental cash flows = 50000 - 25000 - 15000 = 10000
Ii. Kelvin’s project power requires $ 40000 as initial investment. earn a revenue of $ 55000
and expenses $ 20000
Relevant incremental cash flow = 55000 - 40000 - 20000 = (5000)
Iii. Kelvin’s project TSA 3 requires $ 50000 as initial investment. Earn a revenue of $ 60000
and expenses of $ 10000
Relevant incremental cash flow = 60000 - 50000 - 10000 = 0

In the above examples project ASA provide a positive relevant incremental cash flow
$10000, project Power provide a negative cash flow of $ (5000) and project TSA has no
relevant incremental cash flow

B.
Sales Revenue = 143200
Cost of goods sold = 60% of sales revenue
=143200*(60/100) = 85920
Depreciation = 8000
Administration and other expenses = 10500
Earning before interest and tax = 143200- (85920+8000+10500)
= 38780
corporate tax @ 30% = 38780(30/100) = 11634

Operating Cash Flow = EBIT + Depreciation – tax = 38780 + 8000 – 11634 = 35146.

References
Anon., n.d. Your Article Library. [Online]
Available at: www.yourarticlelibrary.com/partnership-firms/partnership-firms-
definition-features-advantages-and-disadvantages/40804
Money Matters, n.d. Sole Trader Business | Advantages | Disadvantages |
Suitability. [Online]
Available at: https://accountlearning.com/sole-trader-business-advantages-
disadvantages-suitability/
Tarver, E., n.d. Investopedia. [Online]
Available at: https://www.investopedia.com/terms/a/auctionmarket.asp
TUOVILA, A., 2019. Investopedia. [Online]
Available at: https://www.investopedia.com/terms/i/incrementalcashflow.asp