ANS1(a): Additional Funds Needed: Additional funds needed

= (((Assets/Sales)Change in Sales) - ((Accounts Payable/Sales)*Change in Sales) - Profit Margin*Expected

Sales*Retention Ratio)

= ($1000/$2000)*25%$2000 – ($100/$2000)25%$2000 – 2.52%$2000(1+25%)*(1-30%)

= $250 - $25 - $44.1

= $180.9 million

ANS1(b): DSO will be reduced to 34 days.

Sales = $2500

Days Sales Outstanding (DSO) = 34 Days

Days Sales Outstanding (DSO) = Account Receivables/ Sales/365 34 = Account Receivables/$2500/365

Account Receivables = $232.8767

Firm’s Net Fixed Assets = $700 million

A new inventory management system will increase its inventory turnover to 10x. Sales = $2500
Inventory Turnover = Sales/Inventory 10 = $2500/Inventory = $250 Total assets do not change.

Total Assets = $1250

Total Current Assets = Total assets - Net Fixed Assets

= $1250 - $700 = $550 million

Cash and Equivalents = Total Current Assets - Accounts Receivables - Inventory

= $550 - $233 - $250 = $67

Formula: IGR = (Ret on Assets* retention rate)/1-(Ret on asset* Ret rate)

2018 2019
Return on Assets 0.0504 0.05232
0.03657019 0.03801630
IGR 7 9

Formula: SGR = (Ret on Equity* retention rate)/1-(Ret on equity* Ret

rate)
2018 2019
Return on Equity 0.03024 0.03924
0.02162577 0.02824380
SGR 4 1
ANS (2):

Machine A Machine B
Initial investment ₹ ₹ Discoun
(CF0) -660,000 -360,000 t 13%
₹ ₹
1 128,000 88,000
₹ ₹
2 182,000 120,000
₹ ₹ Cash
3 166,000 96,000 Inflow
₹ ₹
4 168,000 86,000
₹ ₹
5 450,000 207,000
₹ ₹
Total 1,094,000 597,000
IRR 15.95% 17.34%

Payback 4.0
Period 4 3.65

Machine B is the best option in terms of payback length, as our maximum payback period is four
years.

Benefits:-

1. Simple to use - Compared to other capital budgeting approaches, this method requires very few
inputs and is reasonably simple to calculate.

2. Quick decision-making - Because the payback time is simple to compute and requires fewer inputs,
project managers can quickly determine the payback period. This enables executives to make quick
choices.

3. Uncertain instances - The payback technique is particularly beneficial in businesses where the future
is uncertain or where technology is rapidly changing. Because of this volatility, forecasting future annual
cash inflows is challenging. As a result, using and completing projects with short PBP reduces the
chances of a loss due to obsolescence.

Limitations:-
1. Ignores the time value of money - The time value of money states that money obtained sooner is
worth more than money received later because it has the potential to produce a higher return if
reinvested. The PBP approach ignores this, causing the true worth of the cash flows to be distorted.

2. Cash Flows Aren't Considered Until the Initial Investment Is Repaid - The payback technique only
analyses cash flows until the initial investment is recovered. It ignores the cash flows that will arrive in
coming years.

3. Unrealistic - Because the payback approach is so basic, it ignores typical business realities.

4. Ignores Profitability - Just because a project has a shorter payback period doesn't mean it'll be
lucrative. What if the project's cash flows stop at the payback period or start to decline after the
payback period?

Calculation of NPV  

Initial
PV investment 1 2 3 4 5   NPV
Machine 113274.336 142532.696 115046.326 10303 24424 58132.8
A -660000 3 4 9 8 2   8
Machine 77876.1061 66532.8155 11235 43483.2
B -360000 9 93977.602 8 52745 1   4

Cost Benefit    
Machine
  A 1.088080117
Machine
  B 1.120786781

Annuity
    NPV factor ANPV Rank
Machine 3.51723126 16528.0223
ANPV A 58132.87705 2 9 1st
Machine 3.51723126 12362.9178
  B 43483.24111 2 4 2nd

Yd 13%
1 0.88495
 6
0.78314
2 7
3 0.69305
0.61331
4 9
5 0.54276

Comparison between payback and npv

On the basis of payback machine B is the optimal choice whereas machine a is the right choice as per
NPV. Therefore we have to keep in consideration other qualitative factors as well

Project A vs B
1 2 3 4 5
45000
Machine A 128000 182000 166000 168000 0
20700
Machine B 88000 120000 96000 86000 0

Machine A has more irregular cash flows and more reliable value at the end of the project and machine
B has more cash flow spread-out over the years