Task 2.

1)

Finance is the part of the business which is accountable for organization currency within the
organization. This includes

 Raising funds by issuance of financial instruments(shares, debentures)

 Organization and administration of the finances of the business, and
 arrangement future outflow relevant to operating, financing as well as investing activities of the
business

2)

if an shareholder has the capability to devote in equities or capital employed over the extended term,
that make available the sponsor through the likely to get better from the risks of bear financial markets
and take part in bull market, while if an investor can only spend in a short time frame, the similar
equities have a higher risk suggestion.

Task 2.2:

1) Calculation of the difference between the simple and compound interest:

Difference=Simple interest- Compound interest

Difference=1050-937.5

=112.5 Euros

Calculation of difference Between Simple and Compound Interest

Simple Interest Description Values
Principal Value 15000
Simple Interest Rate 7%
No Of Years 1
Simple Interest =Principal Value *Interest Rate *No of years to be Simple Interest 1050
invested

Compound Interest
Principal Value 15000
Simple Interest Rate 6.25%
No Of Years 1
 Compound Interest=Principal Value*((1+Interest rate)^No of years)-1) OR Compound interest=Future
Value -Principal Value

Compound Interest=15000*((1+6.25)^1-1)
Future Value 15937.5
Compound Interest 937.5

2)

2) Selection of Best Option(By Calculating Future Values Or Sum)

Sum calculated under compound interest is greater as compared to the sum calculated under the simple
interest because of the larger time period for investment despite of the lower interest rate. Due to
larger time period ,at the end of the balance on which compound interest is to be calculated has
reached to its apex Therefore its amount is greater as compared to simple interest that is fixed in each
year due to calculation based on its principal amount of the investment.

Future Value In Simple Interest=Principal Value*(1+Interest Principal Value 15000

Rate*No Of Years)
Simple Interest Rate 7%
No Of Years 12
Future Value=15000*(1+7%*12) Future Value 27600

Future Value In Compound Interest=Principal Value*(1+Interest Principal Value 15000

Rate)^No Of Years
Simple Interest Rate 6.25%
Future Value=15000*(1+7%)^12) No Of Years 12
Future Value 31048.34988

3)

In the year 7, Amount calculated on the basis of the compound interest is greater as compared to
amount calculated under simple interest because of higher value of the balance(principal amount all
previous interests) on which rate applied therefore we have to select the compound interest .

Interest Interest Sum Of Simple Sum Of Compound

Years Principle
Rate Rate2 Interest Interest
1 15000 7% 6.25% 16050 15937.5
 2 15000 7% 6.25% 33150 32871.09375
3 15000 7% 6.25% 51300 50863.03711
4 15000 7% 6.25% 70500 69979.47693
5 15000 7% 6.25% 90750 90290.69424
6 15000 7% 6.25% 112050 111871.3626
7 15000 7% 6.25% 134400 134800.8228
8 15000 7% 6.25% 157800 159163.3742

Task 2.3:Capital Budgeting:

1) Visualization Of Cash Flow of investment in the south Africa:

1) Visualization Of Cash Flow Rs In

MILLION
Year Year Year2 Year3 Year4 Year5 Year Year7 Year Year9 Year10 Year1 Year12 Year1 Year1 Year15 Total
0 1 6 8 1 3 4
Investmen -300 -300
t In Plant
Return On 0 45 45 45 45 45 45 45 45 45 45 45 45 45 45 45 675
the
Investmen
t

Visualization Of Cash Flow of investment in the China:

Year Yea Year Year Year Year Year Year Year Year Year1 Year1 Year1 Year1 Year1 Year1 Tota
0 r1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 l
Investmen -370 -370
t In Plant
Return On 0 25 25 25 25 60 60 60 60 60 90 90 90 90 90 90 940
the
Investmen
t

2) Calculation of Pay Back Period (Rupees In Million):

Payback period is that period which is calculated on the gross amount of investment and all the cash
flows generated in respect of this investment made .

Payback Period=Original amount of Investment/All Cash Inflows

Calculation of Pay Back Period in case of investment in south Africa (Rupees In Million)

Year0 Year Year2 Year Year4 Year Year Year7 Year Year9 Total
1 3 5 6 8
Investment In Plant -300 -300
Return On the 0 45 45 45 45 45 45 45 45 45 405
Investment

Payback Period=Original 0.740741

Investment/Cash Inflows

On the basis of the payback period calculation, investment must have to made in china project despite
of lower interest rate because the return the investment is high as compared to investment made in
south Africa about (.925-.741)84 % more earnings that will generate more cash flows to support the
financing, operating as well as investing activities of the entity as compared to the investment in south
Africa

Calculation of Pay Back Period in case of investment in CHINA (Rupees In Million)

Year Year Year Year Year Year Year Year Year Year Tota
0 1 2 3 4 5 6 7 8 9 l
Investment In Plant -370
Return On the 0 25 25 25 25 60 60 60 60 60 400
Investment

Payback Period=Original 0.925

Investment/Cash Inflows

3) Calculation of the net present values:

Net present value calculated under investment made in South Africa as well as in china is positive that is
indicating more cash flow generation as compared to investment made but cash flow generation id
much more if we made the investment in china as compared to investment made in south Africa

Present Value (In case Of South Africa)Rupees In Million

Years 0 1 2 3 4 5 6 7 8 9 1 11 12 13 1 15 Total
0 4
Investmen - -300
t In Plant 30
0
Return On 0 45 4 4 4 4 4 4 4 4 4 45 45 45 4 45 675
the 5 5 5 5 5 5 5 5 5 5
Investmen
t
Interest 7% 0
 Rate
Present 42. 3 3 3 3 3 2 2 2 2 21. 20 18. 1 16.3 409.8
Value 1 9 7 4 2 0 8 6 4 3 4 7 7 1 6
@7%
Net Present Value @7% 109.8
6
Net present value in project of china is +135 million Euros which is much greater as compared to the net
present value of the future cash flows that is near about to +109.86 therefore we have to made
investment in the china as compared to south Africa.

Present Value (In case Of China)Rupees In Million

Years 0 1 2 3 4 5 6 7 8 9 1 11 12 13 1 15 Total
0 4
Investmen - -370
t In Plant 37
0
Return On 0 25 2 2 25 60 6 60 6 6 9 90 90 90 9 90 940
the 5 5 0 0 0 0 0
Investmen
t
Interest 7% 0
Rate
Present 23. 2 2 19 43 4 37 3 3 4 42. 40 37. 3 32.6 505.
Value 4 2 0 0 5 3 6 8 3 5 2 7
@7%
Net Present Value @7% 135.
7

4)Calculation of Internal rate of return:

Internal rate of the return is rate on which the project is earning internally on the investment (long term
investment)of capital nature made .for decision making regarding the investment is to be made or
not ,the investor has compared such a internal rate of return with the minimum rate of the return that
he wishes to earn on the investment made even at breakeven point.

Calculation Of Internal Rate Of Return in case of South Africa:

Calculation Of Internal Rate Of Return in case of South Africa (Rupees In Million)

Years 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Total
Investment In Plant - -300
300.0
0
Return On the 0.00 45 45 45 45 45 45 45 45 45 45 45 45 45 45 45 675
Investment
Interest Rate 0.07 0
Present Value @7% 42. 39. 36. 34. 32. 30 28 26. 24. 22. 21. 20 18. 17. 16. 409.
 1 3 7 3 1 2 5 9 4 7 5 3 9
Net Present Value 109.8 0
@7% 6
0
Present Value@18% 38. 32. 27. 23. 19. 16. 14. 12 10. 8.6 7.2 6.1 5.2 4.4 3.7 229.
(Assumed) 1 3 4 2 7 7 1 1 9 7 3 3 6 1
Net Present Value -70.88
@18%
IRR=LOWER RATE+[+NPV/(+NPV-(-NPV))*(Higher Rate-Lower Rate)]
Lower Rate 0.07
Net Present Value 109.8
@7% 6
Present Value@18% -70.88
Higher Rate 0.18
Internal Rate Of 0.14
Return

Calculation Of Internal Rate Of Return in case of China:

Calculation Of Internal Rate Of Return in case of China (Rupees In Million)

Years 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Total
Investment In Plant -370.00 -370
Return On the Investment 0.00 25 25 25 25 60 60 60 60 60 90 90 90 90 90 90 940

Interest Rate 0.07 0

Present Value @7% 23. 21. 20. 19. 42. 40 37. 34. 32. 45. 42. 40 37. 34. 32. 505.
4 8 4 1 8 4 9 6 8 8 3 9 6 7
Net Present Value @7% 135.70

Present Value@18% 21. 18 15. 12. 26. 22. 18. 16 13. 17. 14. 12. 10. 8.8 7.5 235
(Assumed) 2 2 9 2 2 8 5 2 6 3 5 7 2
Net Present Value @18% -135.00
IRR=LOWER RATE+[+NPV/(+NPV-(-NPV))*(Higher Rate-Lower Rate)]
Lower Rate 0.07
Net Present Value @7% 135.70

Present Value@18% -135.00

Higher Rate 0.18
Internal Rate Of Return 0.13

Internal rate of the return on the investment made in china is 13% as compared to the investment made
in south Africa having Internal rate of the return about 14% indicating that such a project is generating
more cash flows due to large investment.

5) What are some disadvantages of the Payback Method?

Payback method has following disadvantages

 It ignored the time value of money concept along with the inflation effect
 It does not cover all cash flow of the project
 It is not realistic because it ignores the profitability concept
 It neglects the return on the capital employed as investment