CT – 1

PART - A
1. Define financial management.
Financial management involves planning, organizing, directing, and controlling
the financial activities of an organization in order to achieve its financial goals
and objectives effectively.

2. Write any two Objectives of financial management.

• Maximizing shareholder wealth
• Ensuring liquidity

3. What do you understand by time value of money?

Time value of money is a concept that states that a sum of money today is worth
more than the same sum in the future due to its potential earning capacity. In
other words, money has a time value associated with it, and a dollar received
today is worth more than a dollar received in the future.

4. Write a formula for multiple periods of Compounding interest

calculation.
The formula for multiple periods of compounding interest calculation is:
Future Value (FV) = P(1 + r/n)^(nt)
Where:
FV = Future Value of the investment
P = Principal amount (initial investment)
r = Annual interest rate
n = Number of compounding periods per year
t = Number of years the money is invested for
5. Ms.Banu has deposited Rs.50,000 in IOB. Interest is compounded at 6%
p.a for 3 years. Compute the amount of maturity.
To calculate the amount at maturity for the deposit of Rs. 50,000 at a compound
interest rate of 6% per annum for 3 years, we can use the formula for compound
interest:
A = P(1 + r/n)^(nt)
Where:
A = Amount at maturity
P = Principal amount (initial deposit) = Rs. 50,000
r = Annual interest rate = 6% = 0.06
n = Number of times interest is compounded per year = 1 (annually)
t = Number of years = 3
Substitute the values into the formula:
A = 50,000(1 + 0.06/1)^(1*3)
A = 50,000(1 + 0.06)^3
A = 50,000(1.06)^3
A = 50,000 * 1.191016
A = 59,550.80
Therefore, the amount at maturity after 3 years will be Rs. 59,550.80.

6. State the features of capital budgeting.

1. Long-term focus
2. Risk assessment
3. Allocation of resources
4. Evaluation of investment opportunitieS
5. Decision-making tool

7. Write a short note on Pay-back period.

The pay-back period is a simple capital budgeting method that calculates the
time it takes for an investment to generate cash flows equal to the initial cost of
the investment. It is often used as a quick measure of the risk and liquidity of an
 investment. A shorter pay-back period indicates a faster return of the initial
investment, while a longer pay-back period implies a slower return.

8. What do you mean by Net Present Value

Net Present Value is a capital budgeting technique that calculates the present
value of all expected cash inflows and outflows of an investment project,
discounted at the company's cost of capital. A positive NPV indicates that the
project is expected to generate more cash inflows than outflows, making it a
profitable investment. On the other hand, a negative NPV suggests that the
project may not be financially viable.

9. List out the different stages involved in capital budgeting process.

• Identification of potential investment opportunities.
• Evaluation and analysis of the investment proposals using techniques like
NPV, IRR, pay-back period, etc.
• Selection of the most promising investment projects based on the
analysis.
• Implementation of the selected projects, including securing funding and
resources.
• Monitoring and evaluation of the projects to ensure they are meeting the
expected returns and objectives.
• Review and adjustment of the capital budgeting decisions based on the
performance and changing market conditions.
•
10. Compute Average Rate of Return from the following data:
Cost of Asset : Rs.4,00,000
Useful life of the Asset: 5 Years
Cash flow after tax : Rs.1,72,000
To calculate the Average Rate of Return (ARR), we can use the formula:

ARR = (Average Annual Profit / Initial Investment) x 100

 First, we need to find the average annual profit by subtracting the initial
investment from the total cash flow:

Average Annual Profit = Total Cash Flow - Initial Investment

= Rs.1,72,000 - Rs.4,00,000

= Rs.1,72,000 - Rs.4,00,000

= Rs. (- 2,28,000)

Now, calculate ARR:

ARR = (-2,28,000 / 4,00,000) x 100

ARR = -0.57 x 100

ARR = - 57%

Therefore, the Average Rate of Return is -57%.

PART – B
11 A Explain briefly the significance of financial management

Financial management is a critical aspect of every organization, regardless of its

size or industry. It involves planning, organizing, controlling, and monitoring a
company's financial resources to achieve its financial goals.

Here are some key points highlighting the significance of financial management:

• **Optimal Resource Utilization**: Financial management helps in

utilizing resources effectively to achieve the organization's objectives. By
efficiently managing finances, companies can maximize their profitability
and minimize waste.
• **Strategic Decision-Making**: Sound financial management supports
strategic decision-making by providing accurate and timely financial
information. This information helps in evaluating investment
 opportunities, assessing risks, and making informed decisions that align
with the company's long-term goals.
• **Risk Management**: Financial management plays a crucial role in
identifying and managing financial risks such as market volatility, credit
risks, and liquidity issues. By implementing risk management strategies,
companies can safeguard their financial stability and protect themselves
from unforeseen events.
• **Performance Evaluation**: Financial management helps in measuring
the company's financial performance through various financial ratios,
budgets, and reports. By analyzing financial performance indicators,
organizations can identify areas of improvement and make necessary
adjustments to enhance their profitability.
• **Compliance and Transparency**: Effective financial management
ensures compliance with regulatory requirements and financial reporting
standards. It promotes transparency in financial disclosures, building trust
among stakeholders such as investors, creditors, and regulators.
• **Capital Budgeting**: Financial management involves capital
budgeting, which is the process of evaluating and selecting long-term
investment projects. By analyzing the potential returns and risks
associated with each investment opportunity, companies can allocate their
capital efficiently and maximize shareholder wealth.
• **Cash Flow Management**: Ensuring a healthy cash flow is crucial for
the sustainability of any business. Financial management helps in
managing cash flows effectively by monitoring inflows and outflows,
maintaining adequate liquidity, and optimizing working capital.
• **Striving for Growth**: Financial management plays a pivotal role in
supporting the growth and expansion of a business. By managing finances
prudently, companies can secure funding for growth initiatives, acquire
assets, expand operations, and enter new markets.
 In conclusion, financial management is essential for the overall success and
sustainability of an organization. It provides the necessary tools and frameworks to make
informed decisions, manage risks, allocate resources efficiently, and drive growth in a
competitive business environment.

11. B Calculate the maturity amount if Rs.2,00,000 is invested for 2 years at 12%
compounded: (a) Annually (b) Semi-annually (C) Quarterly and (d)
Monthly.

To calculate the maturity amount for each compounding frequency, we can use
the formula for compound interest:

A = P(1 + r/n)^(nt)

Where:

A = Maturity amount

P = Principal amount (Rs.2,00,000)

r = Annual interest rate (12% or 0.12)

n = Number of compounding periods per year

t = Number of years

Let's calculate the maturity amount using different compounding

frequencies:

(a) Annually:

n = 1 (compounded annually)

t = 2 years

A = 200000(1 + 0.12/1)^(1*2)

A = 200000(1 + 0.12)^2
A = 200000(1.12)^2

A = 200000 * 1.2544

A ≈ Rs. 250880

(b) Semi-annually:

n = 2 (compounded semi-annually)

t = 2 year

A = 200000(1 + 0.12/2)^(2*2)

A = 200000(1 + 0.06)^4

A = 200000(1.06)^4

A = 200000 * 1.26248

A ≈ Rs. 252496

(c) Quarterly:

n = 4 (compounded quarterly)

t = 2 years

A = 200000(1 + 0.12/4)^(4*2)

A = 200000(1 + 0.03)^8

A = 200000(1.03)^8

A = 200000 * 1.270042

A ≈ Rs. 254008

(d) Monthly:

n = 12 (compounded monthly)

t = 2 years

A = 200000(1 + 0.12/12)^(12*2)
 A = 200000(1 + 0.01)^24

A = 200000(1.01)^24

A = 200000 * 1.268242

A ≈ Rs. 253648

Therefore, the maturity amounts for different compounding frequencies

are approximately:

(a) Rs. 250880

(b) Rs. 252496

(c) Rs. 254008

(d) Rs. 253648

12 A

To determine which model is more profitable, we need to calculate the net savings or
profit generated by each machine over their estimated life span.

First, let's calculate the annual savings and costs for each model:

For Model Damsel:

- Savings in scrap per year: Rs. 20,000

- Additional cost of supervision per year: Rs. 24,000

- Additional cost of maintenance per year: Rs. 14,000

- Cost of indirect material per year: Rs. 12,000

- Total savings in wages per year: Rs. 1,200 x 150 = Rs. 180,000

For Model Shylock:

- Savings in scrap per year: Rs. 30,000

- Additional cost of supervision per year: Rs. 32,000

- Additional cost of maintenance per year: Rs. 22,000

- Cost of indirect material per year: Rs. 16,000

- Total savings in wages per year: Rs. 1,200 x 200 = Rs. 240,000

Next, let's calculate the annual profit for each model:

- For Damsel:

Annual Profit = Total savings - Total costs

Annual Profit = Rs. (20,000 + 180,000) - Rs. (24,000 + 14,000 + 12,000)

Annual Profit = Rs. 200,000 - Rs. 50,000

Annual Profit = Rs. 150,000

- For Shylock:

Annual Profit = Total savings - Total costs

Annual Profit = Rs. (30,000 + 240,000) - Rs. (32,000 + 22,000 + 16,000)

Annual Profit = Rs. 270,000 - Rs. 70,000

Annual Profit = Rs. 200,000

Lastly, let's calculate the total profitability over the estimated life span of each
model:

- Total Profit for Damsel over 10 years: Rs. 150,000 x 10 = Rs. 1,500,000

- Total Profit for Shylock over 12 years: Rs. 200,000 x 12 = Rs. 2,400,000
Considering the rate of taxation at 50% of profit, the net profits for each model
will be:

- Net Profit for Damsel: Rs. 1,500,000 - (50% of Rs. 1,500,000) = Rs. 750,000

- Net Profit for Shylock: Rs. 2,400,000 - (50% of Rs. 2,400,000) = Rs. 1,200,000

Therefore, based on the calculations, it is recommended to purchase Model

Shylock as it offers higher net profitability over its estimated life span compared
to Model Damsel.

12. B

To determine if the investment is desirable using the Net Present Value (NPV)
method, we need to calculate the present value of the cash flows generated by the
investment and compare it to the initial investment cost.
Given:
- Initial investment = Rs. 10,000
- Scrap value = Rs. 500
- Yields for each year: 4,000, 4,000, 3,000, 3,000, 2,000
- Discount rates for each year: 10%
- Present Value factors: 0.909, 0.826, 0.751, 0.683, 0.621
First, calculate the present value (PV) of each cash flow:
PV of Year 1 = 4,000 * 0.909 = Rs. 3,636
PV of Year 2 = 4,000 * 0.826 = Rs. 3,304
PV of Year 3 = 3,000 * 0.751 = Rs. 2,253
PV of Year 4 = 3,000 * 0.683 = Rs. 2,049
PV of Year 5 = 2,000 * 0.621 = Rs. 1,242
Next, calculate the total PV of all cash flows:
Total PV = 3,636 + 3,304 + 2,253 + 2,049 + 1,242 = Rs. 12,484
Now, calculate the NPV:
NPV = Total PV - Initial Investment + Scrap Value
NPV = 12,484 - 10,000 + 500
NPV = Rs. 2,984
Since the NPV is positive (Rs. 2,984), the investment is considered
desirable. This means that the investment is expected to generate returns
higher than the cost of capital (10%) and is likely to be profitable.