FIN622 Corporate Finance Assignment 1 Solution Fall 2014

Assignment Question:
MRS Enterprises wants to evaluate a new project having 6 years expected life, with the following information:
New fixed capital investment is Rs. 2, 000,000 and initial investment in net working capital is Rs. 200,000. At the end of each year, additional net working capital will be required to have cumulative investment in net working capital equal to one sixth of next year forecasted sales. New project is depreciated at the rate of 20 % in 1
st year, 32% in 2 nd year, 19.2% in 3rd year, 11.52% in 4 th year, 11.52 % in 5th year, and 5.76% in 6 th year.
Sales are Rs. 1,200,000 in first year. They grow at a 25% annual rate for the next two years then grow at a 10% annual rate for the last three years. Marginal fixed expenses are Rs.150, 000 for first three years and Rs. 130,000 for last three years. Marginal variable expenses are 40 % of sales in 1st year, 39 % of sales in 2nd year, and 38% in each of the remaining years. MRS Enterprises will sell its fixed capital investments for Rs. 150,000 when the project terminates and recapture its cumulative investment in net working capital. Income taxes will be paid on any gains.
Marginal tax rate is 30%. And, the project’s required rate of return is 18 percent.
a) You as a financial manager are required to calculate the following;
1. Net Present Value (NPV)
2. Internal Rate of Return (IRR)
3. Accounting Rate of Return (ARR)
Based on the values of each of the above, make decision regarding the acceptance of the project.
b) Which capital budgeting technique is best in your opinion? Justify your answer with some logical comments.Please read the following instructions carefully before preparing the assignment solution:
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