MGT411 Money & Banking Assignment 1 Solution Fall 2014

Assignment
Dear Students!
The concept of Time value of money is very important in Finance. Every Transactional Event in Business/ Project results in the future cash inflows or outflows. Whenever there are several years/ time periods and manager has to make decision, he always takes into account the concept of Present value. The application of present value is very important to understand.
Download a file: “Feasibility Study- Steel Products Welding.pdf” in the “Downloads” section in your VULMS account. After extracting the data, solve the assignment according to the given questions:
a. Calculate the Present Value of 10 years’ future cash inflows (by using: net profit after tax figure and 40% Discount rate). (4 marks)
b. By comparing Total Project Cost: Rs. 673,258 with the answer of “part a”, comment weather the project is profitable or not? (1 mark)
c.Calculate the IRR of the project, by using the same cash inflows of Part a. (Hint: Calculation of IRR has been discussed on the MDB board: Lecture 11. IRR) (5 marks) (Show complete working of all the calculations)

Solution:

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Years NPAT + Dep CF PV @ 40% Years NPAT + Dep CF PV @ 97%
1       131,773    81,700       213,473       152,481 1       131,773    81,700       213,473     108,362
2       537,542    81,700       619,242       315,940 2       537,542    81,700       619,242     159,561
3       974,213    81,700    1,055,913       384,808 3       974,213    81,700    1,055,913     138,111
4    1,470,746    81,779    1,552,525       404,135 4    1,470,746    81,779    1,552,525     103,080
5    1,830,625    81,779    1,912,404       355,582 5    1,830,625    81,779    1,912,404        64,454
6    2,037,638    85,564    2,123,202       281,983 6    2,037,638    85,564    2,123,202        36,324
7    2,248,830    85,655    2,334,485       221,460 7    2,248,830    85,655    2,334,485        20,273
8    2,473,180    85,655    2,558,835       173,388 8    2,473,180    85,655    2,558,835        11,280
9    2,713,045    85,655    2,798,700       135,458 9    2,713,045    85,655    2,798,700          6,263
10    2,968,566    85,761    3,054,327       105,593 10    2,968,566    85,761    3,054,327          3,469
 (A)    2,530,826     651,178
673258 673258
(B)    1,857,568     (22,080)
Ra 0.4
NPVa    1,857,568
Rb 0.97
NPVb       (22,080)
IRR 96%
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