Cooprate_Finince

Corporate Finance (Fin622)” Assignment No. 1 Marks: 20 Being the finance manager of XYZ Company, you are to select one project of two available options i.e. Project A and Project B. The relevant cash flows for both the projects are summarized in given table. Project A Project B Initial investment Rs. 57,000 Rs. 54,000 Year(n) Cash inflows (CFn) Cash inflows (CFn) 1 Rs. 20,000 Rs. 22,000 2 20,000 20,000 3 20,000 18,000 4 20,000 16,000 Assume the discount rate to be 14 percent. Required: • Calculate the payback period of each project. • Calculate the Net present value (NPV) of each project. • On the basis of results of pay back period and NPV, which project would you recommend to your company and why' | “Corporate Finance | Q.1: Calculate the payback period of each project. For Project A Year | 0 | 1 | 2 | 3 | 4 | Project A | -57,000 | 20,000 | 20,000 | 20,000 | 20,000 | The formula of Payback period is, PP=Io/Ct PP=57,000/20,000 PP=2.85years For Project B Year | 0 | 1 | 2 | 3 | 4 | Project B | -54000 | 22,000 | 20,000 | 18,000 | 16,000 | Payback period is lies between year 2 and year 3 .Sum of money recovered by the end of the second year = (22,000+20,000) = 42,000 =54,000 – 42000 = 12,000 PP= (2+12,000/18,000) PP=2.67years Q.2: Calculate the Net present value (NPV) of each project. For Project A Year | 0 | 1 | 2 | 3 | 4 | Project A | -57,000 | 20,000 | 20,000 | 20,000 | 20,000 | NPV=Cf [(1/i-1/i (1+i)]-Ct NPV=20,000[(1/.14 - 1/.14 (1+.14) ^4)]-57,000 NPV=20,000[(7.1429 – 1/ 0.2365)] – 57,000 NPV=20,000 (7.1429 – 4.2283) – 57,000 NPV= 20,000 *(2.9146) – 57000 NPV=58291 – 57,000 NPV=1291 For Project B Year | 0 | 1 | 2 | 3 | 4 | Project B | -54000 | 22,000 | 20,000 | 18,000 | 16,000 | NPV= [Cf1/ (1+i) + Cf2/ (1+i) ^2+ Cf3/ (1+i) ^3+ Cf4/ (1+i) ^4] -Ct NPV= [22,000 / (1+.14) +20,000/ (1+.14) ^2+18,000/ (1+.14) ^3+16,000 / (1+.14) ^4] - 54000 NPV=19298+15389+12150+9473-54000 NPV=56310 – 54000 NPV=2310 Q.3: On the basis of results of pay back period and NPV, which project would you recommend to your company and why' As per the Calculation According to the Payback Period method we should have to take Project B Because it has less payback time as compare to Project A. As far as the NPV is concern the both the projects is NPV > 0, so both Project could be possible to take , but the Project are Mutually exclusive then we should take the project that has the Greater NPV so that is the Project B.