ACC501 ASSIGNMENT NO. 1 SPRING 2022 || 100% RIGHT SOLUTION || BUSINESS FINANCE || BY VuTech

ACC501 ASSIGNMENT NO. 1 SPRING 2022

ACC501 ASSIGNMENT NO. 1 SPRING 2022 || 100% RIGHT SOLUTION || BUSINESS FINANCE || BY VuTech

ACC501

BUSINESS FINANCE

ASSIGNMENT NO. 1

SPRING 2022

LAST DATE: 17-08-2022

SOLUTION:

For this investment, the benchmark payback period and the required rate of return are set at four (4) years and 11% respectively.

 

a)      Calculate Payback Period for each proposal

 

Cash Flow (Proposal A)
Year 1	500,000
Year 2	550,000
Year 3	650,000
Year 4	750,000
Total	245,0000

 

Remaining = 50,000

we know that,

Payback period = Year + remaining / next year

Cash Flow = payback period

= 4 + 50,000 / 1,250,000

= 4.04 Years

 

Cash Flow (Proposal B)
Year 1	500,000
Year 2	550,000
Year 3	600,000
Total	1,650,000

Remaining = 350,000

we know that,

Payback period = Year + Remaining / next year

Cash flow = payback

= 3 + 350,000 / 750,000

= 3.47 years

 

b)     Calculate Net Present Value (NPV) for each proposal  Net Present Value for Proposal A

Initial Investment = 2,500,000

we know that formula of NPV

(𝐶𝐹)𝐶𝑎𝑠 𝐹𝑙𝑜𝑤

𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 +

1 + 𝑟 (𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛)^𝑌

 

Now,

 

Given data:

Rate of return = 11%

Putting values in formula,

500,000

550,000

650,000

750,000

𝑁𝑃𝑉 = 2,500,000    + (1 + 0.11)¹        +  (1 + 0.11)²  + (1 + 0.11)³     +   (1 + 0.11)⁴

 

NPV = 2,500,000 + 450,450 + 446,392 + 475,274 + 494,048

          = 1866165

 

NPV = Total – Initial Investment NPV

         = 1866165 - 2500000

NPV = -633,835

 

Thus, NPV for proposal A is negative

 

Now,

Net Present Value for Proposal B

 

Initial Investment = 2,000,000

we know that formula of NPV

(𝐶𝐹)𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤

𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 1 + 𝑟 (𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛)𝑌

 

Now,

 

Given data:

Rate of return = 11%

Putting values in formula,

500,000

550,000

600,000

750,000

𝑁𝑃𝑉 = 2,000,000 + (1 + 0.11)¹          + (1 + 0.11)²      + (1 + 0.11)³     + (1 + 0.11)⁴

 

NPV = 2,000,000 + 450450 + 446392 + 438715 + 494048

         = 1829606

NPV = Total – Initial Investment  NPV

         = 1829606 - 2000000

NPV = -170394

 

Thus, NPV for proposal B is negative

 

 

c)      Based upon payback period and NPV calculated above, suggest which proposal is more viable to select?

Payback period of both:                                      

 

Proposal A = 4.04 years

Proposal B = 3.47 years

As we have seen, proposal A is much higher than proposal B and exceeds four years, which is not possible, compared to proposal b, it is less than 4 and quickly recovers from 4 years ago, and it is possible based on the payback period.

Net Present Value:

 

Proposal A = -633835

Proposal B = -170394

 

In this case we have seen that both NPVs are negative and the investment should be accepted if the NPV is positive.

d)     Briefly discuss the suitability of IRR criteria while evaluating the mutually exclusive projects.

In case of mutually exclusive events, IRR will not help to make the best decision, the reason is that it can be positive that if we consider Proposal A and Proposal B. Based on IRR we will choose Proposal A has a large NOV means it brings large returns. So, IRR is not good in case of mutually exclusive event. IRR ignores the size of the investment.

SUBSCRIBE, SHARE, LIKE AND COMMENTS FOR MORE UPDATES 

KINDLY, DON’T COPY PASTE