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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
(πΆπΉ)πΆππ πΉπππ€
1 + π (πππ‘π ππ πππ‘π’ππ)π
Now,
Given data:
Rate of return = 11%
Putting
values in formula,
500,000
550,000
650,000
750,000
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
(πΆπΉ)πΆππ β πΉπππ€
Now,
Given data:
Rate of return
= 11%
Putting
values in formula,
500,000
550,000
600,000
750,000
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.
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