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Assignment No.1 Marks: 10
Due Date: November 23, 2015
ABC Limited is a company that deals in manufacturing chemical. There is an opportunity to
manufacture a new chemical for a Textile Industry. For this, the company must install a plant with
estimated life of 5 years, costing Rs.2.5 million.
For technical aspect of the project, a consultant would be hired at a cost of Rs.60,000. However, if
the project does not turn out financially feasible, his contract would be cancelled by paying him
Rs.20,000. At the end of first year, other acquisition cost would be Rs.40,000.
Working capital requirement in the beginning would be Rs.350,000 and Rs.100,000 in the next year.
All the working capital would be recovered at the end of fifth year. Due to technological
obsolescence the plant will not be useable after fifth year and the salvage value is estimated around
Rs.150,000.
Cash flow emerging from the additional sales would be Rs.650,000 in first year, Rs.600,000 in
second year, Rs.550,000 in third year, Rs.750,000 in fourth and last year.
The company shall depreciate the asset on straight line over its useful life. Tax rate is 20%. Company
requires 10% rate of return on such projects.
Following are some assumptions:
1. Taxes are paid in the same year of benefit occurring.
2. Consultant and Other costs are supposed to occur at the end of first year.
3. Inflation is assumed at 0%
Requirement:
You are required to evaluate the project on the basis of Net Present Value (NPV) whether it would
undertake or not.
Note: Provide all calculations, they carry marks.
24 hours extra / grace period after the due date are usually available to overcome uploading
difficulties. This extra time should only be used to meet the emergencies and above mentioned due
dates should always be treated as final to avoid any inconvenience.
· You can use any other source or book (other than recommended books) in order to clear
any concept.
· Don’t post any direct question related to assignment on MDB as it will not be replied. Only
concept related queries will be entertained.
DEADLINE:
· Make sure to upload the solution file before the due date on VULMS.
· Any submission made via email after the due date will not be accepted.
FORMATTING GUIDELINES:
· Use the font style “Times New Roman” or “Arial” and font size “12”.
· It is advised to compose your document in MS-Word format.
· You may also compose your assignment in Open Office format.
· Use black and blue font colors only.
REFERENCING GuIDELINES:
· Use APA style for referencing and citation. For guidance search “APA reference style” in
Google and read various website containing information for better understanding or visit
http://linguistics.byu.edu/faculty/henrichsenl/apa/APA01.html
RULES FOR MARKING
Please note that your assignment will not be graded or graded as Zero (0), if:
· It is submitted after the due date.
· The file you uploaded does not open or is corrupt.
· It is in any format other than MS-Word or Open Office; e.g. Excel, PowerPoint, PDF etc.
· It is cheated or copied from other students, internet, books, journals etc.

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Replies to This Discussion

MAHAM

You have ignored consultation charges as well as other acquisition charges. Where they have gone.

Consultation charges will be ignored. u r right. we will pay 20,000 at the end of the project because the NPV is negative but where is acquistion charges.

both r irrelevant costs for capital buudegting decisions. (lec 9 slide # 18)

we will not pay the consultant anything. dnt minus 20,000 also. they r not included in any of the capital budgeting techniques.

assignment ko ni krna is style me. agr apne koi website ya book ya article ka reference dalna hai end me k apne yahan se dekh kr kia sb tu usko APA style krna hota hai which i mentioned above.

waise is assignment me zarurat ni reference ki cz lec 9 me sb hai tu net p search krne ki zarurat ni

FIN622 Assignment#01 Solution 

Semester Fall 2015

FIN622- Corporate Finance

Assignment # 01 Solution 

Due Date: November 23, 2015

 

Solution:

 

Year

 

Benefit

 

Depreciation

 

Net Benefit

(Benefit - Depreciation)

1-Tax rate

Tax =20%

 

Benefit after tax

(After tax cash flow)

Total Benefits

 

Discount Factor @ 10%

PV of Total Benefits

 

 

0

 

 

 

 

 

(2,850,000)

1

(2,850,000)

1

650,000

470,000

180,000

0.8

614,000

514,000

0.9091

467,277.40

2

600,000

470,000

130,000

0.8

574,000

574,000

0.8264

474,353.60

3

550,000

470,000

80,000

0.8

534,000

534,000

0.7513

401,194.20

4

750,000

470,000

280,000

0.8

694,000

694,000

0.6830

474,002.00

5

750,000

470,000

280,000

0.8

694,000

1,294,000

0.6209

803,444.60

 

 

 

 

 

 

 

NPV

(229,728.20)

 

 

 

Depreciation = (cost - salvage value)/useful life = (2,500,000 - 150,000)/5 = Rs. 470,000

Benefit after tax = (benefit - depreciation) x (1-tax rate) + depreciation

                          Tax = 20%

                           1 - tax rate = 1 - 20% = 80% = 0.8

 

 

 

Benefit after tax

(After tax cash flow)

Cost of Plant

Working Capital

Salvage Value

Total Benefits

 

 

 

(2,500,000)

(350,000)

 

(2,850,000)

 

614,000

 

(100,000)

 

514,000

 

574,000

 

 

 

574,000

 

534,000

 

 

 

534,000

 

694,000

 

 

 

694,000

 

694,000

 

450,000

150,000

1,294,000

 

 

 

 

 

 

 

 

 

Information Given Below:

Cost of plant

Rs. 2.5 million = 2,500,000

Estimated life

5 years

Salvage value

150,000

Working capital:

 

Beginning

350,000

Next year

100,000

Hire consultant for

60,000

If NPV -ve they pay him

Rs. 20000

Other acquisition cost

40,000

 

 

 

 

 

 

 

 

 

 

Cash flows

Year 1 = 650,000

Year 2 = 600,000

Year 3 = 550,000

Year 4 = 750,000

Year 5 = 750,000

FIN622 Assignment solution

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