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ACC501 Business Finance Assignment No 02 Fall 2020 Solution / Discussion

ACC501 Business Finance Assignment No 02 Fall 2020 Solution / Discussion

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ACC501-Assignment-2-Solution-Fall-2020

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ACC501 Assignment 2 Fall 2020

Due Date: 09 February 2021

LEARNING OBJECTIVES:

After attempting this assignment whole-heartedly, the students would be able to:

• Apply different capital budgeting techniques (NPV and Payback Period).
• Make decisions based on the results of the NPV and Payback

QUESTION:

Haji Textile Mill (Pvt.) Limited is a vertical unit that is involved in the manufacturing and export of high quality fabric. Owing to the country’s electricity crises and unfavorable textile policies by the past governments, the mill is facing difficulties in running its operations smoothly. However, recently the government has announced a new textile policy which is expected to affect the textile sector positively. To reap benefits from the new government policy, Haji textile is planning to enhance its yarn production while installing a new plant. For that purpose, the management is considering two mutually exclusive proposals. Following are the estimates of the initial investment and the associated cash inflows on the proposals:

 Proposal A Proposal B Cash Flows ----- Rupees ---- Initial Cash Outflows 2,000,000 1,500,000 Year-end Cash Inflows 1 500,000 400,000 2 600,000 500,000 3 800,000 700,000 4 900,000 800,000

For this investment, the benchmark payback period and the required rate of return are set at four

• years and 10% respectively. To evaluate feasibility of these proposals, you are required to:

a) Calculate Payback periods for both the proposals (1.5 * 2 Marks)

b) Calculate NPV for both projects (2.5 * 2 Marks)

c) Based upon payback period and NPV calculated above, suggest which project is more suitable to opt. (provide reason as it contain marks(2 Marks)

(Note: You must show complete working/calculation in each of the required parts)

• Copy or reproduction of material is strictly prohibited. You may consult multiple sources for knowledge and understanding but the assignment should be composed in your own
• Your attempt must be to-the-point and according to the
• Put your genuine efforts in order to understand the concepts

24 hours extra/grace period after the due date is 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.

• Make sure to upload the solution file before the due date on
• Any submission made via email after the due date will not be

FORMATTING GUIDELINES:

• Use the font style “Times New Roman”, “Arial” or “Garamond” and font size “12”.
• You may also compose your assignment in Open Office
• Use black and blue font colors

RULES FOR MARKING

Please note that your assignment will not be marked or marked as Zero (0), if

• Plagiarism is found more than 20% because university is following Zero Tolerance Policy for plagiarism. In case of copied solution, plagiarism report will be attached with the assignment solution files in order to provide exact results of copied
• It is submitted after the due date.
• The uploaded solution file is corrupt.
• It is in any format other than MS-Word or Open Office.
• It is cheated or copied from other students, internet, books, journals etc.

ACC501 Business Finance Assignment No 02 Fall 2020 Solution

ACC501 Business Finance Assignment No 02 Fall 2021 Solution

ACC501 Assignment 2 Solution Fall 2020 - 2021 ||Business Finance||

ACC501 Assignment 2 Fall 2020 solution idea:

Stock initial price = 62 Rs

Dividend per share= 1.50 Rs

Ending share price=51 Rs

Dividend yield=?

Capital Gain yield=?

%age total return=?

Question NO 1 Solution

Dividend yield = Dividend/Beginning price

= 1.50/62 *100

= 2

Capital gain yield = (Ending price – beginning price)/Beginning price * 100

= (51-62)/62 * 100

= -18%

Percentage total return = Dividend yield + Capital gain yield

= 2.4% + -18%

= -16%

Question NO 2 Solution

 State of Economy Probability Rate of return If State Accrue Stoke A Stoke B Stoke C Boom 0.20 0.20 0.35 0.34 Normal 0.50 0.15 0.12 0.118 Bust 0.30 0.01 -0.25 -0.196

Profit folio

Boom= 0.40*0.20+0.40*0.35+0.2

= 0.08+0.14+0.12

= 0.34

Normal = 0.40*0.15+0.40*0.12+0.20*0.5

= 0.06+0.048+0.01

= 0.118

Bust= 0.40*0.01+0.40*-0.25+0.50*-0.50

= 0.004-0.1-0.1

= -0.196

Calculation for finding Variance

E (Ra) = 0.04 + 0.075 +0.003

0.118

E (Rb) = 0.07 + 0.06 + (-0.075)

= 0.055

E (Rc) = 0.12 + 0.025 + -0.15

= -0.005

E (Rp) = 40*0.118+40*0.055+20*-0.005

= 6.82 %

Variance

Variance = 0.20*(0.34-0.04075)^2 +0.50*(0.118-0.4075)^2 +0.30*(-0.196-0.6682)^2

= 0.036*100

=3.6 %

Standard Deviation

Standard deviation = √0.036

= 0.186*100

=18.9%

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