FIN622 GDB Solution & Discussion Fall 2010

[+ M.Tariq Malik]

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After discounting all cash flows of projects with its opportunity coats, the net present

values of all three projects are (NPV)

Project A_NPV: +1432

Project B_NPV: -12200

Project C_NPV: +21485

1: On the basis of NPV approach, which project(s) you would select if the projects are

independent and why?

ANS _1 :If the projects are independent so the projects that have +NPV should be

accepted in the given scenario project A and C have positive NPV

 

2: On the basis of NPV approach, which project(s) you would select if the projects are

mutually exclusive and why

Mutually exclusives are those projects where we have to choose only one out of

different options.

If the projects are mutually exclusive the one with higher positive net present value

(+NPV) should be chosen

Ans_2: So in given scenario the best project is C with the higher positive npv 21485

among three projects so rationally chose project C

Reference: Financial Management Theory and Practice

8th edition _BRIGHAM AND GAPENCSKI

Chapter #9 page #398

[+ M.Tariq Malik]

for other complete solution see the attached file pls

[Rao Ali Raza]

rao ali raza
mc090407980

and plez chak it .....................
Based on NPV approach, which project(s) you would select if the projects are independent and why?
Ans:-
In these projects, if the projects are independent then first I will select the project C and then the project A. The reason is that both the project A & C have the positive NPV (Net present value)
2nd
Based on NPV approach, which project(s) you would select if the projects are mutually exclusive and why?
I will select the project C, because it has the positive NPV. The project C has most of all the NPV.

[+ M.Tariq Malik]

Project A
Initial Investment = 45000
Years 1 2 3
Cash Flows 20000 20000 20000
Calculation:-
NPV = -Io + CF1/(1+r)t + CF2/(1+r)t + CF3/(1+r)t
NPV = - 45000 + 20000/(1+0.14)1 + 20000/(1+0.14)2 + 20000/(1+0.14)3
NPV = -45000 + 17543.859 + 15389.350 + 13499.430
NPV = - 45000 + 46432.639
NPV = 1432.639
Project B
Initial Investment = 70000
Years 1 2 3
Cash Flows 20000 26000 30000
Calculation:-
NPV = -Io + CF1/(1+r)t + CF2/(1+r)t + CF3/(1+r)t
NPV = - 70000 + 20000/(1+0.14)1 + 26000/(1+0.14)2 + 30000/(1+0.14)3
NPV = - 70000 + 17543.859 + 20006.155 + 20249.145
NPV = - 70000 + 57800
NPV = - 12200

Project C
Initial Investment = 50000
Years 1 2 3
Cash Flows 30000 28000 35000
Calculation:-
NPV = -Io + CF1/(1+r)t + CF2/(1+r)t + CF3/(1+r)t
NPV = - 50000 + 30000/(1+0.14)1 + 28000/(1+0.14)2 + 35000/(1+0.14)3
NPV = - 50000 + 26316 + 21545 + 23624
NPV = - 50000 + 71485
NPV = 21485

1) On the basis of NPV approach, which project(s) you would select if the projects are independent and why?
Reference:
MGT201 (Page 47)
Independent: implies that the cash flows of the two investments are not linked to each other
Solution:-
If the projects are independent then I will select Project C 1st and after that I will select Project A on 2nd because both have Positive NPV.
2) On the basis of NPV approach, which project(s) you would select if the projects are mutually exclusive and why?
Reference:
MGT201 (page 47)
Mutually Exclusive: means that you can invest in ONE of the investment choices and having chosen one you cannot choose another.
Solution:-
I will Select Project C because it has positive NPV and also have greater amount Rs. 21485.

[Rao Ali Raza]

DEAR BROTHER,
will it correct it not then plz correct it
Scales and Indexes
Scales and indexes are often used interchangeably. Social researchers do not use a consistent
nomenclature to distinguish between the two.
A scale is a measure in which a researcher captures the intensity, direction, level, or potency of a
variable construct. It arranges responses or observations on a continuum or in series of categories. A scale can use a single indicator or multiple indicators.
An index is a measure in which a researcher adds or combines several distinct indicators of a construct into a single score. The composite scores is often a simple sum of the multiple indicators. Indexes are often measured at the interval or ratio level.
Researchers sometimes combine thee features of scales and indexes in a single measure. This is common when a researcher has a several indicators that are scales (i.e. that measure intensity or direction). The researcher then adds these indicators together to yield a single score, thereby creating an index.
Types of Scales
A scale refers to any series of items that are arranged progressively according to value or magnitude, into which an item can be placed according to its quantification. In other words, a scale is a continuous spectrum or series of categories.
It is traditional to classify scales of measurement on the basis of the mathematical comparisons that are allowable with these scales. Four types of scales are nominal, ordinal, interval, and ratio.
Nominal Scale
A nominal scale is the one in which the numbers or letters assigned to objects serve as labels for identification or classification. This measurement scale is the simplest type. With nominal data, we are collecting information on a variable that naturally or by design can be grouped into two or more categories that are mutually exclusive, and collectively exhaustive.
Nominal scales are the least powerful of the four scales. They suggest no order or distance relationship and have no arithmetic origin. Nevertheless, if no other scale can be used, one can almost always one set of properties into a set of equivalent classes.
Ordinal Scale
Ordinal scales include the characteristics of the nominal scale plus an indicator of order. If a is greater than b and b is greater than c, then a is greater than c. The use of ordinal scale implies a statement of “greater than” or “less than” without stating how much greater or less. Other descriptors can be: “superior to,” “happier than,” “poorer than,” or “above.”
Interval Scale
Interval scales have the power of nominal and ordinal scales plus one additional strength: they incorporate the concept of equality of interval (the distance between 1 and 2 equals the distance between 2 and 3). For example, the elapsed time between 3 and 6 A. M. equals the time between 4 and 7 A. M.
One cannot say, however, 6 A.M. is twice as late as 3 A.M. because “zero time” is an arbitrary origin.
In the consumer price index, if the base year is 1983, the price level during 1983 will be set arbitrarily as
100. Although this is an equal interval measurement scale, the zero point is arbitrary.
Ratio Scale
Ratio scales incorporate all thee powers of the previous scales plus the provision for absolute zero or origin. Ratio data represent the actual amounts of variable. Measures of physical dimensions such as weight, height, distance, and area are the examples. The absolute zero represents a point on the scale where there is an absence of the given attribute. If we hear that a person has zero amount of money, we understand the zero value of the amount.
Interval Scale
Interval scales have the power of nominal and ordinal scales plus one additional strength: they incorporate the concept of equality of interval (the distance between 1 and 2 equals the distance between 2 and 3). For example, the elapsed time between 3 and 6 A. M. equals the time between 4 and 7 A. M.
One cannot say, however, 6 A.M. is twice as late as 3 A.M. because “zero time” is an arbitrary origin. In the consumer price index, if the base year is 1983, the price level during 1983 will be set arbitrarily as
100. Although this is an equal interval measurement scale, the zero point is arbitrary.
Ratio Scale
Ratio scales incorporate all thee powers of the previous scales plus the provision for absolute zero or origin. Ratio data represent the actual amounts of variable. Measures of physical dimensions such as weight, height, distance, and area are the examples. The absolute zero represents a point on the scale where there is an absence of the given attribute. If we hear that a person has zero amount of money, we understand the zero value of the amount.
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