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ACC501 Business Finance Assignment No 02 Fall 2020 Solution / Discussion

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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)

Please read the following instructions carefully before preparing the assignment solution:

  • 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

 

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DEADLINE:

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  • You may also compose your assignment in Open Office
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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
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  • It is cheated or copied from other students, internet, books, journals etc.

ACC501 Business Finance Assignment No 02 Fall 2020 Solution 

May be an image of text that says 'a) Calculation Period: Year Cash Flow Proposal Cumulative Cash Flow 0 (2,000,000.00) 1 500,000.00 (1,500,000.00) 600,000.00 3 (900,000.00) 800,000.00 (100,000.00) 900,000.00 800,000.00 Payback Period Payback Period years (100000/900000) 900000 12 months years 1.33 months Payback Period years month Payback Period 0.33 30 days years +1 month 10 days Year Proposal B Cumulative Cash Flow Cash Flow 0 (1,500,000.00) (1,500,000.00) 400,000.00 2 1,100,000.00 500,000.00 3 (600,000.00) 700,000.00 100,000.00 800,000.00 900,000.00 Payback Period years (600000/ 700000) Payback Period years 12 months 10.29 months Payback Period years months Payback Period 0.29 30 days years +10 month days'

May be an image of text that says 'b) Calculation fNPV: Year Proposal A Cash Flow 0 Discount Factor 10% (2,000,000.00) Present Value 1.0000 500,000.00 2 0.9091 (2,000,000.0000) 600,000.00 0000 0.8264 00 495,840.0000 0.7513 900,000.00 0.6830 NPV 614,700.0000 Year 166,130.0000 Proposa B Cash Flow Factor (1,500,000.00) 10% Present 1.0000 400,000.00 2 0.9091 (1,500,000.0000 500,000.00 3 363,640.0000 0000 0.8264 700,000.00 413 4 0000 0.7513 800,000.00 0.6830 525,910.0000 NPV 546,400.0000 Decision: 349,150.0000 Also On the basis fabove calculations Proposal more suitable because Payback period ofBis less means initial investment recovers more quickly compared Proposal A. Bi high than proposal So Proposal Bi more'

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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