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FIN622 GDB No. 01 Solution & Discussion Due Date Nov 13, 2015

FIN622 Corporate Finance GDB No. 01 Solution Fall 2015 Due Date Nov 13, 2015 

Company ABC has planned to extend its product line in manufacturing. Previously, the Company was manufacturing socks and gloves and now it has decided to manufacture jackets also. For this purpose new machinery is required. To acquire that particular machine, Company ABC has two different options. Presently, the interest rate in the market is 12% and cost of the machine is Rs.1 million.

 

Option 1: Pay 0.5 million today, 0.2 million after 2 years and 0.3 million after 3 years.

Option 2: Pay all today and get a credit of 10% of the cost of machine.

 

Requirement:

You are required to identify which option is suitable for Company ABC. Provide logical facts to support your decision.

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Replies to This Discussion

Wesy one thing I found here is .. the term used in the question is "10% credit" ... its not 10% ON CREDIT ...

10% credit definitely means discounting, 10% ON CREDIT is an amount that is payable at some later stage, so, yes right you guys are, that it is going to be discounted.

And Maham,  you mentioned slides no. 14 - 16, I never knew that my file was missing slides from 10 - 18. I straightaway downloaded the file again and now the illustration is there, yawwr teri meherbani, you are a legend.

 

second thing .. my answer is still 872972.9498 even in the morning, so I can safely assume that I wasn't sleepy last night. Still don't know how Tariq got his answer though!

The correct answer is 872972.85.  we need to find out the PV of 2nd and 3rd payment which can easily be calculated through this formula

Pv = Fv/(1 + r)t, we should add the initial payment and the other two. The answer will be definitely 872972.85.

But last main phir hum nay logic bhi batani hai k why the option 1 is better...aur yahan par tori say problem mujhay arahi hai...wo yeh k hum agar baqi payments par interest lagatay hain tu wo profit chorta hai 3rd payment ko pay karnay k baad bhi....

yeh mujhay aab confuse kar raha hai...

Option 2: Cost of machine = 1 million  Credit/discount = 10%

Calculation:

100%-10% = 90%

Rs. 1 million x 90% = Rs. 900,000

Option 1: Cost of machine  = 1 million

There is no discount in this option but the cost of machine is to be paid in 3 installments.

(Is klye hum ye krte hen k 1st installment = 0.5 million pay krdete hen jaise down payment hoti hai ksi bi chez ko khareedne klye.

2nd aur 3rd installments ko pura krne klye hum paisay kahen aur INVEST krdete hen jis se humen utna REURN milay jitni humne installment deni hai.)

Ab sawaal ye hai k kitni invesment krni chaiye abi (present value) takay humen 2 years bad (future value) 0.2 million milay aur 3 years bad (future value) 0.3 million milay takay hum next payments complete krsken. Humne PV find krna hai k kitni investment abi krenge tu uski FV 0.2 million aur 0.3 million hogi.

Baki calculation klye file attached hai. Hope u understand.

Attachments:

Yup .. I did the same thing

yara pehli option me discount ki koi tension ni hy ... cashflow ko discount factor lga k teeno PVs add kerdo ..

doosri option me sari amount he upfront pay hori hy uspy concession mil gei 10%  

and option 1 is better here ..

I was advised to check slides 14-16 of Lec 03 and it sorted everything out.

i think we should adopt aoption 2, if credit means discount, because company has large product line and can pay the cost of machine and after will get a discount of 10%

Ni imran option 2 mein company 900,000 pay kregi aur option 1 me company ko 872,972 use krne parenge sirf. "Use" islye kaha mene cz machine klye tu 1 million he dene hen puray but investment ki wjase company ka 1 million ya 900,000 ni lagegen, 872,972 lagegen.

In this case CREDIT IS DISCOUNT.. jo meny upper comment likha that was purely  "mery dimaagh ka fatoor".

 

"10% ON CREDIT" likha hota tab ye PAYABLE hota... "10% CREDIT" hy .. which  means it IS a concession.

Ni yara option2 kesy? 872972 < 900,000. Large product line hony ka mtlb ye to ni na k apka vendor apsy zada paisy mangy or ap dy do .. Company can invest these 28000 somewhere else

 

wesy ab jo merzi ho .. sei ya ghalat ... abto discussion post kerdi .. so ALLAH KHER TY BERAY PAAR ..

CAN YOU GIVE ME THE DETAIL OF GDB

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