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Case:-
Suppose, you have been appointed as a financial analyst at a company named
ABC Incorporation, which requires you to think over and analyze two projects
so that a wise investment decision can be made for future expansion of the
business. The details of both projects are as follows:
Project 1 requires an initial investment of Rs. 700,000. Expected cash inflows of
the project for next five years are Rs. 162,000, Rs. 173,600, Rs. 185,550, Rs. 189,850
and Rs. 192,980. Required rate of return for this investment is 8%.
Project 2 requires an initial investment of Rs. 830,000. Expected cash inflows of
the project for next five years are Rs. 163,000, Rs. 167,456, Rs 172,850, Rs. 177,940
and Rs. 181,550. Required rate of return for this project is 9%.
Required:
Analyze the feasibility of project 1 by using ‘Net Present Value’ method.
(Marks 7)
Analyze the feasibility of project 2 with the help of ‘Profitability Index’.
(Marks 8)
Calculate ‘Payback Period’ of each project and analyze which project will
recover the invested money in less time.
(Marks 5)

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Replies to This Discussion

yar is ma pay back period kaisy nikly ga iska formula snd kro jaldi

I will begin with an illustration that finds payback period for an example investment proposal. Let us say, we were offered a series of cash inflows at the end of each of the next four years as $5000, $4000, $3000, and $1000. Assuming the initial cash outlay for this proposal is $10,000. We are faced with finding the payback period for this hypothetical investment

Payback Period Step by Step

  1. We add up the cash inflows beginning after the initial cash outlay in the cumulative cash inflows column
  2. We keep an eye on this last column and track the last year for which the cumulative total does not exceed the initial cash outlay
  3. We compute the part or fraction of the next year's cash inflow need to payback the initial cash outlay by taking the initial cash outlay less the cumulative total in the last step then divide this amount by the next years cash inflow. 
    E.g., ( $10,000 - $9,000 ) / $3,000 = 0.334
  4. Since we said these were annual cash flows thus to obtain the payback period in years , we take the figure from the last step and add it to the year from the step 2.
    Thus our payback period is 2 + .334 = 2.334 years
  5. Instead of representing the years as a decimal value we could represent the payback period in years and months this way We take the fraction 0.334 and multiply it by 12 to get the months which is 4.01 months. Thus our payback period is 2 years and 4 months

plz share the assignment sollution .i didnt understand 

Question NO.1
162000/1.08+173600/(1.08^2)+185550/(1.08^3)+189850/(1.08^4)+192980/(1.08^5)-700000 = 17013

Question No. 2 
(-830000+163000/(1.09)+167456/(1.09^2)+172850/(1.09^3)+177940/(1.09^4)+181550/(1.09^5)+830000)/830000 = 0.8048

Question No. 3
Part 1 = 3.94 years
part 2 = 4.82 years

thanks

Shahzad Sadiq  gud keep it up 

Thanks Tariq bhai........:)

Aslam o alekum

yar complete with formulae k sath send karo.............short cut kahan se bna lia direct

Solution of Financial Management MGT201 by

Muhammad Adnan

 

Question#1

NPV= -IO+sum of CFt/(1+i)t ---------------------- HO page # 41

here

-IO= 700000

CF= 162000 n 173600 n 185550 n 189850 n 192980

I = 8% = 0.08

T = 1 ,   2 ,3  4,   5

 

NPV= -700000+ 162000/(1+0.08)^1  + 173600/(1+0.08)^2    +  185550/(1+0.08)^3  + 189850/(1+0.08)^4  + 192980/(1+0.08)^5

 

NPV=   now calculate

 

Question#2

PI = {sum CFt/(1+i)^t}/IO  -------------------------- HO page #42

 

PI = {sum 163000/(1=0.09)+167456/(1+0.09)^2 + 172850/(1+0.09)^3 + 177940/(1+0.09)^4 + 181550/(1+0.09)^5}/830000

PI =

 

Question#3 ----------------------- HO page # 40

 

Payback period for 1st project

Investment = 700,000

So 700,000-(cash inflows )

    162000+173600+185550+189850=711000

so payback period is about $ years

 

Payback period for 2nd  project

Investment = 830000

So 830000-(cash inflows)

163000+167456+172850+177940+181550=862807

so payback period is about 5 years 

if some one want to find the exact answer for the 3rd question that is to find the payback period of the given project read out the attached /below image file that will have formula and example for finding the exact number of years required for finding the Payback period.the snap short is taken from the book Theory & Practice by Brigham that is the recommended reference book for MGT201

 

Suppose, you have been appointed as a financial analyst at a company named ABC Incorporation, which requires you to think over and analyze two projects so that a wise investment decision can be made for future expansion of the business. The details of both projects are as follows:
Project 1 requires an initial investment of Rs. 700,000. Expected cash inflows of the project for next five years are Rs. 162,000, Rs. 173,600, Rs. 185,550, Rs. 189,850 and Rs. 192,980.
Required rate of return for this investment is 8%.
Project 2 requires an initial investment of Rs. 830,000. Expected cash inflows of the project for next five years are Rs. 163,000, Rs. 167,456, Rs 172,850, Rs. 177,940 and Rs. 181,550. Required rate of return for this project is 9%.

Q; 01- Analyze the feasibility of project 1 by using ‘Net Present Value’ method?
Answer-
Calculation: this can be calculated simply by using this technique.162000/1.08+173600/(1.08^2)+185550/(1.08^3)+189850/(1.08^4)+192980/(1.08^5)-700000
= 17013
Q:-II. Analyze the feasibility of project 2 with the help of ‘Profitability Index’.
Answer-
Calculation: this can be calculated simply by using this technique.
(830000+163000/(1.09)+167456/(1.09^2)+172850/(1.09^3)+177940/(1.09^4)+181550/(1.09^5)+830000)/830000 = 0.8048





Answer: ‘Payback Period’ of each project and analyze which project will recover the invested money in less time.

Solution:


Solution for the project I
Solution for the project II
Years Investment Cash Flow C.C.in flow Years Investment Cash Flow C.C.in flow
0 (700000) - (700000) 0 830000 - (830000)
1 162000 (538000) 1 163000 (667000)
2 173000 (364400) 2 167456 (499544)
3 185550 (178850) 3 172850 (326694)
4 189850 11000 4 177940 (148754)
5 192980 203980 5 181550 32796



Calculation of Pay Back Periods

Project I = 3Years + 178850/189850*12
= 3Years and 11Months or 3.94 years
Same Method for Second Project
Project II = 4Years + 1478754/181550*12
=4 Years 10Months or 4.82 years
Always accept the project which gives investment back as soon as possible but disadvantage of that technique is that it ignore profitability In above case Project I will be accepted if mutually exclusive.

MGT201 Assignment#01 Solution Spring 2012

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