Business Finance

This document contains solved questions on Business Finance including topics like payback period, NPV, IRR, and project evaluation. It also includes tables and calculations for better understanding. The content is relevant for students studying Business Finance and related courses in colleges and universities.

Running Head: Business Finance
Business Finance

Business Finance 1
Table of Contents
Question 5.............................................................................................................................................2
Part a..................................................................................................................................................2
Part b.................................................................................................................................................2
Part c..................................................................................................................................................2
Part d.................................................................................................................................................3
Question 6.............................................................................................................................................4
Part a..................................................................................................................................................4
Part b.................................................................................................................................................4
Part c..................................................................................................................................................5
Question 7.............................................................................................................................................6
Question 8.............................................................................................................................................7
Part a..................................................................................................................................................7
Part b.................................................................................................................................................7
Part c..................................................................................................................................................7
Part d.................................................................................................................................................7
Part e..................................................................................................................................................8
Part f..................................................................................................................................................8
References:............................................................................................................................................9

Business Finance 2
Question 5
Initial
investment 85,000.00
Useful Life 5Years
Cost of Capital 0.12
Year Cash Flows
1 18,000.00
2 22,500.00
3 27,000.00
4 31,500.00
5 36,000.00
Part a
Payback Period
Year Cash Flows
Cumulative
cash Flows
1 18,000.00 18,000.00
2 22,500.00 40,500.00
3 27,000.00 67,500.00
4 31,500.00 99,000.00
5 36,000.00 1,35,000.00
Payback
Period = 3.56
Part b
Year Cash Flows PVF @ 12%
PV of cash
flows
0 -85,000.00 1.00 -85,000.00
1 18,000.00 0.89 16,071.43
2 22,500.00 0.80 17,936.86
3 27,000.00 0.71 19,218.07
4 31,500.00 0.64 20,018.82
5 36,000.00 0.57 20,427.37
NPV 8,672.54
Part c
Year Cash Flows PVF @ 20%
PV of cash
flows
PVF @
15%
PV of cash
flows
0 -85,000.00 1.00 -85,000.00 1.00 -85,000.00
1 18,000.00 0.83 15,000.00 0.87 15,652.17
2 22,500.00 0.69 15,625.00 0.76 17,013.23
3 27,000.00 0.58 15,625.00 0.66 17,752.94
4 31,500.00 0.48 15,190.97 0.57 18,010.23

Business Finance 3
5 36,000.00 0.40 14,467.59 0.50 17,898.36
NPV -9,091.44 1,326.93
IRR = 16%
IRR = LDR+ NPV- NPV at LDR *(HDR-LDR)
NPV at LDR- NPV at HDR
Part d
The investment can be done in this project as NPV of the project is positive and the IRR is
more than the company’s cost of capital (Sharan, 2015). The company can implement the
project as the NPV and IRR both have positive implication on the acceptability of the project.
Positive NPV shows that companies’ profits will increase gradually with the acceptance of
the project.
* Payback Period= Base Year+ Cumulative cash flows of previous year
Cash Flows of Base Year
(Titman, Keown & Martin, 2017)

Business Finance 4
Question 6
Disco
unt
rate 15%
Part a
Year Renovate (X) Replace (Y) PVF @ 15%
PV of cash
flows of X
PV of cash flows
of Y
0 -90,00,000.00 -10,00,000.00 1 -90,00,000.00 -10,00,000.00
1 35,00,000.00 6,00,000.00 0.86 30,43,478.26 5,21,739.13
2 30,00,000.00 5,00,000.00 0.75 22,68,431.00 3,78,071.83
3 30,00,000.00 4,00,000.00 0.65 19,72,548.70 2,63,006.49
4 28,00,000.00 3,00,000.00 0.57 16,00,909.09 1,71,525.97
5 25,00,000.00 2,00,000.00 0.49 12,42,941.84 99,435.35
NPV 11,28,308.89 4,33,778.78
Ranking
Renov
ate I
Repla
ce II
Part b
Year Renovate (X) PVF @ 20%
PV of Cash
Flows PVF @ 25% PV of Cash Flows
0 -90,00,000.00 1.00 -90,00,000.00 1.00 -90,00,000.00
1 35,00,000.00 0.83 29,16,666.67 0.80 28,00,000.00
2 30,00,000.00 0.69 20,83,333.33 0.64 19,20,000.00
3 30,00,000.00 0.58 17,36,111.11 0.51 15,36,000.00
4 28,00,000.00 0.48 13,50,308.64 0.41 11,46,880.00
5 25,00,000.00 0.40 10,04,693.93 0.33 8,19,200.00
NPV 91,113.68 NPV -7,77,920.00
IRR 20.49%
Year Replace (Y) PVF @ 30%
PV of Cash
Flows PVF @ 40% PV of Cash Flows
0 -10,00,000.00 1.00 -10,00,000.00 1.00 -10,00,000.00
1 6,00,000.00 0.77 4,61,538.46 0.71 4,28,571.43
2 5,00,000.00 0.59 2,95,857.99 0.51 2,55,102.04
3 4,00,000.00 0.46 1,82,066.45 0.36 1,45,772.59
4 3,00,000.00 0.35 1,05,038.34 0.26 78,092.46
5 2,00,000.00 0.27 53,865.81 0.19 37,186.89
NPV 98,367.06 NPV -55,274.59
IRR 36%
Ranking

Business Finance 5
Renov
ate II
Repla
ce I
IRR = LDR+ NPV- NPV at LDR *(HDR-LDR)
NPV at LDR- NPV at HDR
Part c
These rankings give mixed signals as NPV is the difference between initial investment and
present value of cash inflows and IRR is the rate at which PV of cash outflows (Initial
Investment is equal to Present value of cash inflows (Barr & McClellan, 2018).

Business Finance 6
Question 7
Year Project A Project B Project C Project D Project E
0 -20,000.00 -6,00,000.00
-
1,50,000.00 -7,60,000.00 -1,00,000.00
1 3,000.00 1,20,000.00 18,000.00 1,85,000.00 -
2 3,000.00 1,45,000.00 17,000.00 1,85,000.00 -
3 3,000.00 1,70,000.00 16,000.00 1,85,000.00 -
4 3,000.00 1,90,000.00 15,000.00 1,85,000.00 25,000.00
5 3,000.00 2,20,000.00 15,000.00 1,85,000.00 36,000.00
6 3,000.00 2,40,000.00 14,000.00 1,85,000.00 -
7 3,000.00 13,000.00 1,85,000.00 6,000.00
8 3,000.00 12,000.00 1,85,000.00 72,000.00
9 3,000.00 11,000.00 84,000.00
10 3,000.00 10,000.00
PVF @ 15% PV of A PV of B PV of C PV of D PV of E
1.00 -20,000.00 -6,00,000.00
-
1,50,000.00 -7,60,000.00 -1,00,000.00
0.87 2,608.70 1,04,347.83 15,652.17 1,60,869.57 -
0.76 2,268.43 1,09,640.83 12,854.44 1,39,886.58 -
0.66 1,972.55 1,11,777.76 10,520.26 1,21,640.50 -
0.57 1,715.26 1,08,633.12 8,576.30 1,05,774.35 14,293.83
0.50 1,491.53 1,09,378.88 7,457.65 91,977.70 17,898.36
0.43 1,296.98 1,03,758.62 6,052.59 79,980.61 -
0.38 1,127.81 4,887.18 69,548.35 2,255.62
0.33 980.71 3,922.82 60,476.83 23,536.93
0.28 852.79 3,126.89 23,878.04
0.25 741.55 2,471.85 -
NPV -4,943.69 47,537.04 -74,477.85 70,154.48 -18,137.21
Project A, C and E have negative NPV. Hence, we can accept project B and D.

Business Finance 7
Question 8
Part a (Amount in $)
Year
Alpha
(Cash
Flows)
Cumulative
cash Flows
Beta (Cash
Flows)
Cumulative
cash Flows
Gamma
(Cash Flows)
Cumulati
ve cash
Flows
0
-
15,00,
000.00
-
15,00,000.0
0 -4,00,000.00 -4,00,000.00 -75,00,000.00
-
75,00,000
.00
1
3,00,0
00.00
-
12,00,000.0
0 1,00,000.00 -3,00,000.00 20,00,000.00
-
55,00,000
.00
2
5,00,0
00.00 -7,00,000.00 2,00,000.00 -1,00,000.00 30,00,000.00
-
25,00,000
.00
3
5,00,0
00.00 -2,00,000.00 2,00,000.00 1,00,000.00 20,00,000.00
-
5,00,000.
00
4
4,00,0
00.00 2,00,000.00 1,00,000.00 2,00,000.00 15,00,000.00
10,00,000
.00
5
3,00,0
00.00 5,00,000.00 -2,00,000.00 0 55,00,000.00
65,00,000
.00
Pay
Back
period 3.50 2.50 3.33
Part b
If cut off payback is 3 years then Beta is chosen and if cut of is 4 years then all the three can
be accepted.
Part c
Beta is to be chosen if the company wants shortest payback period.
Part d
Year
Alpha (Cash
Flows)
PVF
@
15%
PV of Cash
Flows
Cumulative
Cash Flows
0 -15,00,000.00 1.00 -1500000 -1500000
1 3,00,000.00 0.87 260869.5652 -1239130.435
2 5,00,000.00 0.76 378071.8336 -861058.6011
3 5,00,000.00 0.66 328758.1162 -532300.4849
4 4,00,000.00 0.57 228701.2982 -303599.1867
5 3,00,000.00 0.50 149153.0206 -154446.1661
Discounted
payback
0

Business Finance 8
Period
Year
Beta (Cash
Flows)
PVF
@
15%
PV of Cash
Flows
Cumulative
cash flows
0 -4,00,000.00 1.00 -400000 -400000
1 1,00,000.00 0.87 86956.52174 -313043.4783
2 2,00,000.00 0.76 151228.7335 -161814.7448
3 2,00,000.00 0.66 131503.2465 -30311.49832
4 1,00,000.00 0.57 57175.32456 26863.82624
5 -2,00,000.00 0.50 -99435.34706 -72571.52082
Discounted
payback
Period
0
Year
Gamma
(Cash Flows)
PVF
@
15%
PV of Cash
Flows
Cumulative
cash flows
0 -75,00,000.00 1.00 -75,00,000.00 -75,00,000.00
1 20,00,000.00 0.87 17,39,130.43 -57,60,869.57
2 30,00,000.00 0.76 22,68,431.00 -34,92,438.56
3 20,00,000.00 0.66 13,15,032.46 -21,77,406.10
4 15,00,000.00 0.57 8,57,629.87 -13,19,776.23
5 55,00,000.00 0.50 27,34,472.04 14,14,695.81
Discounted
payback
Period 4.48
If cut off period is 4years then none of the project is accepted.
Part e
Beta should be rejected, but if company uses payback analysis then can be accepted.
Part f
Gama can be accepted, but might be rejected if company uses payback analysis.
* Payback Period= Base Year+ Cumulative cash flows of previous year
Cash Flows of Base Year
(Sharan, 2015).

Business Finance 9
References:
Barr, M. J., & McClellan, G. S. (2018). Budgets and financial management in higher
education. John Wiley & Sons.
Brigham, E. F., & Daves, P. R. (2014). Intermediate financial management. Cengage
Learning.
Sharan, V. (2015). Fundamentals of Financial Management, 3/e. Pearson Education India.
Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial management: Principles and
applications. Pearson.