Business Finance: A Case Study

Business finance
(Assignment 2: A Case Study)

Table of Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................5
REFERENCES..............................................................................................................................10

Question 1
i) The payback periods.
Payback Period = Initial Investment / Annual Payback
year
project
1
project
2
initial cost 360000 390000
1 100000 70000
2 150000 90000
3 130000 10000
4 80000 150000
5 50000 50000
pay back pe-
riod 0.71 1.06
ii) Net present value at a 12% cost of capital
year
project
1
project
2
Dis-
count
rate
(12%)
Pv of
project
1
Pv of
project
2
initial
cost 360000 390000
1 100000 70000 0.893 89300 62510
2 150000 90000 0.797 119550 71730
3 130000 10000 0.712 92560 7120
4 80000 150000 0.636 50880 95400
5 50000 50000 0.567 28350 28350
380640 265110
net present value -20640 124890
Suitability of the projects
The optimal rate of return is the level where the cost of debt as well as the current value of
potential cash flows are equal. A venture that does this would be profitable. In other terms, the
financing activities and current value of inflows are identical at this point, making the work
appealing. If indeed the costs are the same across all programmes, the project is acceptable IRR
would be chosen. If a company must choose between several investment opportunities for the