Technology Investment Analysis

This assignment evaluates the financial viability of investing in new technology. It presents a scenario with detailed annual cash flows, a cost of capital, and requires the calculation of both discounted cash flow and net present value (NPV). The ultimate goal is to determine if the investment is profitable based on the NPV result.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Answer to Question 1:.....................................................................................................................3
Answer 1.a:..................................................................................................................................3
Answer 1.b:..................................................................................................................................3
Answer to Question 2:.....................................................................................................................4
Answer to Question 2.a:..............................................................................................................4
Answer a.i:...............................................................................................................................4
Answer a.iii:.............................................................................................................................4
Answer to Question 2.b:..............................................................................................................5
Answer b.i:...............................................................................................................................5
Answer b.ii:..............................................................................................................................5
Answer b.iii:............................................................................................................................6
Answer b.iv:.............................................................................................................................7
Answer b.v:..............................................................................................................................7
Answer to Question 3:.....................................................................................................................7
Answer to Question 3.a:..............................................................................................................7
Answer a.i:...............................................................................................................................7
Answer a.ii:..............................................................................................................................8
Answer a.iii:.............................................................................................................................9
Answer a.iv:...........................................................................................................................10

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Answer a.v:............................................................................................................................11
Answer to a.vi:.......................................................................................................................11
Answer to Question 3.b:............................................................................................................11
Answer b.i:.............................................................................................................................11
Answer b.ii:............................................................................................................................12
Answer b.iii:..........................................................................................................................12
Answer to Question 4:...................................................................................................................12
Answer to Question 4.a:............................................................................................................12
Answer to Question 4.b:............................................................................................................14
Reference & Bibliography:............................................................................................................15

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Answer to Question 1:
Answer 1.a:
Particulars Amount
Payout Ratio A 70%
Share of W.Brown B 12%
Growth Rate of Net Profit C 25%
Interest Rate p.a. D 9%
Net profit after tax on '16-
17 D $600,000
Total Dividend Paid on '16-
17 E=DxA $420,000
Dividend Received on '16-
17 F=ExB $50,400
Net profit after tax on '17-
18 H=D*(1+C) $750,000
Total Dividend on '17-18 I=HxA $525,000
Dividend Receivable on '17-
18 J=IxB $63,000
PV of Dividends on '17-18 K=J/(1+D)^1 $57,798
Fund Required on '17-18 L $100,000
PV of Fund Required
M=L/
(1+D)^1 $91,743
Consumption in August'17 N=F-(M-K) $16,455
Answer 1.b:
Periods
Particulars 0 1 2 3 4
t0 t1 t2 t3 t4
Dividend Growth Rate 0% 20% 15% 10% 5%

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g0 g1 g2 g3 g4
Required Rate of Return 12% 12% 12% 12% 12%
r0 r1 r2 r3 r4
Dividend
$1.2
0 $1.44 $1.66 $1.82 $1.91
D0 D1=D0x(1+g1) D2=D1x(1+g2) D3=D2x(1+g3) D4=D3x(1+g4)
PV of Dividends for Unstable
Period $1.29 $1.32 $1.30
P1=D1/(1+r1)^t1 P2=D2/(1+r2)^t2 P3=D3/(1+r3)^t3
Terminal Value of Perpetuity $27.32
T=D4/(r4-g4)
PV of Terminal Value $17.36
P4=T/(1+r4)^t4
Expected Selling of Stocks
on August,2017 $21.27
F=P1+P2+P3+P4
Answer to Question 2:
Answer to Question 2.a:
Answer a.i:
Particulars Amount
Total Perpetual Scholarship p.a. A $50,000
Required Rate of Return p.a. B 5%
Present Value of Perpetuity in
2020 C=A/B $1,000,000
Deferred Period D 3
Present Value of Income
Stream on 2017 E=C/(1+B)^(D-1)
$907,029.4
8

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Answer a.iii:
Particulars Amount
Total Perpetual Scholarship
p.a. A $50,000
Required Rate of Return p.a. B 5%
Growth rate of Fees p.a. C 3%
Present Value of Perpetuity in
2020 D=A/(B-C) $2,500,000
Deferred Period E 3
Present Value of Income
Stream on 2017 F=D/(1+B)^(E-1)
$2,267,573.7
0
Answer to Question 2.b:
Answer b.i:
Particulars Amount
Interest Rate p.a. A 7.80%
Compounding Period p.a. B 12
Effective Annual Interest Rate
p.a. C=[(1+A/B)^B]-1 8.08%
Answer b.ii:
Particulars Amount
Loan Amount A $540,000
Effective Annual Interest Rate
p.a. B 8.08%
Compounding Period p.a. C 12
Total Period (in years) D 20

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Effective Annual Interest Rate
per month E=B/C 0.67%
Total nos. of Repayments F=BxD 240
Amount of Monthly Repayment G=(AxE)/[1-(1+E)^-F] $4,545.38
Answer b.iii:
Particulars Amount
Initial Loan Amount A $540,000
Effective Annual Interest Rate
per month B 0.67%
Compounding Period p.a. C 12
FV of Loan after first 12 months D=Ax[(1+B)^C] $585,313.62
Monthly Repayments in first 12
months E $3,300
FV of Total Repayments in first
12 months F=Ex[{(1+B)^C}-1]/B $41,100.88
Balance of Loan after first 12
months G=D-F $544,212.73
FV of Balance Loan in next 12
months H=Gx[(1+B)^C] $589,879.86
Monthly Repayments in Next 12
months I $3,750
FV of Total Repayments in next
12 months J=Ix[{(1+B)^C}-1]/B $46,705.55
Balance of Loan after next 12
months K=H-J $543,174.31
Total nos. of Repayments L 240
Balance nos. of Repayments M=L-(Cx2) 216

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Amount of Monthly Repayments
from 3rd Year Onwards
N=(BxK)/[1-(1+B)^-
M] $4,780.53
Answer b.iv:
Particulars Amount
Initial Loan Amount A $540,000
Effective Annual Interest Rate
per month B 0.67%
Interest Due on first month C=AxB $3,638.24
Monthly Repayments D $2,500
Interest Due E=C-D $1,138.24
It is clear from the table, by paying monthly installments of $2500, Ron and Robin would
not be able to cover the full interest amount for the first month. As the result, the due interest
would be added with the principal amount in the next month and subsequently increase the
amount of interest in the next month. In this manner, the principal amount would increase in
every month and can never be repaid fully with the monthly installment of $2500.
Answer b.v:
From the above discussion, it can be stated that as the loan cannot be repaid with the
monthly payment of $2500, there would be no final repayments.

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Answer to Question 3:
Answer to Question 3.a:
Answer a.i:
If it is assumed that the cash flows have occurred in the mid of every year after period 0,
then payback periods of the two investments would be as follows:
Investment X Investment Y
Period Period
Particulars 0 0.5 1.5 2.5 0 0.5 1.5 2.5
t0 t1 t2 t3 t0 t1 t2 t3
Cash Flows -40000 12000 18000 27000 -40000 18000 18000 18000
C0 C1 C2 C3 C0 C1 C2 C3
Cumulative Cash Flow -40000 -28000 -10000 17000 -40000 -22000 -4000 14000
CC0 CC1 CC2 CC3 CC0 CC1 CC2 CC3
Payback Period (in years) 1.87 1.72
P=t2+(-CC2/C3) P=t2+(-CC2/C3)
From the table, it is clear that Investment Y would have lesser payback period than
Investment X and hence, it should be selected for investment purpose.
Answer a.ii:
If the cash flows occurred at the end of each period, then the payback periods would
surely differ from the above answer. The payback periods for this alternative scenario are
calculated below:
Investment X Investment Y
Period Period
Particulars 0 1 2 3 0 1 2 3
t1 t2 t3 t4 t1 t2 t3 t4
Cash Flows -40000 12000 18000 27000 -40000 18000 18000 18000
C1 C2 C3 C4 C1 C2 C3 C4

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Cumulative Cash Flow -40000 -28000 -10000 17000 -40000 -22000 -4000 14000
CC1 CC2 CC3 CC4 CC1 CC2 CC3 CC4
Payback Period (in years) 2.37 2.22
P=t3+(-CC3/C4) P=t3+(-CC3/C4)
The table denotes that the payback periods for both the project would extend for further
0.5 years. However, in this scenario also, Investment Y would recover the initial investment
faster than Investment X and therefore, it would be better to select investment Y.
Answer a.iii:
NPV is calculated on the basis of present vales of future cash flows, which, in turn, are
ascertained with the help of discount rate. The discount rate is generally the required rate of
return or the cost of capital for any investment. In this case, no such rates have been mentioned
in the case study. Hence, it is not possible to draw any graph for comparing the NPV of the two
projects (Mukherjee and Al Rahahleh 2013).
However, the net cash flows, generated from the two projects are calculated and shown in
the graph below to compare the two investments:
Investment X Investment Y
Period Period
Particulars 1 2 3 4 1 2 3 4
t1 t2 t3 t4 t1 t2 t3 t4
Cash Flows -40000 12000 18000 27000 -40000 18000 18000 18000
C1 C2 C3 C4 C1 C2 C3 C4
Net Cash Flow 17000 14000
NPV = C1+C2+C3+C4 NPV = C1+C2+C3+C4

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Investment X Investment Y
0
5000
10000
15000
20000
Net Cash Flow
Net Cash Flow
Investments
Net Cash Flows
Answer a.iv:
Investment X Investment Y
Period Period
Particulars 1 2 3 4 1 2 3 4
t1 t2 t3 t4 t1 t2 t3 t4
Cash Flows -40000 12000 18000 27000 -40000 18000 18000 18000
C1 C2 C3 C4 C1 C2 C3 C4
IRR 17% 16.6%
It should be noted that IRR is mainly computed on the basis of discount rate, which is not
given in the case study. However, it can also be ascertained from the undiscounted cash flows,
though the outcomes are not reliable under this technique (Abor 2017).

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Answer a.v:
1 2 3 4
-50000
-40000
-30000
-20000
-10000
0
10000
20000
30000
40000
Crossover Point
Investment X
Investment Y
Axis Title
Answer to a.vi:
Required rate of return is determined on the basis of return rates of similar investments.
Cost of capital can also be used as the required rate of return. However, in this case study, no
such information has been given in regards to return rate of similar investments or cost of capital.
Hence, the investments cannot be compared depending on the required rate of return (Burns and
Walker 2015).
Answer to Question 3.b:
Answer b.i:
Particulars Bond 1 Bond 2
Face Value A $100,000 $100,000
Coupon Rate p.a. B 6% 6%
Nos. of Coupon Payment
p.a. C 2 2
Coupon Payment D=(AxB)/C $3,000 $3,000
Increase in Yield Rate E 2% 2%
Current Yield Rate p.a. F=B+E 8% 8%
Cuurent Half-Yearly Yield
Rate G=F/C 4% 4%

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Settlement Date H
2/15/201
7
2/15/201
7
Maturity Date I
8/15/202
0
8/15/202
3
Balance Period J=(I-H) 3.5 6.5
Nos. of Coupon Payments
due K=(JxC)-1 6 12
Selling Price of Bonds
L=Dx[1-{1/(1+G)^K}]/
G+A/(1+G)^K $94,758 $90,615
Answer b.ii:
The difference in the price movements of the two bonds has mainly occurred due to the
difference in the maturity date of the two bonds.
Answer b.iii:
Particulars Bond 1 Bond 2
Selling Price on 15 Feb,2017 A $94,758 $90,615
Coupon Payment B $3,000 $3,000
Days Since Last Coupon
Payment C 84 84
Total days between two
Coupon Payments D 184 184
Interest Due E=Bx(C/D) $1,370 $1,370
Selling Price on 7 Nov,2017 F=A+E $96,127 $91,984
Answer to Question 4:
Answer to Question 4.a:
Period
Particulars 0 1 2 3 4

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Initial Investment:
Cost of New Technology
($600,000.0
0)
Compensation to Tenant ($44,000.00)
Additional Current Assets ($30,000.00)
Total Initial Investment
($674,000.0
0) $0.00 $0.00 $0.00 $0.00
Operating Cash Flow:
Reduction in Labor Cost $0 $200,000.00 $200,000.00 $200,000.00 $200,000.00
Depreciation on Technology $0.00
($150,000.0
0)
($150,000.0
0)
($150,000.0
0)
($150,000.0
0)
Loss on Rental Income $0.00 ($40,000.00) ($40,000.00) ($40,000.00) ($40,000.00)
Ovehauling Cost $0.00 ($20,000.00)
Net Incremental Profit/(Loss)
before Tax $0.00 $10,000.00 ($10,000.00) $10,000.00 $10,000.00
Less: Income Tax $0.00 $3,000.00 $0.00 $3,000.00 $3,000.00
Net Incremental Profit/(Loss)
after Tax $0.00 $7,000.00 ($10,000.00) $7,000.00 $7,000.00
Add: Depreciation on
Technology $0.00 $150,000.00 $150,000.00 $150,000.00 $150,000.00
Net Operating Cash Flow $0.00 $157,000.00 $140,000.00 $157,000.00 $157,000.00
Terminal Value:
Sale of Technology $30,000.00
Less: Tax on Selling Price ($9,000.00)
Net Sales Income from
Technology $21,000.00
Recovery of Current Assets $30,000.00
Total Terminal Value $0.00 $0.00 $0.00 $0.00 $51,000.00
Net Annual Cash Flow
($674,000.0
0) $157,000.00 $140,000.00 $157,000.00 $208,000.00
Cost of Capital 10% 10% 10% 10% 10%
Discounted Cash Flow
($674,000.0
0) $142,727.27 $115,702.48 $117,956.42 $142,066.80

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Net Present Value ($155,547.03)
Answer to Question 4.b:
As the NPV of the project is negative, it would be better to not to invest in the new
technology.

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Reference & Bibliography:
Abor, J.Y., 2017. Evaluating Capital Investment Decisions: Capital Budgeting.
In Entrepreneurial Finance for MSMEs (pp. 293-320). Springer International Publishing.
Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now
Mukherjee, T.K. and Al Rahahleh, N.M., 2013. Capital budgeting techniques in practice: US
survey evidence. Capital Budgeting Valuation: Financial Analysis for Today's Investment
Projects, pp.151-171
Robinson, C.J. and Burnett, J.R., 2016. Financial Management Practices: An Exploratory Study
of Capital Budgeting Techniques in the Caribbean Region
Rossi, M., 2015. The use of capital budgeting techniques: an outlook from Italy. International
Journal of Management Practice, 8(1), pp.43-56.