Evaluating Investment Decisions

The assignment focuses on evaluating the feasibility of Diana Deall Ltd purchasing new technology. It presents a detailed cash flow analysis, calculates the Net Present Value (NPV) and Internal Rate of Return (IRR), and recommends whether the company should proceed with the investment based on these financial metrics. The analysis highlights the importance of using investment appraisal techniques to make informed decisions about capital expenditures.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Question 1:.................................................................................................................................3
a) Calculating the amount that will be consumed by Jillian in 2018 if the capital market offers
an interest rate of 8% per year:..................................................................................................3
b) Calculating the actual share value of Ram Shack ltd with its future dividend:.....................4
Question 2:.................................................................................................................................4
a.i) Identifying whether target sum will be achieved:................................................................4
a.ii) Calculating the monthly pension of Colin from 65 years to 85 years:...............................5
b.i) Identifying the annual interest rate on loan:........................................................................5
b.ii) Calculating the monthly repayment loan over the 20-year period of the loan:..................6
b.iii) Calculating the monthly repayment conducted by the company over the period of 18-
year term:...................................................................................................................................6
b.iv) Identifying the number of years needed for loan repayment:............................................7
b.v) Identifying the final repayment amount:............................................................................7
Question 3:.................................................................................................................................7
i) Identifying the Payback period when even cash flow is conducted each year:......................7
ii) Identifying actual payback period of the project:..................................................................8
iii) Drafting the sketch for NPV profiles in axes:......................................................................8
iv) Identifying the internal rate of return for both the projects:.................................................8
v) Identifying and calculating exact crossover point:................................................................9
vi) Selecting the adequate project for investment:.....................................................................9
Question 4:...............................................................................................................................10
a) Calculating NPV of the project for Diana Deall Ltd:..........................................................10
b) Identifying whether the company should purchase the technology with the help of
investment appraisal technique:...............................................................................................11

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Reference and Bibliography:....................................................................................................12

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Question 1:
a) Calculating the amount that will be consumed by Jillian in 2018 if the capital market
offers an interest rate of 8% per year:
Particulars Value
Jillian Black income 10%
Halcyon Ltd Net Income 2016-17 800,000
Halcyon Ltd Net Income 2017-18 800,000*120%
Halcyon Ltd Net Income 2017-18 960,000
Particulars Value
Halcyon Ltd Net Income 2017-18 960,000.00
Total dividend payment 960,000.00 * 80%
Total dividend payment 768,000
Particulars Value
Dividend received by Jillian in 2016-17 800,000.00 * 80% * 10%
Dividend received by Jillian in 2016-17 64,000.00
Dividend received by Jillian in 2017-18 768,000.00 * 10%
Dividend received by Jillian in 2017-18 76,800.00
Particulars Value
Present Value of expenses 100,000.00

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Rate 8%
Time 1 year
Earnings needed 100,000*((1+8%)-1)
Earnings needed 92,592.59
Divided earned 76,800.00
Amount Consumed in 2018 64,000.00-(92,592.59-76,800.00)
Amount Consumed in 2018 48,207.41
b) Calculating the actual share value of Ram Shack ltd with its future dividend:
Return on investment 13%
Particulars G-rate Dividend Discount rate Dividend
Dividend in 2018 3 * (1+0) $ 3.00 1/(1+13%)= 0.88 $ 2.65
Dividend in 2019 20% 3 * (1+0.20) $3.60 1/(1+13%)^2= 0.78 $ 2.82
Dividend in 2020 16% 3.6 * (1+0.16) $4.18 1/(1+13%)^3= 0.69 $ 2.89
Dividend in 2020 12% 4.18 * (1+0.12) $4.68 1/(1+13%)^4= 0.61 $ 2.87
Dividend in 2021 5% 4.68 * (1+0.05) $4.91 1/(1+13%)^5= 0.54 $ 33.32
Selling price of Ram Shack Ltd $ 44.56
Question 2:
a.i) Identifying whether target sum will be achieved:
Particulars Value
N 300.0

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PMT 3,000.0
I 0.5%
Future value =3000 * ((((1 + 0.5%)^300) - 1) / 0.5%)
Future value (A) $2,078,981.9
Target value (B) 2,000,000.0
Excess (C=A-B) $78,981.9
a.ii) Calculating the monthly pension of Colin from 65 years to 85 years:
Particulars Value
I 0.5%
N 240
Amount earned after 65 2,078,981.9
Monthly pension after retirement 2,078,981.9 *0.5%) / ((1 - ((1 + 0.5%)^-240)))
Monthly pension after retirement $14,894.5
b.i) Identifying the annual interest rate on loan:
Particulars Value
N 20.0
I 4.8%
Annual interest rate ((1 + (4.8% / 20.0))^20.0) - 1
Annual interest rate 4.9%

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b.ii) Calculating the monthly repayment loan over the 20-year period of the loan:
Particulars Value
Principal Amount 600,000.0
Rate 4.80%
Number of years 20.0
Loan repayment amount 600,000.0 * ((1 + 4.8%)^20)
Loan repayment amount 1,532,416.8
Monthly instalment of the Loan 1,532,416.8 / (20.0*12)
Monthly instalment of the Loan 6,385.1
b.iii) Calculating the monthly repayment conducted by the company over the period of
18-year term:
Particulars Value
Number of years 20.0
Rate 4.80%
Principal Amount 600,000.0
Loan repayment amount 600,000.0 * ((1 + 4.8%)^20)
Loan repayment amount 1,532,416.8
Payment 1 12*3300
Payment 1 39,600.0
Payment 2 12*3750
Payment 2 45,000.0
Monthly repayment ((1,532,416.8 -(39,600.0+45,000.0))) / (18*12)
Monthly repayment 6,702.9

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b.iv) Identifying the number of years needed for loan repayment:
Particulars Value
Payment per month 3,500.0
Repayment Amount 1,532,416.8
Number of years 1,532,416.8 / (3,500.0*12)
Number of years 36.5
b.v) Identifying the final repayment amount:
Particulars Value
Last year 0.50
Payment per month 3,500.0
Final repayment will cover 3500.0 * 0.50
Final repayment will cover 1,750.0
Question 3:
i) Identifying the Payback period when even cash flow is conducted each year:
Year Cash flow X Cash flow Y
0 $ (42,000.00) $ (42,000.00) $ (42,000.00) $ (42,000.00)
1 $ 19,000.00 $ (23,000.00) $ 18,000.00 $ (24,000.00)
2 $ 19,000.00 $ (4,000.00) $ 18,000.00 $ (6,000.00)
3 $ 19,000.00 $ 15,000.00 $ 18,000.00 $ 12,000.00
Payback period 2 + (4,000/19,000) = 2.2 years 2 + (6,000/18,000) = 2.3 years

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ii) Identifying actual payback period of the project:
Year Cash flow X Cash flow Y
0 $ (42,000.00) $ (42,000.00) $ (42,000.00) $ (42,000.00)
1 $ 12,000.00 $ (30,000.00) $ 18,000.00 $ (24,000.00)
2 $ 18,000.00 $ (12,000.00) $ 18,000.00 $ (6,000.00)
3 $ 27,000.00 $ 15,000.00 $ 18,000.00 $ 12,000.00
Payback period 2+(12,000/27,000) = 2.4 years 2+(6,000/18,000) = 2.3 years
iii) Drafting the sketch for NPV profiles in axes:
0% 5% 10% 15% 20% 25% 30% 35%
(15,000)
(10,000)
(5,000)
-
5,000
10,000
15,000
20,000
NPV X NPV Y
iv) Identifying the internal rate of return for both the projects:
Year Cash flow X Cash flow Y
Year 0 $ (42,000.00) $ (42,000.00)
Year 1 $ 12,000.00 $ 18,000.00
Year 2 $ 18,000.00 $ 18,000.00

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Year 3 $ 27,000.00 $ 18,000.00
IRR 14.75% 13.70%
0% 5% 10% 15% 20% 25% 30% 35%
(15,000)
(10,000)
(5,000)
-
5,000
10,000
15,000
20,000
(211)-
NPV X NPV Y
v) Identifying and calculating exact crossover point:
From the evaluation of above graph the crossover point for Project X is mainly at
14.75%, as the internal rate of return will make the cash flow zero. On the other hand,
crossover point for Project Y is mainly at Internal Rate of Return of 13.70%.
vi) Selecting the adequate project for investment:
The evaluation of both the project mainly helps in identifying the most viable project
of investment. According to the Internal rate of return, project X is chosen, where the project
will provide higher return from investment in near future.

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Question 4:
a) Calculating NPV of the project for Diana Deall Ltd:
Year 0 1 2 3 4
Cost $ (700,000.0) $ 0 $ (30,000.0) $ 0 $ 0
Increase in working capital $ (40,000.0) $ 0 $ 0 $ 0 $ 0
Total initial outlay $ (740,000.0) $ 0 $ 0 $ 0 $ 0
Year 0 1 2 3 4
Saving in labour costs $250,000.0 $250,000.0 $250,000.0 $250,000.0
(-) Rent expense $ 35,000.0 $ 35,000.0 $ 35,000.0 $ 35,000.0
EBITDA $215,000.0 $215,000. $215,000. $215,000.
(-) Deprecation $(175,000.0) $(175,000.0) $(175,000.0) $(175,000.0)
EBIT $ 40,000.0 $ 40,000.0 $ 40,000.0 $ 40,000.0
(-) interest expense $ (70,000.0) $ (70,000.0) $ (70,000.0) $ (70,000.0)
EBT $ (30,000.0) $ (30,000.0) $ (30,000.0) $ (30,000.0)
Tax expense $ (9,000.0) $ (9,000.0) $ (9,000.0) $ (9,000.0)
Net Income $ (21,000.0) $ (21,000.0) $ (21,000.0) $ (21,000.0)
(+) Deprecation $ 175,000.0 $ 175,000.0 $ 175,000.0 $ 175,000.0
Operating cash flow $ 154,000.0 $ 154,000.0 $ 154,000.0 $ 154,000.0
Working capital recovered $ 0 $ 0 $ 0 $ 40,000.0
less tax on salvage value $ 0 $ 0 $ 0 $ 12,000.0
Total cash flow $ (740,000.0) $ 154,000.0 $ 124,000.0 $ 154,000.0 $ 206,000.0

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Year 0 1 2 3 4
Total cash flow (A) $ (740,000.0) $ 154,000.0 $ 124,000.0 $ 154,000.0 $ 206,000.0
discount rate (B) 12.0% 12.0% 12.0% 12.0% 12.0%
Dis-Cash flow (A*B) $ (740,000.0) $ 137,500.0 $ 98,852.0 $ 109,614.2 $ 130,916.7
NPV $ (263,117.1)
IRR -5.4%
b) Identifying whether the company should purchase the technology with the help of
investment appraisal technique:
After the evaluation of above table and investment appraisal technique, it is better to
avoid the purchase of new technology, as NPV is calculated to be negative. This negative
NPV mainly indicates that future cash flows of the organisation are relatively not adequate to
support one-time investment conducted in the project (Petty et al. 2015). Hence, Diana Deall
Ltd could halt the commencement of the project, as it will not provide the anticipated return
from investment.