Investment Appraisal: Financial Problems and Solutions Guide

This assignment provides solutions to several financial problems, primarily focusing on investment analysis and financial ratios. It begins by calculating the Net Present Value (NPV) for different investment options, demonstrating the application of discounted cash flow techniques to determine project profitability. The assignment also addresses stock valuation, calculating the present value of future dividend payments using the dividend discount model. Furthermore, it evaluates the payback period for different projects, aiding in short-term investment decisions. The solutions extend to analyzing a company's financial health through ratio analysis, including current ratio, quick ratio, and acid-test ratio, along with calculations for average debtor and creditor payment periods. The document is contributed by a student and available on Desklib, offering a resource for students studying finance and investment analysis, providing step-by-step solutions and explanations to enhance understanding and learning.

Running Head: Financial Problems

Financial Problems 1
QUESTION 1
INVESTMENT A
PVF @
20%
CASH
FLOWS
PRESEN
T
VALUES
Initial Investment 1.000 -15000 -15000
Year 1 0.833 30000 25000
NPV 10000
Therefore, the answer is 10000 (rounded off)
QUESTION 2
INVESTMENT A
initial investment 1.000 -15000 -15000
year 1 0.833 30000 25000
NPV 10000
INVESTMENT B
initial investment 1.000 -7500 -7500
year 1 0.833 18000 15000
NPV 7500
INVESTMENT C
initial investment 1.000 -7500 -7500
year 1 0.833 8250 6875
NPV -625
INVESTMENT D
initial investment 1.000 -3000 -3000
year 1 0.833 7500 6250
NPV 3250
Investment A has the highest Net Present Value
Therefore option A is the answer.

Financial Problems 2
QUESTION 3
D1 5
G 5%
Ke 15%
Po= D1/ (Ke – g)
= 5/ (15%-5%)
= $50
QUESTION 4
D1 5
G 5%
Ke 12%
Po= D1/ (Ke – g)
= 5/ (12%-5%)
=$71.43
QUESTION 5
YEAR CASH
FLOWS PVF
PV OF
CASH
FLOWS
0 -1000 1 -1000
1 1000 0.893 893
2 1300 0.797 1036
3 0 0.712 0
NPV 929
CASH
FLOWS PVF
PV OF
CASH
FLOWS
0 -1300 1300 -1000
1 850 0.893 759
2 850 0.797 678
3 850 0.712 605
NPV 742
Project A should be accepted as it has higher NPV (Option C).

Financial Problems 3
QUESTION 6
CALCULATION PAYBACK PERIOD
PROJECT A
CASH
FLOWS
CUMULATIVE
CASH FLOWS
0 -7000 -7000
1 1500 -5500.000
2 2000 -3500.000
3 3750 250.000
PAYBACK PERIOD 2.93
PROJECT B
YEAR
CASH
FLOW
S
CUMLATIVE
CASH FLOWS
0 -5000 -5000
1 1000 -4000
2 1500 -2500
3 2000 -500
PAYBACK
PERIOD 0
Since the cash inflows are not sufficient enough to cover the initial investment therefore it would not
have any payback period.
Hence, project A should be accepted. (Option C).
QUESTION 7
OPTION D
QUESTION 8
NUMBER OF UNITS SOLD
MARKET SIZE *
MARKET SHARE
500000
Selling price PER UNIT 850
Less Variable Cost Per Unit 600
Contribution Per Unit 250
Total Contribution 125000000
Less Total Fixed Cost 20000000
Net Profit 105000000
Less Tax 42000000

Financial Problems 4
Profit After Tax 63000000
Add Depreciation 3000000
Net Cash Flows 66000000
Particulars
PVF @
12%
Cash
Flows
Present
Values
Initial Investment 1
30000000
0 300000000
Annual Cash Flows 5.65 66000000 372900000
NPV 72900000
NPV
72.9
Million
QUESTION 9
CURRENT RATIO CURRENT ASSETS 37678 =2.51:1
CURRENT LIABILITIES 15000
OPTION B
QUESTION 10
ACID TEST RATIO QUICK ASSETS 22678 =1.51:1
CURRENT LIABILITIES 15000
Note: Quick Assets = Current Assets – Inventories
=37678-15000
= 22678
Answer: OPTION A
QUESTION 11
Average Debtors Payment Period
Net Credit Sales 137000
Average Accounts Receivables 10000
Receivable Turnover Ratio 13.7
Average Debtors Collection Period 365
Payable Turnover Ratio
26.64

Financial Problems 5
Therefore answer is Option A
QUESTION 12
Average Creditors Payment Period
Net Credit Purchases 63000
Average Accounts Payables 15000
Payable Turnover Ratio 4.2
Average Creditors Payment Period 365
Payable Turnover Ratio
86.90
Therefore answer is Option C
QUESTION 13
OPTION C

Financial Problems 6
References:
DRURY, C.M., 2013. Management and cost accounting. Springer.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.