International Financial Management

International Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
QUESTION 1..................................................................................................................................3
(a) Calculation of expected net present value..............................................................................3
(b) Calculation of standard deviation of NPV.............................................................................4
QUESTION 2..................................................................................................................................5
(a) Calculation of expected NPV and standard deviation of the NPV for the project to buy
English lignite mines...................................................................................................................5
(b) Calculation of probability of avoiding liquidation.................................................................8
(c) Calculation of probability of occurring..................................................................................9
QUESTION 3..................................................................................................................................9
(a) Calculation of Net Present Value of each project on the assumption that the cash flows are
not subject to any risk..................................................................................................................9
(b) Reason of why NPV is being superior to internal rate of return for investment appraisal. .11
(c) Calculation of Highest Net Present Value achievable on the assumption that each project is
divisible......................................................................................................................................12
(d) Calculation of probability of the product producing a negative net present value..............13
CONCLUSION..............................................................................................................................16
REFERENCES................................................................................................................................1

INTRODUCTION
Financial management is the part of the business if they want to run their company smoothly
and efficiently. Financial decision is the decision which became impossible to change if the
manages take such decision in a wrong way. The loses the company need to bear may be to that
extent that the company might dissolve their business. So, this report will cover the concept of
expected return the company can expects from their investment plans and the probability of
losing the amount. The report also covers the standard deviation concept which need the
attention of company and their managers which making any finance related decision.
MAIN BODY
QUESTION 1
(a) Calculation of expected net present value
Initial cash outlay = 15000
Year 1
Returns Probability Expected value
8000 0.1 800
(8000* .1)
10000 0.6 6000
(10000* .6)
12000 0.3 3600
(12000* .3)
Expected value of returns
in year 1
10400
Year 2
Returns Probability Expected value
4000 0.3 1200
(4000* .3)
8000 0.7 5600
(8000* .7)

Expected value of
returns in year 1
6800
Present value of cash inflows in year 1 = 10400 / [ 1/ (1+11%) ^ 1] = 9369.36
Present Value of cash inflows in year 2 = 6800 / [ 1/ (1+11%) ^ 2] = 5521.6
Present value of cash inflows = 14891
Net present value of the project = present value of cash inflows – initial cash outlay
= 14891 - 15000
= (109).
Interpretation: From the above calculation it is interpretate that the net present value of the
project is negative. And it is stated that if a company want to earn profit on their investment, they
have to select those projects only that have positive expected net present value. Here, the present
value of the cash inflow is less than the initial cash outlay. That’s why it is advisable to the
company that they should reject this project (Attridge and Engen, 2019).
(b) Calculation of standard deviation of NPV
The standard deviation of NPV
Year 1
Returns
(X)
D = (X –
Expected value)
D2 Probability Probability * D2
8000 -2400 5760000 0.1 576000
10000 -400 160000 0.6 96000
12000 1600 2560000 0.3 768000
Variance of returns in year 1 = σ2 1440000
Standard deviation of returns in year 1 = square root of σ2 = σ = 1200.
Interpretation: The above calculation clearly indicates that the standard deviation of the net
present value of year one is 1200. And this means that cash flow the different events are