International Financial Management Task

INTERNATIONAL
FINANCIAL
MANAGEMENT TASK

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.................................................................9
(c) Calculation of probability of occurring..................................................................................9
Question 3......................................................................................................................................10
(a) Calculation of Net Present Value of each project on the assumption that the cash flows are
not subject to any risk................................................................................................................10
(b) Reason of why NPV is being superior to internal rate of return for investment appraisal. .12
(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..............14
CONCLUSION..............................................................................................................................16
REFERENCES................................................................................................................................1

INTRODUCTION
Nowadays, every company in order to grow their business in the different country needs
funds for the same purpose. And for this they need to acquire the funds from the market by
visualizing and analysing the different proposal and investment plan. For this, the report will
address the net present value technique for calculating the expected return of different events.
The report will also calculate the standard deviation of the NPV on the basis of different
probability (Danso and et.al., 2019). Investment appraisal helps the business in identifying the
best and profitable projects and also help them in making decisions regarding long-term
investments. As it is known to every company manager that capital expenditure decision is
irreversible and any wrong decision may lead to heavy loss to the company. So, this report will
cover every aspect that need to be considered by the company before making decisions regarding
the investment of the funds.
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).
As, in the given case the project is showing negative figure of the expected net present value that
why selecting this project by the company lead to net loss to the company. It is because it is not
meeting the standard selection criteria of the NPV technique. The criteria state that the company
can only select the project if present cash inflow of that project is higher than the present cash
outflow or can say initial investment (Istiana and Nur, 2020). This indicate that such project is
not offering any profit to the company because of negative NPV. Such negative NPV may be
arises because of the reduction in the expected value of return as compared to the year 1.
(b) Calculation of standard deviation of NPV
Year 1
Returns
(X)
D = (X –
Expected value)
D2 Probability Probability * D2
8000 -2400 5760000 0.1 576000
(5760000* .1)
10000 -400 160000 0.6 96000
(160000* .6)