Managing Finances and strategic Decision Making Question Answer 2022

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Managing Finances and strategic
Decision Making

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Table of Contents
Question 1..................................................................................................................................3
a).............................................................................................................................................3
b)............................................................................................................................................4
c).............................................................................................................................................4
Question 2..................................................................................................................................5
a).............................................................................................................................................5
b)............................................................................................................................................6
c).............................................................................................................................................7
Question 3..................................................................................................................................7
a).............................................................................................................................................7
b)............................................................................................................................................8
c).............................................................................................................................................8
Question 4..................................................................................................................................8
Question 5..................................................................................................................................9
Question 6..................................................................................................................................9
Question 7................................................................................................................................10
Question 8................................................................................................................................10
Question 9................................................................................................................................10
References................................................................................................................................12

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Question 1
a)
i) Payback period
Year Project
A
Cumulative cash
flows
Project
B
Cumulative cash
flows
0 -130000 -130000 -130000 -130000
1 30000 -100000 55000 -75000
2 10000 -90000 5000 -70000
3 30000 -60000 40000 -30000
4 70000 10000 40000 10000
5 20000 30000 20000 30000
Payback period 3.86 3.75
ii & iii) Net present value and IRR
Yea
r
Project A PVF @ 9% PV Project
B
PVF @ 9% PV project B
0 -130000 1 -130000 -130000 1 -130000
1 30000 0.917 27522.94 55000 0.917 50458.72
2 10000 0.842 8416.8 5000 0.842 4208.4
3 30000 0.772 23165.5 40000 0.772 30887.34
4 70000 0.708 49589.76 40000 0.708 28337.01
5 20000 0.650 12998.63 20000 0.650 12998.63
NPV -8306.37 -3109.909
IRR 6.72% 7.99%
iv) ARR
Year Project
A
Depreciat
ion
Net
profits
Project
B
Depreciat
ion
Net profit
project B
0 -
130000
-
130000
1 30000 26000 4000 55000 26000 29000
2 10000 26000 -16000 5000 26000 -21000
3 30000 26000 4000 40000 26000 14000
4 70000 26000 44000 40000 26000 14000
5 20000 26000 -6000 20000 26000 -6000
Average
investment
26000 26000
Average profits 6000 6000
ARR 23.077
%
23.077%

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v) Project selection
All the calculations have been made by using various tools and techniques which are
available and on the basis of that project B will be selected and the investment will be made
in the same. This is because of the lower payback period in the same and also the net present
value is negative but lower than the other project. The IRR of project B is also higher which
is also beneficial and so project B will be chosen among both otherwise none of them will be
selected because of negative NPV.
b)
Limitations of ratio analysis:
Ratio analysis is an important technique that is used for the evaluation of business
performance and position but also includes some limitations. There are various changes that
take place in the price because of inflation and they are ignored in the same (Omar et al.,
2014). The historical cost is used to make the calculation which is also a disadvantage as an
accurate position is not identified. All companies use various policies and comparing them on
the basis of ratios ignores the impact of policies.
c)
The weighted average cost of capital is the rate in which all the sources of capital are
considered in a proportionate manner on the basis of weights (Krüger, Landier and Thesmar,
2015). The calculation of WACC is made in the following manner.
Assume;
Debt= 600000
Equity= 400000
Cost of equity = 10%
Cost of debt = 6%
WACC = (we*Ke) + (Wd * Kd) /We + Wd
WACC = (0.4*.1) + (0.6*0.06)/(0.4+0.6)
WACC = 0.04 + 0.036
WACC = 0.076 or 7.6%