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The assignment content discusses various financial concepts and formulas for calculating payback period, net present value (NPV), internal rate of return (IRR), present value, future value, compounding cash flow, discounting cash flow, effective rate, and annuity payment. The calculations are provided in Excel sheets and the results indicate that the project should be accepted due to its positive NPV and IRR exceeding the required rate of return.

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Page No: 205-206

1. Pay-back period

The formula for calculating payback period-= Cash outflow/ cash inflow

Following excel shows the calculations:

Yrs Cash flow C.F.

0 -280,000 -

1 100,000 -180,000

2 100,000 -80,000

3 100,000 20,000

4 125,000 145,000

5 150,000 295,000

Payback period = 4+ 135,000/150,000

= 4.9 yrs.

Thus, the payback period is 4.9yrs

2. NPV

The formula for calculating Net present value = Cash inflow- Cash outflow

= 331,150 â€“ 280,000

= 51,150

Following excel shows the calculations:

Yrs Cash flow pvf @20%Cash flow

0 -280,000

1 100,000 0.833 83300

2 100,000 0.694 69400

3 100,000 0.579 57900

4 125,000 0.482 60250

5 150,000 0.402 60300

331150

Thus, the NPV is positive 51,150

3. IRR

Following excel shows the calculations:

1. Pay-back period

The formula for calculating payback period-= Cash outflow/ cash inflow

Following excel shows the calculations:

Yrs Cash flow C.F.

0 -280,000 -

1 100,000 -180,000

2 100,000 -80,000

3 100,000 20,000

4 125,000 145,000

5 150,000 295,000

Payback period = 4+ 135,000/150,000

= 4.9 yrs.

Thus, the payback period is 4.9yrs

2. NPV

The formula for calculating Net present value = Cash inflow- Cash outflow

= 331,150 â€“ 280,000

= 51,150

Following excel shows the calculations:

Yrs Cash flow pvf @20%Cash flow

0 -280,000

1 100,000 0.833 83300

2 100,000 0.694 69400

3 100,000 0.579 57900

4 125,000 0.482 60250

5 150,000 0.402 60300

331150

Thus, the NPV is positive 51,150

3. IRR

Following excel shows the calculations:

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Yrs Cash flow

0 -280,000

1 100,000

2 100,000

3 100,000

4 125,000

5 150,000

IRR 0.275

Thus, the IRR is 0.275

4. Factors which influence the decision making for selecting the project.

The project should be accepted because of the following reasons:

ï‚· Net present value of the project is positive

ï‚· Internal rate of return exceed required rate of return

Page: 121

3.

a. Present value of the proposed least payment

Following excel shows the calculations:

1 25,000

2 30,000

3 35,000

4 40,000

5 25,000

PV 116660.250

Thus the PV from NPV function is 116,660.250

b. Future value

Following excel shows the calculations:

0 -280,000

1 100,000

2 100,000

3 100,000

4 125,000

5 150,000

IRR 0.275

Thus, the IRR is 0.275

4. Factors which influence the decision making for selecting the project.

The project should be accepted because of the following reasons:

ï‚· Net present value of the project is positive

ï‚· Internal rate of return exceed required rate of return

Page: 121

3.

a. Present value of the proposed least payment

Following excel shows the calculations:

1 25,000

2 30,000

3 35,000

4 40,000

5 25,000

PV 116660.250

Thus the PV from NPV function is 116,660.250

b. Future value

Following excel shows the calculations:

1 25,000

2 30,000

3 35,000

4 40,000

5 25,000

Total 155,000

FV 187851.974

Thus the FV is 187,851.974

4.

Time value of money shows the importance of money in the present. It tells the benefits of receiving

money in the present rather than future. The value of the money with the span of time. There are two

types of cash flows: discounting cash flow and compounding cash flow.

ï‚· Compounding cash flow is used to find the future value of money when the present value is

given.

ï‚· Discounting cash flow is used to find the present value of money when the future value of the

money is given.

Page-119-120

1.

a. Future value

Following excel shows the calculations:

Yrs Cash flow

PV 100,000

Rate 2,1,3%

t 3

FV-1 106111.619

FV-2 $103,021.01

FV-3 $109,263.43

2 30,000

3 35,000

4 40,000

5 25,000

Total 155,000

FV 187851.974

Thus the FV is 187,851.974

4.

Time value of money shows the importance of money in the present. It tells the benefits of receiving

money in the present rather than future. The value of the money with the span of time. There are two

types of cash flows: discounting cash flow and compounding cash flow.

ï‚· Compounding cash flow is used to find the future value of money when the present value is

given.

ï‚· Discounting cash flow is used to find the present value of money when the future value of the

money is given.

Page-119-120

1.

a. Future value

Following excel shows the calculations:

Yrs Cash flow

PV 100,000

Rate 2,1,3%

t 3

FV-1 106111.619

FV-2 $103,021.01

FV-3 $109,263.43

b. Effective rate and future value

Following excel shows the calculations:

PV 100,000

Nominal Interest 0.25

t 36

Effective rate 0.003

FV 109,292

2.

a. Present value

Following excel shows the calculations:

FV 500,000

Nominal Interest 0.03

t 3

PV 457,562

b. Rate

Following excel shows the calculations:

PV 450,000

FV 500,000.00

t 3

Rate 0.036

c. Annuity payment

Immediate annuity payment plan is used in this question.

Following excel shows the calculations:

PV 100,000

Nominal Interest 0.25

t 36

Effective rate 0.003

FV 109,292

2.

a. Present value

Following excel shows the calculations:

FV 500,000

Nominal Interest 0.03

t 3

PV 457,562

b. Rate

Following excel shows the calculations:

PV 450,000

FV 500,000.00

t 3

Rate 0.036

c. Annuity payment

Immediate annuity payment plan is used in this question.

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Following excel shows the calculations:

Amount 500,000

Interest 0.48

t 36

Annual payment 215,999.982

The equal annual payments is 215,999.982

Amount 500,000

Interest 0.48

t 36

Annual payment 215,999.982

The equal annual payments is 215,999.982

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