Principles of Finance

This document discusses the principles of finance, including ethics in finance, application in capital budgeting, and project risk analysis. It explores the importance of sustainability and social responsibility in finance and highlights a case of misconduct in the banking industry. The document also provides calculations and analysis for capital budgeting and project risk analysis. Study material and solved assignments on these topics are available on Desklib.

Running head: PRINCIPLES OF FINANCE
Principles of Finance

1PRINCIPLES OF FINANCE
Table of Contents
Task 1: Ethics in Finance...........................................................................................................2
Task 2(a): Application in Capital Budgeting.............................................................................3
i. Relevant Assumption:.............................................................................................................3
ii. Treatment of depreciation:.....................................................................................................3
iii. Treatment of working capital:...............................................................................................4
iv. Calculation of initial cash outlay, operating cash flows per year and terminal cash flows:. 5
v. Calculation of NPV and IRR:................................................................................................7
vi. Providing conclusion:...........................................................................................................7
Task 2(b): Project Risk Analysis................................................................................................7
References..................................................................................................................................9

2PRINCIPLES OF FINANCE
Task 1: Ethics in Finance
Sustainability and social responsibility are an integral part of all the business
integration in today are an interconnected, complex and competitive market. These kinds of
responsibilities are an ethical aspect that creates a social, economic and environmental value
for the entire organisation. The optimum usage of resources without wastage and the
corporate social responsibility increases the goodwill of the company and the customer feels
satisfied and remains loyal to the organisation (Cheng, Ioannou and Serafeim 2014). Ethics in
finance is therefore noteworthy. The following paragraph discusses in details about one such
ethical issue in the financial organisations.
The Royal Commission into Misconduct in the Banking, Superannuation and the
Financial Services Industry was founded in the year 2017 in order to inquire into the
misconducts and unethical practices of the banks (Matthews 2016). This commission has
conducted several public hearings and reviewed many public submissions. It reviewed many
Australian banks out of which the National Australia Bank is not an exception.
The Royal Commission stated that the National Australia Bank was involved in a
number of scandals in relation to financial planning. It was revealed that the bank gave false
financial advice to its clients. Falsifying the customers in order to make profits is a serious
crime and is unethical in nature. The bank did not follow proper financial planning and was
also involved in improper foreign exchange trading. It was also engaged in misconduct
relating to personal loans, home loans, credit cards and several other fees. It engaged itself
with providing loans without proper documentation and that was unsuitable.
The customer’s signatures were duplicated and were misused, the loan statements
were misstated and incorrect income figures were being used. This conduct was not just
misconduct but was beyond that and was purely unethical. Superannuation customers were

3PRINCIPLES OF FINANCE
charged unnecessary fees without any service being provided for the same. It has also been
reported that the bank deducted advice fees from the accounts that belonged to the customers
who have expired. The NAB employees also accepted bribes for providing loans and
thereafter reaching their targets. The company also had issues with their risk management
policies and lacked auditor’s independence (Theguardian.com 2019).
The bank faced serious damage because of this report. It emerged as the most
distrusted bank in Australia. It was found that almost 53.7% of the Australian customers
started to distrust the bank (Smartcompany.com.au 2019). The Chairman of the bank Ken
Henry and the chief executive Andrew Thornburn were forced to resign. The bank had to pay
a million dollars to hundreds of customers as compensation for their misconduct with them.
The profitability of the bank has also reduced significantly after the report. The share
price on the ASX showed a fall in the value. Many employees of the organisation lost their
jobs because of the job cut, which was done to reduce the costs. The efficiency of the
organisation was also at a stake as the cost with respect to the income increased a lot.
Task 2(a): Application in Capital Budgeting
i. Relevant Assumption:
The main assumption that has been taken into consideration is the initial cost used for
the organisation. The initial outlay of the organisation consists of equipment, development
cost, testing cost, and initial marketing cost, which makes the total investment in the project
to 50 million.
ii. Treatment of depreciation:
Particulars Value
New Equipment (A) $ 80,00,000
Salvage value (B) $ 2,00,000
Depreciation $ 7,80,000

4PRINCIPLES OF FINANCE
(A-B)/10
iii. Treatment of working capital:
Particulars Value
Inventory (A) $ 4,50,000
Receivables (B) $ 1,50,000
Payables (C) $ 1,00,000
Working capital (A+B)-
C $ 5,00,000

5PRINCIPLES OF FINANCE
iv. Calculation of initial cash outlay, operating cash flows per year and terminal cash flows:
Particulars 1 2 3 4 5 6 7 8 9 10
Sales
$
1,80,00,00
0
$
1,96,20,00
0
$
2,13,85,80
0
$
2,33,10,52
2
$
2,36,60,18
0
$
2,40,15,08
3
$
2,43,75,30
9
$
2,47,40,93
8
$
2,51,12,05
2
$
2,54,88,73
3
Variable cost
$
36,00,000
$
39,24,000
$
42,77,160
$
46,62,104
$
47,32,036
$
48,03,017
$
48,75,062
$
49,48,188
$
50,22,410
$
50,97,747
Fixed cost
$
35,00,000
$
35,00,000
$
35,00,000
$
35,00,000
$
35,00,000
$
35,00,000
$
35,00,000
$
35,00,000
$
35,00,000
$
35,00,000
Depreciation $ 7,80,000 $ 7,80,000 $ 7,80,000 $ 7,80,000 $ 7,80,000 $ 7,80,000 $ 7,80,000 $ 7,80,000 $ 7,80,000 $ 7,80,000
EBT
$
1,01,20,00
0
$
1,14,16,00
0
$
1,28,28,64
0
$
1,43,68,41
8
$
1,46,48,14
4
$
1,49,32,06
6
$
1,52,20,24
7
$
1,55,12,75
1
$
1,58,09,64
2
$
1,61,10,98
7
Tax
$
30,36,000
$
34,24,800
$
38,48,592
$
43,10,525
$
43,94,443
$
44,79,620
$
45,66,074
$
46,53,825
$
47,42,893
$
48,33,296
PAT
$
70,84,000
$
s79,91,200
$
89,80,048
$
1,00,57,89
2
$
1,02,53,70
1
$
1,04,52,44
6
$
1,06,54,17
3
$
1,08,58,92
6
$
1,10,66,74
9
$
1,12,77,69
1
Working
capital $ 5,00,000
Cash flow
$
78,64,000
$
87,71,200
$
97,60,048
$
1,08,37,89
2
$
1,10,33,70
1
$
1,12,32,44
6
$
1,14,34,17
3
$
1,16,38,92
6
$
1,18,46,74
9
$
1,25,57,69
1
Yea Cash flow Discounting Terminal Cashflow

6PRINCIPLES OF FINANCE
r rate
0 $ -5,05,00,000.00 1 $ -5,05,00,000.00
1 $ 78,64,000.00 0.896860987 $ 70,52,914.80
2 $ 87,71,200.00 0.804359629 $ 70,55,199.18
3 $ 97,60,048.00 0.721398771 $ 70,40,886.63
4 $ 1,08,37,892.32 0.646994413 $ 70,12,055.78
5 $ 1,10,33,700.70 0.580264048 $ 64,02,459.83
6 $ 1,12,32,446.22 0.520416186 $ 58,45,546.82
7 $ 1,14,34,172.91 0.466740974 $ 53,36,797.00
8 $ 1,16,38,925.50 0.418601771 $ 48,72,074.82
9 $ 1,18,46,749.38 0.375427597 $ 44,47,596.65
10 $ 1,25,57,690.63 0.336706365 $ 42,28,254.36

7PRINCIPLES OF FINANCE
v. Calculation of NPV and IRR:
Yea
r Cash flow
Discounting
rate Terminal Cashflow
0 $ -5,05,00,000.00 1 $ -5,05,00,000.00
1 $ 78,64,000.00 0.896860987 $ 70,52,914.80
2 $ 87,71,200.00 0.804359629 $ 70,55,199.18
3 $ 97,60,048.00 0.721398771 $ 70,40,886.63
4 $ 1,08,37,892.32 0.646994413 $ 70,12,055.78
5 $ 1,10,33,700.70 0.580264048 $ 64,02,459.83
6 $ 1,12,32,446.22 0.520416186 $ 58,45,546.82
7 $ 1,14,34,172.91 0.466740974 $ 53,36,797.00
8 $ 1,16,38,925.50 0.418601771 $ 48,72,074.82
9 $ 1,18,46,749.38 0.375427597 $ 44,47,596.65
10 $ 1,25,57,690.63 0.336706365 $ 42,28,254.36
NPV $ 87,93,785.88
IRR 15.24%
vi. Providing conclusion:
The positive NPV value and higher IRR value in comparison to the weighted average
cost of capital indicates the financial viability of the project. Hence, the organisation should
accept the project for investment.
Task 2(b): Project Risk Analysis
Scenario Analysis:
Scenarios NPV IRR
Pessimistic estimate $ -84,13,784.32 7.65%
Base case $ 87,93,785.88 15.24%
Optimistic estimate $ 2,60,01,356.07 21.98%
Sensitivity Analysis:
Sensitivity Analysis
Change in Sale %

8PRINCIPLES OF FINANCE
Change in fixed cost %
$
87,93,785.
88 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% -30.00%
30.00%
$
2,97,06,6
36.85
$
2,99,26,3
67.79
$
3,01,46,0
98.73
$
3,03,65,8
29.67
$
3,05,85,5
60.62
$
3,08,05,2
91.56
$
3,10,25,0
22.50
20.00%
$
2,25,15,9
55.58
$
2,27,35,6
86.53
$
2,29,55,4
17.47
$
2,31,75,1
48.41
$
2,33,94,8
79.35
$
2,36,14,6
10.29
$
2,38,34,3
41.23
10.00%
$
1,53,25,2
74.32
$
1,55,45,0
05.26
$
1,57,64,7
36.20
$
1,59,84,4
67.14
$
1,62,04,1
98.08
$
1,64,23,9
29.03
$
1,66,43,6
59.97
0.00%
$
81,34,59
3.05
$
83,54,32
3.99
$
85,74,05
4.94
$
87,93,78
5.88
$
90,13,51
6.82
$
92,33,24
7.76
$
94,52,97
8.70
-10.00%
$
9,43,911.
79
$
11,63,64
2.73
$
13,83,37
3.67
$
16,03,10
4.61
$
18,22,83
5.55
$
20,42,56
6.50
$
22,62,29
7.44
-20.00%
$
(62,46,76
9.48)
$
(60,27,03
8.54)
$
(58,07,30
7.59)
$
(55,87,57
6.65)
$
(53,67,84
5.71)
$
(51,48,11
4.77)
$
(49,28,38
3.83)
-30.00%
$
(1,34,37,
450.74)
$
(1,32,17,
719.80)
$
(1,29,97,
988.86)
$
(1,27,78,
257.92)
$
(1,25,58,
526.98)
$
(1,23,38,
796.04)
$
(1,21,19,
065.09)

9PRINCIPLES OF FINANCE
References
Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to
finance. Strategic management journal, 35(1), pp.1-23.
Matthews, A., 2016. The financial services industry: Whistleblowing and calls for a royal
commission. Precedent (Sydney, NSW), (136), p.35.
Smartcompany.com.au. 2019. "Startling result": NAB worst hit as bank trust plummets in the
wake of the royal commission - SmartCompany. [online] Available at:
https://www.smartcompany.com.au/finance/nab-cba-westpac-anz-trust/ [Accessed 8 Apr.
2019].
Theguardian.com. 2018. NAB issues public apology after week of damning evidence at royal
commission. [online] the Guardian. Available at: https://www.theguardian.com/australia-
news/2018/aug/09/nab-issues-public-apology-after-week-of-damning-evidence-at-royal-
commission [Accessed 8 Apr. 2019].