Financial Analysis and Valuation

This assignment delves into the financial analysis of a company over five years. It requires calculating key financial ratios such as the payback period using both regular and discounted cash flows. The assignment also explores Net Present Value (NPV) and Internal Rate of Return (IRR), providing insights into the profitability and investment efficiency of the company. Finally, it determines the IRR at different discount rates, showcasing the sensitivity of the project's return on investment.

Year
Profit
before tax Tax Profit after tax Depreciation
Cash
flows
Cumulative
Cash flows
Discounted
cash flows @
10%
1 100,000 50,000 50,000 40,000 90,000 90,000 81,818.18
2 100,000 50,000 50,000 40,000 90,000 180,000 74,380.17
3 80,000 40,000 40,000 40,000 80,000 260,000 60,105.18
4 80,000 40,000 40,000 40,000 80,000 340,000 54,641.08
5 40,000 20,000 20,000 40,000 60,000 400,000 37,255.28
200,000 200,000 200,000 400,000 1,270,000 308,199.89
(a)
Payback period = 2 + ((200000 - 180000)/ 80000)
= 2.25 years
(b)
Average Annual profits = 200,000 / 5
= 40,000
Rate of return on original investment method = 40,000 / 200,000
= 20.00%
(c)
Average Annual Return = 200,000 / 5
= 40,000
Average Investment = 200,000 / 2
= 100,000
Rate of return on average investment method = 40,000 / 100,000

= 40.00%
(d)
Payback period (discounted cash flows) = 2 + ((200000 - 156198.35)/ 60105.18)
= 2.73 years
(e)
Year
Cash
flows
Discounted
cash flows @
10%
0
-
200,000
-
200,000.00
1 90,000 81,818.18
2 90,000 74,380.17
3 80,000 60,105.18
4 80,000 54,641.08
5 60,000 37,255.28
200,000 108,199.89
Net present value (NPV) = 108,199.89
(f)
Year
Cash
flows
Discounted
cash flows @
30%
Discounted
cash flows @
31%
0
-
200,000
-
200,000.00
-
200,000.00
1 90,000 69,230.77 68,702.29
2 90,000 53,254.44 52,444.50
3 80,000 36,413.29 35,585.75
4 80,000 28,010.22 27,164.69
5 60,000 16,159.74 15,552.31

200,000 3,068.47
-
550.47
Internal rate of return (IRR) = 30% + (31% - 30%) (3068.47 / (3068.47 +
550.47)
= 30.85%