Analysis and Decision Making for a Housing Project

The assignment content discusses four questions related to financial analysis. Question (A) calculates the payback period for an investment project, which is found to be 3.20 years. Question (B) calculates the net present value (NPV) of the project, which is $1995 at a discount rate of 20%. Question (C) calculates the internal rate of return (IRR), which is 20.2575% based on the NPV and IRR formulas. Finally, question (D) concludes that the project should be undertaken due to its positive NPV at the 20% hurdle rate, despite taking more than 60% of the projected period to recover the cost of investment.

Table of Contents
Q.1 (A)...................................................................................................................................................2
Q.1 (B)...................................................................................................................................................2
Q.2 (A)...................................................................................................................................................3
Q.2 (B)...................................................................................................................................................3
Q.2 (C)....................................................................................................................................................3
Q.3 (A)...................................................................................................................................................4
Q.3 (B)...................................................................................................................................................4
Q.4 (A)...................................................................................................................................................5
Q.4 (B)...................................................................................................................................................5
Q.4 (C)....................................................................................................................................................5
Q.4 (D)...................................................................................................................................................6

Q.1 (A)
Principal Amount $1,00,000
Time 3 Years
Interest Annually Compounded
Future Value P(1+R)n
P = Principal R = Rate of Interest n = Time
Particulars At 1 % At 2% At 3%
Principal Amount $1,00,000 $1,00,000 $1,00,000
Cumulative factor 1.0303 1.0612 1.0927
Future Value $1,03,030 $1,06,120 $1,09,270
Q.1 (B)
Calculation of Future Value
Bank offer CD 3% Nominal
Interest
Monthly
Compounded
Monthly Interest Rate 3/12 = .25%
Annually Effective
Rate (1+R)n
(1+.25)12
Annually Effective
Rate 1.0342
Value of investment $1,00,000
Time 3 Years
Future value $100000(1+.25)36
$1,09,405

Q.2 (A)
Calculate Amount to be Invested
Amount Needed after 3 years = $500000
Rate of Interest 3 % P.A.
Future Value = P(1+R)n
$500000= P(1+3)3
$500000= P(1.0927)
Principal $4,57,570
Q.2 (B)
Calculation of Annual Rate Of Return
Future value = Present Value(1+r)n
$500000= $450000(1+r)3
1.1111= (1+r)3
(1+r)= 1.0357
R= 1.0357-1 = 0.0357 or 3.57%
Q.2 (C)
Calculation of Annuity Due
FV = Annuity [(1+r)n-1]*(1+r)/r
$500000 =
Annuity[(1+0.04)3-1]*(1+0.04)/0.04
$500000 = Annuity(1.12486-1)*(1.04)/.04
$500000 = Annuity 3.24646
Annuity = 154014 (rounding off)

Q.3 (A)
Calculation of Present Value of Lease Payment at Present
Required Rate of Return at 10% P.A.
Year Net Cash flow P.V.@10% Present Value
1 $25,000 0.909 $22,725
2 $30,000 0.826 $24,780
3 $35,000 0.751 $26,285
4 $40,000 0.683 $27,320
5 $25,000 0.621 $15,525
Present Value of Lease Payment $1,16,635
Q.3 (B)
Calculation of the Future Value of Lease Payment
Rate of Investment at 10% P.A.
Yea
r Investment Cumulative P.V.F.@10% Future Value
1 $25,000 (1.10)4 = 1.4641 $36,603
2 $30,000 (1.10)3 = 1.331 $39,930
3 $35,000 (1.10)2 = 1.21 $42,350
4 $40,000 (1.10)1 = 1.10 $44,000
5 $25,000 (1.10) = 0 $25,000
Total F.V. $1,87,883
NOTE:- We are assuming that amount is invested at the end of each
year.

Q.4 (A)
Calculation of Payback Period
Investment Amount = $280000
Year Cash in Flow Operating
Expeses
Net Cash in
Flow
Cumulative Cash in
Flow
1 $1,00,000 $1,00,000 $0 $0
2 $2,20,000 $1,00,000 $1,20,000 $1,20,000
3 $2,35,000 $1,00,000 $1,35,000 $2,55,000
4 $2,50,000 $1,25,000 $1,25,000 $3,80,000
5 $3,00,000 $1,50,000 $1,50,000 $5,30,000
Payback Period = 3 + ($280000-$255000)/$125000
Payback Period= 3.20 Years
Q.4 (B)
Calculation of the Net Present Value of the Project
Cash Outflow = Cost of the Housing Unit with Equipment = $280000
Cash In Flow
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Revenues $1,00,000 $2,20,000 $2,35,000 $2,50,000 $3,00,000
Less: Operating coat $1,00,000 $1,00,000 $1,00,000 $1,25,000 $1,50,000
Profit Before Tax $0 $1,20,000 $1,35,000 $1,25,000 $1,50,000
Less ; Tax 0 0 0 0 0
Profit After Tax $0 $1,20,000 $1,35,000 $1,25,000 $1,50,000
PV Factor @ 20% 0.833 0.694 0.579 0.482 0.402
PV of Factor cash flow $0 $83,280 $78,165 $60,250 $60,300
Total Cash Inflow $2,81,995
NPV Total Cash Inflow- Total Cash outflow
NPV $281995- $280000 = $1995
Q.4 (C)
Calculation of IRR
Yea
r
Net Cash
Flow
PV Factor@
20%
PV @
20%
PV Factor @
21%
PV
@21%
1 $0 0.833 $0 0.826 $0
2 $1,20,000 0.694 $83,280 0.683 $81,960

3 $1,35,000 0.579 $78,165 0.564 $76,140
4 $1,25,000 0.482 $60,250 0.466 $58,250
5 $1,50,000 0.402 $60,300 0.386 $57,900
$2,81,995 $2,74,250
IRR = R1+NPV1*(R2-R1)
(NPV1-NPV2)
= 20%+$1995*(21%-20%)/1995(-5750)
= 20%+$1995*1%/7745
= 20%+0.2575
= 20.2575%
Q.4 (D)
Project should be undertaken because project has the positive NPV of $1995 at 20% hurdle
rate but as per the payback period it will take more than 60% of Projected Period to recover
Cost of Investment.