Financial Modeling and Investment Appraisal: Case Studies

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Accounting and Finance

Table of Contents
Table of Contents
Table of Contents........................................................................................................................................2
Question 1...................................................................................................................................................3
A..............................................................................................................................................................3
(B)............................................................................................................................................................4
Question 2...................................................................................................................................................7
A..............................................................................................................................................................7
A..............................................................................................................................................................8
B..............................................................................................................................................................8
Q: 3..............................................................................................................................................................9
(A)............................................................................................................................................................9
(B)............................................................................................................................................................9
(C)............................................................................................................................................................9
(D)..........................................................................................................................................................11
References.................................................................................................................................................16

Question 1
A
For the purpose of saving the money as the daughter wants to join the university after the completion of
her school education so, it is important at the present time to estimate about the investment which can be
used when she becomes eligible for further studies (Cole, and Nightingale, 2016).
Required amount in future $60,000
Interest rate 4%
Time period 5 years
Formula for the calculation of the required future amount:
A Total Amount
P Principal Amount
R Annual rate of interest
N
number of period compounded
annually
T time in years
A = P 1 + R / N) ^ N* T
60000 = P (1 + 0.04 / 12) ^ 12 * 5
60000 = P (1 + 0.0033) ^ 60
60000 = P (1.0033 ^ 60)
60000 = P * 60.198
Principle = 60000 / 60.198
Principle = 996.710
So, according to the above calculations done for the further studies of daughter investment can be started
with an amount of $ 996.710 per month. In this way there can be saving of about $ 60,000 which can be
used for the future studies of the daughter. So, the approx. value of money which can be saved monthly is
$ 997.

(B)
1
Required amount of
investment $22,000,000
Project Time 5 years
Rate of Return (RoR) 10%
Years Amount ($)
Closing
Balance CF PV PV Balance
0 22,000,000 22,000,000 22,000,000 22,000,000
1 1,800,000 20,200,000 1,636,364 20,363,636
2 3,000,000 17,200,000 2,479,339 15,480,090
3 6,500,000 10,700,000 4,883,546 9,742,777
4 8,400,000 2,300,000 5,737,313 17,380,109
5 12,300,000 -10,000,000 -7,637,332
Particulars Years
(PBP) Payback period 4.2
Discounted Payback period 4.7
So, it can be estimated that the PBP is about 4 years 2 months and 12 days, on the other hand
Discounted PBP is for 4 years 8 months and 12 days.
According to the question from the initial investment of $22000000 and the rate of returns of
10%, by estimating with the help of PBP method it can be said that the investment would be
covered in 4.7 years by the implementation of the discounted payback and it would take around
4.2 years to cover the investment with the implementation of the PBP method. Therefore it can
be beneficial for the company to take this project as this involves covering the cost in shorter
period of time (Cole, and Nightingale, 2016).

2
Initial Investment
amount $22,000,000
Time of Project 5 years
Rate of Return 15%
Years
Investment
($)
Closing
Balance CF PV PV Balance
0 22,000,000 22,000,000 22,000,000 22,000,000
1 1,800,000 20,200,000 1,565,217 20,434,783
2 3,000,000 17,200,000 2,268,431 16,160,927
3 6,500,000 10,700,000 4,273,856 11,358,200
4 8,400,000 2,300,000 4,802,727 17,473,474
5 12,300,000 -10,000,000 -6,115,274
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4
With the initial investment of the $22000000 with the rate of returns of the 15% and according to the
above estimates this project may not be feasible for the company as this project is taking more time to
cover the costs as according to the PBP and the discounted PBP it is 4.2 and 5.4 years. Which means that
the project needs further more extra 7 months for covering outlay.
C)
1
The amount which he will receive during the time of his retirement is $ 5189.16
2
The monthly pension estimated is $ 0.99

Question 2
A
1
The interest rate which is offered to the James is notional interest rate and not the real rate of
interest. The reason behind this is that because of the present current rate of returns of the bank
of Australia comes between the percentage 2.99 and 3.75 and on the other hand James have
taken the interest of 4% which also includes the inflation, in case of real rate of returns inflations
are not included so, this interest rate is definitely the notional rate of interest (Fry, et. al., 2016).
2.
Dissimilarities between the Notional rate of interest and the Real rate of Interest:
Notional rate of interest
These kinds of rate are used in the bonds and loans and also considered as the simple rate of
interest. These are the interest rates by which the borrower who takes the money for the personal
purpose and for taking the lending capital. One of the basic difference is that inflation cost and
capital costs are included in the notional rate of interest and real rate of interest does not involves
these two costs (Brunnermeier, and Koby, 2016).
Real rate of interest
This are the interest rate at which the loan amounts are sanctioned to the borrowers from the
financial institutions. This rate is similar to the notional rate of interest but the difference is that it
does not involve the inflation costs on the other hand nominal rate of interest considers the
inflations. Whenever in the situation where the inflation rates are zero then in that case real rate
of interest and the notional rate of interest become equal (Brunnermeier, and Koby, 2016).

3.
Amount of loan
$250,00
0
Rate of Interest 4%
Real Rate of Interest 2.99%
Notional Rate of Return 4%
Inflation Rate 1.01%
4.
A
Yes, there can be the situation when notional rate of interest and the real rate of interest becomes
equal. The reason behind is that as the notional rate involves inflation costs and when these costs
are reduced form the notional rate of interest then real rate of interest is obtained so, in case of
condition when the inflation costs are zero then in that case both real rate of interest and the
notional rate of interest becomes equal.
B.
According to the reserve banks cash rates are the rate at which the cooperative banks have to
keep certain percentage amount of money as a hold which can be used by the bank in case of any
unforeseen future circumstances or the uncertainties. This also puts a huge impact on the
circulation of the economy. Cash rate are actually the benchmark rate at which the banks give the
facility of loans to the borrowers. If the government makes any changes in the cash rate it can
have the huge affect on the economy of the country specially on the sectors of housing loan and
sector because according to these cash rates loans are provided (Jensen, and Spange, 2015).
Inflation rate influences the objective if the cash rate as it is important for the banks to maintain
the inflation rate between 2% to 3% which will further help in maintaining the economy of the
Australia.
When there is a reduction in the bank rates in that case of people starts to invest more capital in
any of the business which further helps in increasing the flow of the capital in the economy
(Jensen, and Spange, 2015).
.

Q: 3
(A)
(i) Bradley has to pay 32.5% and 2% tax in Medicare. Suppose the inflation rate is 2.5% the tax
will be given according to the income earned will be as follows:
For example- If the monthly income of Bradley is $1,000 and he is accountable to pay 32.5% of
$1,000. The tax Bradley has to pay is $325. According to the bank guarantee against the amount,
Bradley is able to save $30. Bradley will only be able to save 3% of his total income.
(ii) Bradley gets benefit from the risk because he now only 32.5% as total tax including
Medicare levy. It means the able to save the cost of Medicare levy which is to pay but now as he
is not liable to pay to an amount for this (Baker, et. al., 2016).
(B)
Australian Dividend Imputation System:
Australian Dividend Imputation System is defined as the corporate tax system where the
organization pays some or full amount. The amount further can be extracted by the shareholders
in the form of tax credit. In comparison with the classical system, dividend imputation eradicates
the disadvantages of the tax and distribution of the dividends to the stakeholders. Basically, it
provides a benefit and makes the company liable to recompense less income tax than what it was
paid earlier. This way, the stakeholders are liable to pay the difference amount of corporate rate
and the marginal rate. The main objective of using the Dividend Imputation System is to ignore
the double tax system on the profits made by the business in the year. In the year and before
1987, the companies in the market were liable to pay a fixed per cent of amount i,e. 49% even if
the company has earned profit or was in loss. 49% from the total income of the business was
mandatory to pay. 1988 was the year where the tax rate was lowered. The company was now
liable to pay 39% of the company’s total income. In the year 1993, the tax rate was reduced
again and was stopped at 33%. The tax rate was again lowered in the year 2001 to 30% and is
valid till now.
Tax is imposed on the stakeholders by a system imputation. This is the base on which imputation
system follow where company pay dividend to shareholders then it have to be franked and after
that they are eligible to franking tax offset for a specific firm for one year. Franking credit aid in
promoting long term equity and this will increase dividend payout to business. If companies pay
full tax on the income earning then franking proportion is 100% (Cúrdia, et. al., 2015).
Calculation of Franking Credit:
Franking Credit = (Dividend Amount/ (1- Company Tax Rate)) – Dividend Amount

(C)
(i)
Monthly Holding Return Period
Date Opening Value Ending Value
17-Jul 3.79 4.14
17-Aug 4.15 5.04
17-Sep 5.1 5.86
17-Oct 5.92 7.62
17-Nov 7.34 7.59
17-Dec 7.6 7.37
18-Jan 7.4 8.29
18-Feb 8.32 12.23
18-Mar 12.21 11.46
18-Apr 10.96 11.31
18-May 11.36 9.93
18-Jun 9.7 10.52
Date Initial Value Closing Value
Income
Generated
Holding
Period
Return (%)
17-Jul 3.79 4.14 7.93 11.15
17-Aug 4.15 5.04 9.19 13.41
17-Sep 5.1 5.86 10.96 15.95
17-Oct 5.92 7.62 13.54 20.4
17-Nov 7.34 7.59 14.93 21.55
17-Dec 7.6 7.37 14.97 21.31
18-Jan 7.4 8.29 15.69 23.09
18-Feb 8.32 12.23 20.55 32.10
18-Mar 12.21 11.46 23.67 34.06
18-Apr 10.96 11.31 22.27 32.61
18-May 11.36 9.93 21.29 30.08
18-Jun 9.7 10.52 20.22 29.82
(ii)

Date Open High Low Close
Adj
Close Returns
7/1/2017 3.79 4.26 3.6 4.14 4.14
-
17.857%
8/1/2017 4.15 5.37 4.11 5.04 5.04
-
13.993%
9/1/2017 5.1 6.4 5.03 5.86 5.86
-
23.097%
10/1/2017 5.92 7.91 5.91 7.62 7.62 0.395%
11/1/2017 7.34 8.05 6.33 7.59 7.59 2.985%
12/1/2017 7.6 7.63 6.82 7.37 7.37
-
11.098%
1/1/2018 7.37 8.56 6.97 8.29 8.29
-
32.216%
2/1/2018 8.32 13.78 7.7 12.23 12.23 6.719%
3/1/2018 12.21 13.21 11.26 11.46 11.46 1.326%
4/1/2018 11.46 12.58 10.83 11.31 11.31 13.897%
5/1/2018 11.36 12.385 9.19 9.93 9.93 -5.608%
6/1/2018 9.7 11.41 9.4 10.52 10.52
The Average Returns is 7.141%
(iii) The annual holding period return is:-
According to per cent (%) = {income + (period value at the end – starting value)/starting value}
* 100
= {9.7 + (10.52 – 4.14)/4.14} *100
= {9.7 + 1.54} * 100
= 11.24%
According to dollars ($) = capital gain + income
= (10.52 – 3.79) + 9.7
= 16.43
(D)
(i)
Date Initial Value Closing Value Income Generated
Holding Period
Return (%)
17-Jul 5764 5773.9 11537.9 17310.80

17-Aug 5773.9 5776.3 11550.2 17325.50
17-Sep 5776.3 5744.9 11521.2 17265.09
17-Oct 5744.9 5976.4 11721.3 17696.7
17-Nov 5976.4 6057.2 12033.6 18089.81
17-Dec 6057.2 6167.3 12224.5 18390.82
18-Jan 6167.3 6146.5 12313.8 18459.30
18-Feb 6146.5 6117.3 12263.8 18380.10
18-Mar 6117.3 5868.9 11986.2 17854.06
18-Apr 5868.9 6071.6 11940.5 18011.13
18-May 6071.6 6123.5 12195.1 18317.61
18-Jun 6123.5 6289.7 12413.2 18701.93
(ii)
Date Open High Low Close Adj Close Returns
7/1/2017 5764 5846.2 5705.6 5773.9 5773.9 0%
8/1/2017 5773.9 5852.7 5711.7 5776.3 5776.3 1%
9/1/2017 5776.3 5835.7 5702.2 5744.9 5744.9 -4%
10/1/2017 5744.9 6003.2 5717.7 5976.4 5976.4 -1%
11/1/2017 5976.4 6124.7 5976.4 6057.2 6057.2 -2%
12/1/2017 6057.2 6193 6023.5 6167.3 6167.3 0%
1/1/2018 6167.3 6256.5 6103.9 6146.5 6146.5 0%
2/1/2018 6146.5 6229.8 5887.3 6117.3 6117.3 4%
3/1/2018 6117.3 6130.7 5861.9 5868.9 5868.9 -3%
4/1/2018 5868.9 6079.3 5834 6071.6 6071.6 -1%
5/1/2018 6071.6 6245.9 6067.9 6123.5 6123.5 -3%
6/1/2018 6123.5 6347.8 6086.8 6289.7 6289.7
Average Returns is 1%
(iii)
Date Open High Low Close
Adj
Close
Daily
Returns
Annual
Returns
6/26/2017 null Null null null null
7/3/2017 5764 5828
5717.
3
5743.
9 5743.9 -1.11557 -8.73823
7/10/2017
5743.
9
5820.
8
5710.
1
5808.
7 5808.7 0.649778 -7.62266
7/17/2017
5808.
7
5818.
5
5729.
9
5771.
2 5771.2 0.278009 -8.27244
7/24/2017 5771. 5846. 5705. 5755. 5755.2 -0.31351 -8.55045