Project Report: Business Finance - Office Building Loan Analysis

This project report delves into the financial analysis of an office building loan, providing a detailed breakdown of loan calculations. It starts with the determination of the monthly EMI, calculated to be $2,42,655. The report proceeds to calculate the monthly interest payment, which is $1,33,333 for the first month, and the monthly principle payment, which is $1,09,322. The report also includes a loan schedule showing the loan amount after 3 years, which is $1,55,68,577.62. Furthermore, the report compares the total EMI and interest amounts for an 8% interest rate versus a 7% interest rate, along with the costs associated with refinancing. Finally, the report presents a loan schedule for the remaining loan amount after refinancing, with a new EMI of $2,34,972 and a detailed breakdown of interest and closing balance over 84 months. The analysis is based on the data and financial models related to loan amortization and repayment schedules.

Running Head: Business Finance
1
Project report: Business Finance

Business Finance
2
Part A:
Office Building $
25
Million
Loan to value ratio 80%
Loan amount $
20
Year 10
Interest rate 8%
Payment Monthly
1.1)
Que 1 a)
Calculation of monthly payment
Loan
$
2,00,00,000
Tenure (months) 120
Interest rate
monthly 0.67%
EMI $2,42,655
This explains that the EMI of the company is $ 2,42,655.
1.2)
Question 1b)
Calculation of monthly interest
Loan amount $2,00,00,000
EMI $2,42,655
Interest amount
(Balance loan
amount * interest
rate) $1,33,333
(Tucker, 2011)
The interest payment of first month would be $ 1,33,333.
1.3)

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3
Question 1c)
Calculation of monthly interest
Loan amount $2,00,00,000
EMI $2,42,655
Interest amount
(Balance loan
amount * interest
rate) $1,33,333
Principle amount
(EMI - Interest
amount) $1,09,322
The principle payment of company would be $ 1,09,322.
1.4)
Que 1d)
Calculation of loan amount after 3
year
Loan $2,00,00,000
Less: total Principle
amount in 3 years 44,31,422
Balance Amount 1,55,68,577.62
Loan Schedule
EMI No.
Opening balance
loan EMI Interest
Closing balance
loan
1 2,00,00,000 2,42,655.19 1,33,333 1,98,90,678
2 1,98,90,678 2,42,655.19 1,32,604.52 1,97,80,627
3 1,97,80,627 2,42,655.19 1,31,870.85 1,96,69,843
4 1,96,69,843 2,42,655.19 1,31,132.29 1,95,58,320
5 1,95,58,320 2,42,655.19 1,30,388.80 1,94,46,054
6 1,94,46,054 2,42,655.19 1,29,640.36 1,93,33,039
7 1,93,33,039 2,42,655.19 1,28,886.93 1,92,19,271
8 1,92,19,271 2,42,655.19 1,28,128.47 1,91,04,744
9 1,91,04,744 2,42,655.19 1,27,364.96 1,89,89,454
10 1,89,89,454 2,42,655.19 1,26,596.36 1,88,73,395
11 1,88,73,395 2,42,655.19 1,25,822.63 1,87,56,562
12 1,87,56,562 2,42,655.19 1,25,043.75 1,86,38,951

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13 1,86,38,951 2,42,655.19 1,24,259.67 1,85,20,555
14 1,85,20,555 2,42,655.19 1,23,470.37 1,84,01,371
15 1,84,01,371 2,42,655.19 1,22,675.80 1,82,81,391
16 1,82,81,391 2,42,655.19 1,21,875.94 1,81,60,612
17 1,81,60,612 2,42,655.19 1,21,070.75 1,80,39,028
18 1,80,39,028 2,42,655.19 1,20,260.18 1,79,16,633
19 1,79,16,633 2,42,655.19 1,19,444.22 1,77,93,422
20 1,77,93,422 2,42,655.19 1,18,622.81 1,76,69,389
21 1,76,69,389 2,42,655.19 1,17,795.93 1,75,44,530
22 1,75,44,530 2,42,655.19 1,16,963.53 1,74,18,838
23 1,74,18,838 2,42,655.19 1,16,125.59 1,72,92,309
24 1,72,92,309 2,42,655.19 1,15,282.06 1,71,64,936
25 1,71,64,936 2,42,655.19 1,14,432.90 1,70,36,713
26 1,70,36,713 2,42,655.19 1,13,578.09 1,69,07,636
27 1,69,07,636 2,42,655.19 1,12,717.57 1,67,77,699
28 1,67,77,699 2,42,655.19 1,11,851.32 1,66,46,895
29 1,66,46,895 2,42,655.19 1,10,979.30 1,65,15,219
30 1,65,15,219 2,42,655.19 1,10,101.46 1,63,82,665
31 1,63,82,665 2,42,655.19 1,09,217.77 1,62,49,228
32 1,62,49,228 2,42,655.19 1,08,328.18 1,61,14,901
33 1,61,14,901 2,42,655.19 1,07,432.67 1,59,79,678
34 1,59,79,678 2,42,655.19 1,06,531.19 1,58,43,554
35 1,58,43,554 2,42,655.19 1,05,623.69 1,57,06,523
36 1,57,06,523 2,42,655.19 1,04,710.15 1,55,68,578
Total principle amount 44,31,422.38
1.5)
In case of 8%
Total EMI amount 2,03,83,035.85
Total interest
amount 48,14,458
48,14,458
In case of 7%
Total EMI amount 1,97,37,611
Total interest
amount 41,69,033

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5
Refinanced cost 2,50,000
44,19,033
Que 1 e)
Calculation of monthly payment
Loan
$
1,55,68,578
Tenure (months) 84
Interest rate
monthly 0.58%
EMI $2,34,972
Loan Schedule
EMI No.
Opening balance
loan EMI Interest
Closing balance
loan
37 1,55,68,578 2,42,655.19 1,03,791 1,54,29,713
38 1,54,29,713 2,42,655.19 1,02,865 1,52,89,923
39 1,52,89,923 2,42,655.19 1,01,933 1,51,49,200
40 1,51,49,200 2,42,655.19 1,00,995 1,50,07,540
41 1,50,07,540 2,42,655.19 1,00,050 1,48,64,935
42 1,48,64,935 2,42,655.19 99,100 1,47,21,379
43 1,47,21,379 2,42,655.19 98,143 1,45,76,866
44 1,45,76,866 2,42,655.19 97,179 1,44,31,390
45 1,44,31,390 2,42,655.19 96,209 1,42,84,944
46 1,42,84,944 2,42,655.19 95,233 1,41,37,522
47 1,41,37,522 2,42,655.19 94,250 1,39,89,117
48 1,39,89,117 2,42,655.19 93,261 1,38,39,723
49 1,38,39,723 2,42,655.19 92,265 1,36,89,332
50 1,36,89,332 2,42,655.19 91,262 1,35,37,939
51 1,35,37,939 2,42,655.19 90,253 1,33,85,537
52 1,33,85,537 2,42,655.19 89,237 1,32,32,119
53 1,32,32,119 2,42,655.19 88,214 1,30,77,678
54 1,30,77,678 2,42,655.19 87,185 1,29,22,207
55 1,29,22,207 2,42,655.19 86,148 1,27,65,700
56 1,27,65,700 2,42,655.19 85,105 1,26,08,149
57 1,26,08,149 2,42,655.19 84,054 1,24,49,549
58 1,24,49,549 2,42,655.19 82,997 1,22,89,890
59 1,22,89,890 2,42,655.19 81,933 1,21,29,168

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60 1,21,29,168 2,42,655.19 80,861 1,19,67,374
61 1,19,67,374 2,42,655.19 79,782 1,18,04,501
62 1,18,04,501 2,42,655.19 78,697 1,16,40,543
63 1,16,40,543 2,42,655.19 77,604 1,14,75,491
64 1,14,75,491 2,42,655.19 76,503 1,13,09,339
65 1,13,09,339 2,42,655.19 75,396 1,11,42,079
66 1,11,42,079 2,42,655.19 74,281 1,09,73,705
67 1,09,73,705 2,42,655.19 73,158 1,08,04,208
68 1,08,04,208 2,42,655.19 72,028 1,06,33,580
69 1,06,33,580 2,42,655.19 70,891 1,04,61,816
70 1,04,61,816 2,42,655.19 69,745 1,02,88,906
71 1,02,88,906 2,42,655.19 68,593 1,01,14,844
72 1,01,14,844 2,42,655.19 67,432 99,39,621
73 99,39,621 2,42,655.19 66,264 97,63,230
74 97,63,230 2,42,655.19 65,088 95,85,663
75 95,85,663 2,42,655.19 63,904 94,06,912
76 94,06,912 2,42,655.19 62,713 92,26,969
77 92,26,969 2,42,655.19 61,513 90,45,827
78 90,45,827 2,42,655.19 60,306 88,63,478
79 88,63,478 2,42,655.19 59,090 86,79,912
80 86,79,912 2,42,655.19 57,866 84,95,123
81 84,95,123 2,42,655.19 56,634 83,09,102
82 83,09,102 2,42,655.19 55,394 81,21,841
83 81,21,841 2,42,655.19 54,146 79,33,332
84 79,33,332 2,42,655.19 52,889 77,43,565
85 77,43,565 2,42,655.19 51,624 75,52,534
86 75,52,534 2,42,655.19 50,350 73,60,229
87 73,60,229 2,42,655.19 49,068 71,66,642
88 71,66,642 2,42,655.19 47,778 69,71,764
89 69,71,764 2,42,655.19 46,478 67,75,587
90 67,75,587 2,42,655.19 45,171 65,78,103
91 65,78,103 2,42,655.19 43,854 63,79,302
92 63,79,302 2,42,655.19 42,529 61,79,175
93 61,79,175 2,42,655.19 41,195 59,77,714
94 59,77,714 2,42,655.19 39,851 57,74,911
95 57,74,911 2,42,655.19 38,499 55,70,755
96 55,70,755 2,42,655.19 37,138 53,65,238
97 53,65,238 2,42,655.19 35,768 51,58,351
98 51,58,351 2,42,655.19 34,389 49,50,085
99 49,50,085 2,42,655.19 33,001 47,40,430
100 47,40,430 2,42,655.19 31,603 45,29,378
101 45,29,378 2,42,655.19 30,196 43,16,919
102 43,16,919 2,42,655.19 28,779 41,03,043

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103 41,03,043 2,42,655.19 27,354 38,87,741
104 38,87,741 2,42,655.19 25,918 36,71,005
105 36,71,005 2,42,655.19 24,473 34,52,823
106 34,52,823 2,42,655.19 23,019 32,33,186
107 32,33,186 2,42,655.19 21,555 30,12,086
108 30,12,086 2,42,655.19 20,081 27,89,511
109 27,89,511 2,42,655.19 18,597 25,65,453
110 25,65,453 2,42,655.19 17,103 23,39,900
111 23,39,900 2,42,655.19 15,599 21,12,845
112 21,12,845 2,42,655.19 14,086 18,84,275
113 18,84,275 2,42,655.19 12,562 16,54,182
114 16,54,182 2,42,655.19 11,028 14,22,554
115 14,22,554 2,42,655.19 9,484 11,89,383
116 11,89,383 2,42,655.19 7,929 9,54,657
117 9,54,657 2,42,655.19 6,364 7,18,366
118 7,18,366 2,42,655.19 4,789 4,80,500
119 4,80,500 2,42,655.19 3,203 2,41,048
120 2,41,048 2,42,655.19 1,607 (0)
(Sherman, 2005)
Loan Schedule
EMI
No.
Opening
balance loan EMI Interest
Closing
balance
loan
37 1,55,68,578 2,34,972 90,817 1,54,24,423
38 1,54,24,423 2,34,972 89,976 1,52,79,427
39 1,52,79,427 2,34,972 89,130 1,51,33,585
40 1,51,33,585 2,34,972 88,279 1,49,86,893
41 1,49,86,893 2,34,972 87,424 1,48,39,345
42 1,48,39,345 2,34,972 86,563 1,46,90,936
43 1,46,90,936 2,34,972 85,697 1,45,41,662
44 1,45,41,662 2,34,972 84,826 1,43,91,517
45 1,43,91,517 2,34,972 83,951 1,42,40,496
46 1,42,40,496 2,34,972 83,070 1,40,88,594
47 1,40,88,594 2,34,972 82,183 1,39,35,806
48 1,39,35,806 2,34,972 81,292 1,37,82,126
49 1,37,82,126 2,34,972 80,396 1,36,27,550
50 1,36,27,550 2,34,972 79,494 1,34,72,073
51 1,34,72,073 2,34,972 78,587 1,33,15,688
52 1,33,15,688 2,34,972 77,675 1,31,58,392
53 1,31,58,392 2,34,972 76,757 1,30,00,177
54 1,30,00,177 2,34,972 75,834 1,28,41,040
55 1,28,41,040 2,34,972 74,906 1,26,80,975

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56 1,26,80,975 2,34,972 73,972 1,25,19,976
57 1,25,19,976 2,34,972 73,033 1,23,58,037
58 1,23,58,037 2,34,972 72,089 1,21,95,154
59 1,21,95,154 2,34,972 71,138 1,20,31,321
60 1,20,31,321 2,34,972 70,183 1,18,66,532
61 1,18,66,532 2,34,972 69,221 1,17,00,782
62 1,17,00,782 2,34,972 68,255 1,15,34,065
63 1,15,34,065 2,34,972 67,282 1,13,66,376
64 1,13,66,376 2,34,972 66,304 1,11,97,708
65 1,11,97,708 2,34,972 65,320 1,10,28,056
66 1,10,28,056 2,34,972 64,330 1,08,57,415
67 1,08,57,415 2,34,972 63,335 1,06,85,778
68 1,06,85,778 2,34,972 62,334 1,05,13,141
69 1,05,13,141 2,34,972 61,327 1,03,39,496
70 1,03,39,496 2,34,972 60,314 1,01,64,838
71 1,01,64,838 2,34,972 59,295 99,89,161
72 99,89,161 2,34,972 58,270 98,12,460
73 98,12,460 2,34,972 57,239 96,34,727
74 96,34,727 2,34,972 56,203 94,55,958
75 94,55,958 2,34,972 55,160 92,76,147
76 92,76,147 2,34,972 54,111 90,95,286
77 90,95,286 2,34,972 53,056 89,13,370
78 89,13,370 2,34,972 51,995 87,30,393
79 87,30,393 2,34,972 50,927 85,46,349
80 85,46,349 2,34,972 49,854 83,61,231
81 83,61,231 2,34,972 48,774 81,75,034
82 81,75,034 2,34,972 47,688 79,87,750
83 79,87,750 2,34,972 46,595 77,99,373
84 77,99,373 2,34,972 45,496 76,09,898
85 76,09,898 2,34,972 44,391 74,19,318
86 74,19,318 2,34,972 43,279 72,27,625
87 72,27,625 2,34,972 42,161 70,34,815
88 70,34,815 2,34,972 41,036 68,40,880
89 68,40,880 2,34,972 39,905 66,45,813
90 66,45,813 2,34,972 38,767 64,49,609
91 64,49,609 2,34,972 37,623 62,52,260
92 62,52,260 2,34,972 36,472 60,53,760
93 60,53,760 2,34,972 35,314 58,54,102
94 58,54,102 2,34,972 34,149 56,53,280
95 56,53,280 2,34,972 32,977 54,51,286
96 54,51,286 2,34,972 31,799 52,48,113
97 52,48,113 2,34,972 30,614 50,43,756
98 50,43,756 2,34,972 29,422 48,38,206

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99 48,38,206 2,34,972 28,223 46,31,457
100 46,31,457 2,34,972 27,017 44,23,502
101 44,23,502 2,34,972 25,804 42,14,335
102 42,14,335 2,34,972 24,584 40,03,947
103 40,03,947 2,34,972 23,356 37,92,332
104 37,92,332 2,34,972 22,122 35,79,482
105 35,79,482 2,34,972 20,880 33,65,391
106 33,65,391 2,34,972 19,631 31,50,051
107 31,50,051 2,34,972 18,375 29,33,454
108 29,33,454 2,34,972 17,112 27,15,595
109 27,15,595 2,34,972 15,841 24,96,464
110 24,96,464 2,34,972 14,563 22,76,055
111 22,76,055 2,34,972 13,277 20,54,361
112 20,54,361 2,34,972 11,984 18,31,373
113 18,31,373 2,34,972 10,683 16,07,084
114 16,07,084 2,34,972 9,375 13,81,487
115 13,81,487 2,34,972 8,059 11,54,574
116 11,54,574 2,34,972 6,735 9,26,338
117 9,26,338 2,34,972 5,404 6,96,770
118 6,96,770 2,34,972 4,064 4,65,863
119 4,65,863 2,34,972 2,718 2,33,609
120 2,33,609 2,34,972 1,363 0
1.6)
Que 1 f)
Calculation of quarterly payment
Loan
$
2,00,00,000
Tenure (months) 40
Interest rate
monthly 1.75%
EMI $6,99,442
1.7)
Que 1 g)
Calculation of quarterly payment
Loan
$
2,00,00,000
Tenure (months) 40

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10
Interest rate
monthly 1.75%
EMI $6,99,442
Amount after 3
years 1,53,78,596
Loan Schedule
EMI No.
Opening balance
loan EMI Interest
Closing balance
loan
1 2,00,00,000 6,99,442 3,50,000 1,96,50,558
2 1,96,50,558 6,99,442 3,43,885 1,92,95,001
3 1,92,95,001 6,99,442 3,37,663 1,89,33,222
4 1,89,33,222 6,99,442 3,31,331 1,85,65,111
5 1,85,65,111 6,99,442 3,24,889 1,81,90,559
6 1,81,90,559 6,99,442 3,18,335 1,78,09,452
7 1,78,09,452 6,99,442 3,11,665 1,74,21,676
8 1,74,21,676 6,99,442 3,04,879 1,70,27,113
9 1,70,27,113 6,99,442 2,97,974 1,66,25,646
10 1,66,25,646 6,99,442 2,90,949 1,62,17,153
11 1,62,17,153 6,99,442 2,83,800 1,58,01,511
12 1,58,01,511 6,99,442 2,76,526 1,53,78,596
(Phillips & Stawarski, 2016)
1.8)
Que 1 h)
Calculation of annual % rate
Interest rate 8.00%
1.9)
Que 1 i)
Calculation of Effective annual rate
Interest rate 8.00%
Compounding
monthly 12
EAR 0.67%

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Part B:
2.1)
Que 1a)
Calculation of required return
Calculation of required return
Face value
$
100
Time 10
Current selling price
$
78.12
Required rate of
return 3.28%
2.2)
Que 1b)
Calculation of bond return
Market price
$
100
Face value
$
78.12
Rate 3.28%
Return
$
3.28
2.3)
Que 1c)
Rate 2.50%
Time 10
Market's required rate of
return
3.28%
Coupon rate 3.28%
Par value $
1,000
Calculation of bond return

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12
Market price $ 1,000
Coupon rate 3.28%
Interest rate 2.50%
Return $ 287.07
It explains that the return of second bond option is way better than the first option.
Part C:
Quarterly dividend $ 3.28
Past quarterly dividend $ 3.12
Growth rate 5%
Market return 11%
Next annual dividend $ 3.70
Calculation of cost of Share price
Dividend expected $ 3.70
Growth rate 5%
Rate of return 11.00%
Share price $ 61.67
Formula = Growth rate = (dividend/ share price)- cost of equity
Calculation of required rate of
return
Dividend expected $ 3.75
Growth rate 5%
Share price $ 61.67
Rate of return 11.08%
(Niu, 2006)
Part D:
A) Systematic risk
B) Systematic risk
C) Unsystematic risk
D) Unsystematic risk

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E) Unsystematic risk

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Part E)
Year Cash Flows
1
$
18,000
2
$
22,500
3
$
27,000
4
$
31,500
5
$
36,000
5.1)
Payback period
Time Cash Flow
Cumulative Cash
Flow
0
$ -
85,000 $ -85,000
1
$
18,000 -62500
2
$
22,500 -35500
3
$
27,000 -4000
4
$
31,500 32000
5
$
36,000 32000
Payback
Period 3.13
5.2)
Net Present Value
Time Cash Flow Discount rate Cash flow
0 $ -85,000 1 -85000
1 $ 18,000 0.893 16071

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2 $ 22,500 0.797 17937
3 $ 27,000 0.712 19218
4 $ 31,500 0.636 20019
5 $ 36,000 0.567 20427
Net Present Value 8673
5.3)
Calculation of IRR
Year Cash Flows
0 $ -85,000
1 $ 18,000
2 $ 22,500
3 $ 27,000
4 $ 31,500
5 $ 36,000
IRR 16%
(Nobes & Parker, 2008)
5.4)
The above capital budgeting evaluation over the investment proposal of the company
explains that this investment opportunity must be accepted by the company as the entire
investment amount would be got back by the company in 3.28 years and the project would
offer positive return to the company. On the other hand, the internal rate of return of the
company is 16% which is way higher than the cost of capital.

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Part F)
6.1)
Net Present Value Net Present Value
Tim
e Cash Flow
Discount
rate Cash flow
Ti
me Cash Flow
Discount
rate
Cash
flow
0
$ -
90,00,000 1 -9000000 0
$ -
10,00,000 1
-
1000000
1
$
35,00,000 0.87 3043478 1
$
6,00,000 0.87 521739
2
$
30,00,000 0.76 2268431 2
$
5,00,000 0.76 378072
3
$
30,00,000 0.66 1972549 3
$
4,00,000 0.66 263006
4
$
28,00,000 0.57 1600909 4
$
3,00,000 0.57 171526
5
$
25,00,000 0.50 1242942 5
$
2,00,000 0.50 99435
Net Present Value
$
11,28,309 Net Present Value
$
4,33,779
(Moles, Parrino and Kidwekk, 2011)
According to this calculation, project A is way better than project B.
6.2)
Calculation of IRR Calculation of IRR
Year Cash Flows Year Cash Flows
0 $ -90,00,000 0 $ -10,00,000
1 $ 35,00,000 1 $ 6,00,000
2 $ 30,00,000 2 $ 5,00,000
3 $ 30,00,000 3 $ 4,00,000
4 $ 28,00,000 4 $ 3,00,000
5 $ 25,00,000 5 $ 2,00,000
IRR 20% IRR 36%
According to this calculation, project B is way better than project A.
6.3)
According to the above evaluation, in case of NPV, project A is better and in case of
IRR, project B is better. These differences have occurred due to different methods and

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17
techniques. In case of profit, the project A is better but in case of cost, company should go for
project B. The decision depends on the company (Marginson, 2009).

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18
Part G)
Year Project A
P.V. factor Present value
0 $ -20,000 1 -20000
1 $ 3,000 0.86957 2609
2 $ 3,000 0.75614 2268
3 $ 3,000 0.65752 1973
4 $ 3,000 0.57175 1715
5 $ 3,000 0.49718 1492
6 $ 3,000 0.43233 1297
7 $ 3,000 0.37594 1128
8 $ 3,000 0.3269 981
9 $ 3,000 0.28426 853
10 $ 3,000 0.24718 742
NPV -4943.69
Year Project A
P.V. factor Present value
0 $ -6,00,000 1 -600000
1 $ 1,20,000 0.86957 104348
2 $ 1,45,000 0.75614 109641
3 $ 1,70,000 0.65752 111778
4 $ 1,90,000 0.57175 108633
5 $ 2,20,000 0.49718 109379
6 $ 2,40,000 0.43233 103759
NPV 47537.04
Year Project C
P.V. factor Present value
0 $-1,50,000.00 1 -150000
1 $ 18,000.00 0.86957 15652
2 $ 17,000.00 0.75614 12854
3 $ 16,000.00 0.65752 10520
4 $ 15,000.00 0.57175 8576
5 $ 15,000.00 0.49718 7458

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6 $ 14,000.00 0.43233 6053
7 $ 13,000.00 0.37594 4887
8 $ 12,000.00 0.3269 3923
9 $ 11,000.00 0.28426 3127
10 $ 10,000.00 0.24718 2472
NPV -74478
(Hillier, Grinblatt and Titman, 2011)
Year Project A
P.V. factor Present value
0 $ -1,00,000 1 -100000
1 $ - 0.86957 0
2 $ - 0.75614 0
3 $ - 0.65752 0
4 $ 25,000 0.57175 14294
5 $ 36,000 0.49718 17898
6 $ - 0.43233 0
7 $ 60,000 0.37594 22556
8 $ 72,000 0.3269 23537
9 $ 84,000 0.28426 23878
10
NPV 2163.39
The above evaluation explains that the project A must not be accepted by the
company as it would offer negative return to the company. On the other hand, project B,
Project C, Project D and Project E must be accepted by the company due to their higher and
positive return.

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20
Part H)
Cash
Flows
Alpha Beta Gamma
($ in
millions)
($ in
millions)
($ in
millions)
Initial
Outflow
– 1.5 – 0.4 – 7.5
Year 1 0.3 0.1 2
Year 2 0.5 0.2 3
Year 3 0.5 0.2 2
Year 4 0.4 0.1 1.5
Year 5 0.3 – 0.2 5.5
8.1)
Payback period Payback period
Time
Cash
Flow
Cumul
ative
Cash
Flow Time
Cash
Flow
Cumul
ative
Cash
Flow Time
Cash
Flow
Cumul
ative
Cash
Flow
($ in
millio
ns)
($ in
millio
ns)
($ in
millio
ns)
($ in
millio
ns)
($ in
millio
ns)
($ in
millio
ns)
0
$
-1.50
$ -
1.50 0
$ -
0.40
$ -
0.40 0
$ -
7.50
$ -
7.50
1
$
0.30
$ -
1.00 1
$
0.10
$ -
0.20 1
$
2.00
$ -
4.50
2
$
0.50
$ -
0.50 2
$
0.20
$
- 2
$
3.00
$ -
2.50
3
$
0.50
$ -
0.10 3
$
0.20
$
0.10 3
$
2.00
$ -
1.00
4
$
0.40
$
0.20 4
$
0.10
$
0.20 4
$
1.50
$
4.50
5
$
0.30
$
0.20 5
– 0.2 $
0.20 5
$
5.50
$
4.50
Payback
Period 3.25
Paybac
k Period 2.00
Paybac
k
Period 3.67
(Glajnaric, 2016)
8.2)

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21
According to the above evaluation project Alpha is way better than any other project.
8.3)
If the shortest payback period is chose by the company than the company should go
for project Beta.
8.4)
Payback period Payback period Payback period
Time
Cash
Flo
w
Discou
nted
paybac
k
Cum
ulati
ve
Cash
Flo
w Time
Cash
Flo
w
Disc
ount
ed
payb
ack
Cu
mul
ativ
e
Cas
h
Flo
w Time
Cash
Flo
w
Disc
ount
ed
payb
ack
Cu
mul
ativ
e
Cas
h
Flo
w
($ in
milli
ons)
($ in
milli
ons)
($ in
milli
ons)
($ in
milli
ons)
($ in
milli
ons)
($ in
milli
ons)
0 -1.5 -1.30
-
1.30 0 -0.4
-
0.35
-
0.3
5 0
$ -
7.50
-
6.52
-
6.5
2
1 0.3 0.26
-
1.04 1 0.1 0.09
-
0.2
6 1
$
2.00 1.74
-
4.7
8
2 0.5 0.43
-
0.61 2 0.2 0.17
-
0.0
9 2
$
3.00 2.61
-
2.1
7
3 0.5 0.43
-
0.17 3 0.2 0.17
0.0
9 3
$
2.00 1.74
-
0.4
3
4 0.4 0.35 0.17 4 0.1 0.09
0.1
7 4
$
1.50 1.30
0.8
7
5 0.3 0.26 0.43 5 -0.2
-
0.17
0.0
0 5
$
5.50 4.78
5.6
5
Payb
ack
Perio
d 3.50
Payb
ack
Perio
d
2.5
0
Payb
ack
Perio
d
0.7
0
Project Alpha must be accepted by the company (Daodaran, 2011).
8.5)

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22
According to the above evaluation, project alpha should be accepted.
8.6)
If the opportunity cost of the company is very higher than the Gamma project should
be accepted by the company.

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23
Part I)
Financial Data
Description JB Hi-FI Limited ($M)
2017 2016 2015 2014 2013
Revenue 5628 3954 3652 3484 3308
Cost of goods sold 4398 3089 2854 2745 2610
Gross profit 1230 865 798 739 698
Operating profit 268 221 201 191 178
Net profit 172 152 137 128 116
Interest 11 4 6 9 10
Inventory 860 546 479 459 426
Current assets 1171 703 617 578 564
Cash and cash
equivalents 73 52 49 43 67
Receivables 197 98 81 71 64
Current liabilities 886 447 380 352 442
Payables 584 302 254 244 335
Shares outstanding 439 49 57 58 63
Equity 854 405 343 295 243
Total liabilities 1599 588 552 565 600
Total assets 2453 993 895 860 843
Market share price 23.86
Long-term debt 559 110 139 180 124
Description Formula JB Hi-FI Limited
2017 2016 2015 2014 2013
Profitability
Return on equity Net profit/revenues 3.06% 3.84% 3.75% 3.67% 3.51%
Return on assets Net profit/Equity
20.14
%
37.53
%
39.94
%
43.39
%
47.74
%
Profit margin Net profit / Sales 3.06% 3.84% 3.75% 3.67% 3.51%
Asset turnover
total assets / total sales
*365 (Davies and
Crawford, 2011)
159.0
88
91.66
54
89.45
1
90.09
76
93.01
54

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24
Price earnings ratio
Market value per
share / Earnings per
share
15.49
35
Liquidity
Cash ratio
cash equivalents +
cash / current
liabilities
0.082
39
0.116
33
0.128
95
0.122
16
0.151
58
Capital intensity ratio Total assets /sales 0.44 0.25 0.25 0.25 0.25
Quick Ratio
Current assets-
Inventory/current
liabilities 0.35 0.35 0.36 0.34 0.31
Solvency
Times interest earned
EBIT / Interest
expenses
24.36
36 55.25 33.5
21.22
22 17.8
Long term debt ratio
Long term debt/ total
assets 0.23 0.11 0.16 0.21 0.15
Equity multiplier
Total assets /
stockholder's equity 2.87 2.45 2.61 2.92 3.47
Part J)
10.1)
Calculation of cost of equity (CAPM)
Fire Water Air
RF 4.00% 4.00% 4.00%
RM 12.00% 12.00% 12.00%
Beta 0.85 1.25 1.6
Required rate of return 10.80% 14.00% 16.80%
(Borio, 2014)

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10.2)
Name of Company
$m
invested
Required
rate of
return Probability
Portfolio
rate
Fire $2 10.80% 0.2 0.0216
Water $3 14.00% 0.3 0.042
Air $5 16.80% 0.5 0.084
TOTAL $10 14.76%
10.3)
Beta
RF 4.00%
RM 12.00%
Required rate of return 14.76%
Beta 1.345
Calculation of required rate of
return
RF 4.00%
RM 12.00%
Beta 1.345
Required rate of return 14.76%
(Bromwich and Bhimani, 2005)
10.4)
Name of Company $m invested
Required
rate of
return Probability
Portfolio
rate
Water $ 4.00 14.00% 0.3 0.042
Air $ 6.00 16.80% 0.5 0.084
TOTAL $ 10.00 12.60%
RM
RF 4.00%
RM 12.00%
Required rate of return 12.60%
Beta 1.075
Calculation of required rate of
return

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26
RF 4.00%
RM 12.00%
Beta 1.075
Required rate of return 12.60%
10.5)
According to the above table, after the changes into the portfolio, the risk of the
company have been lower (Brealey, Myers and Marcus, 2007).

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27
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Borio, C., (2014). The financial cycle & macroeconomics: What have we learnt?. Journal of
Banking & Finance, 45, pp.182-198.
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Bromwich, M. & Bhimani, A., (2005). Management accounting: Pathways to progress. Cima
publishing.
Damodaran, A, (2011), Applied corporate finance,3rd edition, John Wiley & sons, USA
Davies, T. & Crawford, I., (2011). Business accounting & finance. Pearson.
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Hillier, D., Grinblatt, M. & Titman, S., (2011). Financial markets & corporate strategy.
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