Financial Management Assignment: NPV, Variance, and WACC Analysis

This financial management assignment solution provides a comprehensive analysis of several key financial concepts. Question 1 focuses on Net Present Value (NPV) analysis, evaluating the acquisition of new equipment, including initial investment, cash flow projections over ten years, and calculating the NPV to determine the project's financial viability. Question 2 delves into risk and return, calculating the variance and standard deviation of stock returns over a five-year period. Question 3 addresses the time value of money, specifically calculating monthly loan installments and constructing a loan amortization schedule. Question 4 explores present value calculations, determining the present value of a series of cash flows. Finally, Question 5 covers cost of capital and weighted average cost of capital (WACC) calculations, including the cost of equity, debt, and preference shares, and determining the optimal project based on the lowest cost and highest return, along with references.

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Financial management

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Table of Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................4
Question 4........................................................................................................................................5
Question 5........................................................................................................................................6

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Question 1
Initial investment
Particulars Amount
Still price 600000
+ Cost of
transportation
60000
+ Cost of installation 40000
+ Working capital 30000
Initial outlay 730000
Particulars 1 2 3 4 5 6 7 8 9 10 Tot
al
Revenue 120000 12000
0
1200
00
120
000
12000
0
120
000
120
000
120
000
120
000
120
000
Cost 20000 20000 2000
0
200
00
20000 200
00
200
00
200
00
200
00
200
00
Depreciation 118000 11800
0
1180
00
118
000
11800
0
Net profit -18000 -
18000
-
1800
0
-
180
00
-
18000
100
000
100
000
100
000
100
000
100
000
Tax @ 30% -5400 -5400 -
5400
-
540
0
-5400 300
00
300
00
300
00
300
00
300
00
NPAT -12600 -
12600
-
1260
0
-
126
00
-
12600
700
00
700
00
700
00
700
00
700
00
Depreciation 118000 11800
0
1180
00
118
000
11800
0
Residual
value of an
asset
100
00
Recovery of Working
capital
300
00
Cash flows 105400 10540
0
1054
00
105
400
10540
0
700
00
700
00
700
00
700
00
110
000
PVF @ 10% 0.909 0.826 0.75
1
0.68
3
0.621 0.56
4
0.51
3
0.46
7
0.42
4
0.38
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PV of
inflows
95818.
18182
87107
.438
7918
8.58
719
89.6
65445
.107
395
13.2
359
21.1
326
55.5
296
86.8
424
09.8
579
735
Initial cost 730

4
000
NPV -
150
265
(Source: Žižlavský, 2014)
NPV = PV of inflows – PV of outflows
= 579735-730000
= -150265
Question 2
Variance and standard deviation
year Return
1 20
2 -10
3 -30
4 5
5 15
Variance 330
Standard deviation 18.16590212
Variance = average of squares of deviation from mean
Mean = (20-10-30+5+15)/5 = 0
Variance = (20)2+(-10)2+(-30)2+(5)2+(15)2/5
=330
Standard deviation = √variance
=√330
=18.166
Question 3
Monthly installment
Particulars Amount
Loan Value 17999
Initial payment 2000

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Remaining amount -15999
Interest rate 1.25%
Number of
installments
36
Monthly installment $554.61
Monthly Payment = P (r(1+r)^n)/((1+r)^n-1)
= 15999 [0.0125(1+0.0125)^36/(1+0.0125)^36 -1]
= $554.61
Schedule of Loan amortization
Months Opening
balance
Installment Principal Interest closing
balance
1 $15,999.00 $554.61 $354.62 199.99 $15,644.38
2 $15,644.38 $554.61 $359.06 195.55 $15,285.32
3 $15,285.32 $554.61 $363.54 191.07 $14,921.78
4 $14,921.78 $554.61 $368.09 186.52 $14,553.69
5 $14,553.69 $554.61 $372.69 181.92 $14,181.00
6 $14,181.00 $554.61 $377.35 177.26 $13,803.65
7 $13,803.65 $554.61 $382.06 172.55 $13,421.59
8 $13,421.59 $554.61 $386.84 167.77 $13,034.75
9 $13,034.75 $554.61 $391.68 162.93 $12,643.07
10 $12,643.07 $554.61 $396.57 158.04 $12,246.50
11 $12,246.50 $554.61 $401.53 153.08 $11,844.97
12 $11,844.97 $554.61 $406.55 148.06 $11,438.43
13 $11,438.43 $554.61 $411.63 142.98 $11,026.80
14 $11,026.80 $554.61 $416.78 137.83 $10,610.02
15 $10,610.02 $554.61 $421.98 132.63 $10,188.04
16 $10,188.04 $554.61 $427.26 127.35 $9,760.78
17 $9,760.78 $554.61 $432.60 122.01 $9,328.18
18 $9,328.18 $554.61 $438.01 116.60 $8,890.17
19 $8,890.17 $554.61 $443.48 111.13 $8,446.69
20 $8,446.69 $554.61 $449.03 105.58 $7,997.66
21 $7,997.66 $554.61 $454.64 99.97 $7,543.02
22 $7,543.02 $554.61 $460.32 94.29 $7,082.70
23 $7,082.70 $554.61 $466.08 88.53 $6,616.62
24 $6,616.62 $554.61 $471.90 82.71 $6,144.72
25 $6,144.72 $554.61 $477.80 76.81 $5,666.92
26 $5,666.92 $554.61 $483.77 70.84 $5,183.15
27 $5,183.15 $554.61 $489.82 64.79 $4,693.32

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28 $4,693.32 $554.61 $495.94 58.67 $4,197.38
29 $4,197.38 $554.61 $502.14 52.47 $3,695.24
30 $3,695.24 $554.61 $508.42 46.19 $3,186.82
31 $3,186.82 $554.61 $514.77 39.84 $2,672.04
32 $2,672.04 $554.61 $521.21 33.40 $2,150.84
33 $2,150.84 $554.61 $527.72 26.89 $1,623.11
34 $1,623.11 $554.61 $534.32 20.29 $1,088.79
35 $1,088.79 $554.61 $541.00 13.61 $547.79
36 $547.79 $554.61 $547.76 6.85 $0.03
Question 4
Present value = Amount * PVF at discount rate
Year Amount PVF@14% PV
0 24000 1 24000
1 24000 0.87719298 21052.63
2 24000 0.76946753 18467.22
3 24000 0.67497152 16199.32
4 24000 0.59208028 14209.93
5 24000 0.59208028 14209.93
6 24000 0.45558655 10934.08
7 24000 0.39963732 9591.296
8 24000 0.35055905 8413.417
9 24000 0.30750794 7380.191
10 24000 0.26974381 6473.851
Total 150931.9
Question 5
Particulars amount
Equity dividend 3.6
Dividend on preference stock
D
11
growth rate 0.09
Dividend after a year D1 3.924
Current share price P0 54
Net proceeds (NP) 95

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tax rate 40%
coupon rate 11.115
Cost of capital
Particulars Formula Cost of
capital
Cost of equity D1/Po +g 15.67%
Cost of debt Coupon rate(1-tax) 6.67
Cost of preference
share
D/NP 11.58%
Cost of equity = D1/Po +g
= 3.924/54+0.09
= 15.67%
Cost of debt = Coupon rate (1-tax)
= 11.115(1-0.4) = 6.67%
Cost of preference share = D/NP
= 11/95 = 11.58%
The weighted average cost of capital
Particulars weight cost of
fund
Weighted
rate
Equity 60% 15.67 9.402
Debt 25% 6.67 1.6675
Preference share 15% 11.58 1.737
Total 12.8065
WACC 12.81%
WACC = (We*Cost of equity)+( Wd*Cost of debt)+ (Wp*Cost of preference
share)/We+Wd+Wp
WACC = (0.6*15.67)+ (0.25*6.67)+ (0.15*11.58)/1
WACC = 12.81%

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In all the available projects there is the cost and return which has been provided. From the
evaluation of them, it can be noted that the lowest cost will have to be incurred in the project
(Hou et al., 2012). A amounting to $10000. At this value also the earnings which will be made
by it are highest and the company will be earning at the rate of 17.4%. Due to these reasons the
project A will be selected among all.

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References
Hou, K., Van Dijk, M. A., & Zhang, Y. (2012). The implied cost of capital: A new
approach. Journal of Accounting and Economics, 53(3), 504-526.
Žižlavský, O. (2014). Net present value approach: method for economic assessment of
innovation projects. Procedia-Social and Behavioral Sciences, 156, 506-512.