Financial Management Assignment: Cash Flow, Risk & Cost of Capital

This assignment solution addresses several key concepts in financial management. Question 1 focuses on cash flow analysis, calculating the initial investment, and determining the Net Present Value (NPV) of a project using a 10% cost of capital, considering revenue, costs, depreciation, and salvage value. Question 2 calculates the variance and standard deviation of returns for a stock over a five-year period, assessing risk. Question 3 involves the time value of money, calculating monthly installments and creating a loan amortization schedule. Question 4 calculates the present value of an annuity. Finally, Question 5 delves into the cost of capital, computing the cost of equity, preference shares, and debt to determine the Weighted Average Cost of Capital (WACC), and also makes investment decisions based on the lowest cost and highest returns. The solution demonstrates the application of various financial formulas and concepts to real-world scenarios.

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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
Calculation of initial investment
Particulars Amount
Price of still 600000
transportation cost 60000
Installation cost 40000
Working capital 30000
Initial outlay 730000
Particu
lars
1 2 3 4 5 6 7 8 9 10 Tot
al
Increas
e in
revenue
120000 12000
0
1200
00
1200
00
12000
0
1200
00
1200
00
1200
00
1200
00
1200
00
Increas
e in
cost
20000 20000 2000
0
2000
0
20000 2000
0
2000
0
2000
0
2000
0
2000
0
Depreci
ation
118000 11800
0
1180
00
1180
00
11800
0
Net
profit
-18000 -
18000
-
1800
0
-
1800
0
-
18000
1000
00
1000
00
1000
00
1000
00
1000
00
Tax @
30%
-5400 -5400 -5400 -
5400
-5400 3000
0
3000
0
3000
0
3000
0
3000
0
Net
profit
after tax
-12600 -
12600
-
1260
0
-
1260
0
-
12600
7000
0
7000
0
7000
0
7000
0
7000
0
Depreci
ation
118000 11800
0
1180
00
1180
00
11800
0
Salvage
value of
asset
1000
0
Workin
g
capital
recover
y
3000
0
Cash
flows
105400 10540
0
1054
00
1054
00
10540
0
7000
0
7000
0
7000
0
7000
0
1100
00
PVF @
10%
0.909 0.826 0.751 0.68
3
0.621 0.56
4
0.51
3
0.46
7
0.42
4
0.38
6
PV of 95818.1 87107 7918 7198 65445 3951 3592 3265 2968 4240 579

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inflows 8182 .438 8.58 9.6 .107 3.2 1.1 5.5 6.8 9.8 735
Initial
outlay
730
000
NPV -
150
265
Question 2
Calculation of variance and standard deviation
year Return
1 20
2 -10
3 -30
4 5
5 15
Variance 412.5
Standard deviation 20.31009601
Question 3
Calculation of monthly installment
Particulars Amount
Loan amount 17999
Down payment 2000
Loan to be repaid -15999
Rate of interest 1.25%
Number of
installments
36
Monthly installment $554.61
Loan amortization schedule
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

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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
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
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

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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
Dividend on equity 3.6
D1 3.924
Current price P0 54
growth 0.09
Dividend on preference stock
D
11
Net proceeds(NP) 95
coupon rate 11.115
tax rate 40%
Calculation of cost of capital
Particulars Formula Cost of
capital
Cost of equity (D1/Po)+g 15.67%
Cost of preference
share
D/NP 11.58%
Cost of debt Coupon rate(1-tax) 6.67
Calculation of weighted average cost of capital
Particulars weight cost of
fund
Weighted
rate
Equity 60% 15.67 9.402
Preference share 15% 11.58 1.737
Debt 25% 6.67 1.6675
Total 12.8065
WACC 12.81%
The project A will be selected as it is having the lowest cost of $10000 with the highest returns
of 17.4%.