Financial Management Assignment: Detailed Analysis, 2024

This document presents a comprehensive solution to a financial management assignment. It addresses several key concepts including the time value of money, comparing ordinary annuities and annuities due. It provides detailed calculations for loan amortization, bond valuation, and dividend valuation. The assignment also explores investment appraisal techniques, including payback period, discounted payback period, net present value, present value index, and internal rate of return, with a focus on incremental cash flow analysis. The document concludes with a discussion of additional factors to consider when evaluating an investment project.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

1FINANCIAL MANAGEMENT
Table of Contents
Answer to question 1:......................................................................................................................3
Answer to question 2:......................................................................................................................3
Answer to question 3:......................................................................................................................3
Part a:...........................................................................................................................................3
Part b:...........................................................................................................................................4
Answer to question 4:......................................................................................................................4
Part a:...........................................................................................................................................5
Part b:...........................................................................................................................................5
Answer to question 5:......................................................................................................................6
Part a:...........................................................................................................................................6
Part b:...........................................................................................................................................7
Part c:...........................................................................................................................................7
Answer to question 6:......................................................................................................................7
Part a:...........................................................................................................................................7
Part b:...........................................................................................................................................8
Answer to question 7:......................................................................................................................8
Part a:...........................................................................................................................................8
Part b:...........................................................................................................................................9
Part c:...........................................................................................................................................9

2FINANCIAL MANAGEMENT
Part d:...........................................................................................................................................9
Part f:.........................................................................................................................................10
Part g:.........................................................................................................................................10
References and bibliography:........................................................................................................12

3FINANCIAL MANAGEMENT
Answer to question 1:
Year 1 2 3
Income from the trust $ 40,000 $ 30,000 $ 60,000
Consumptions $ -32,000 $ -42,000 $ -
Balance (Income –
Consumption) $ 8,000 $ -12,000 $ 60,000
Compounding factor
@5% p.a. 1.1025 1.0500 1.0000
Compounded value
8000*1.1025 = $
8,820
-12000*1.0500 = $ -
12,600
60000*1.0000 = $
60,000
Consumption in two years = 8820+12600+60000 = $56,220
Answer to question 2:
In an ordinary annuity, the amount is paid at the end of the period whereas in an annuity
due, the amount is paid at the beginning of the period. As per the time value of money concept,
the amount is more preferable at present rather than a certain time period hence. Hence, it is
more beneficial to invest in an annuity due. Amount received from an annuity due at the
beginning of the period can be invested in another investment option. For example, if from an
annuity due, an amount of $10,000 is received at present it can be invested in market or in any
other investment option which can give a significant amount of earnings. If the same amount is
received at the end of the period then there would be a loss of interest earnings (Khan&
Jain2018).
Answer to question 3:
Part a:
Loan amount = $75,000
Interest rate per annum = 7.20%

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Term of loan = 7Years
Number of payments in a year = 4 times
Therefore,
75000=
[ A
7.20 %
4
×
{1− 1
(1+7.20 %
4 )
7 × 4
}]
75000= [ A
0.018 ×0.3918 ]
A=75000 ×0.018
0.3918 = $3,434
A= Installment amount.
Part b:
If the installment amount is $3,867 then,
75000=
[ 3867
7.20 %
4
×
{1− 1
(1+7.20 %
4 )
n × 4
}]
n = Number of years
Solving the above equation, we get,
n = 6
Hence, if the installment amount is $3,867, then the loan could be repaid in 6 years.

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Answer to question 4:
Current age of the individual = 34 Years
Expected age of retirement = 67 Years
Expected age after retirement to be self-financed by pension = 85 Years
Total number of years from the age of 67 till retirement (67-34) = 33 Years
Total number of years form 67 years to 85 years (85-67) = 18 Years
Present balance is share portfolio investment = $47,000
Expected rate of return from share portfolio investment = 7%
Present balance in the superannuation account = $78,000
Contribution to the superannuation account = $1,000 per month
Expected rate of return from the superannuation account = 8%
Interest compounded in year = 12 times
Balance of assets required at the age of 85 years = $120,000
Part a:
Value of share portfolio investment at the age of retirement ¿ [ 47,000 ×(1+7 %)33 ]=$438,291
Value of the superannuation account at the age of retirement
¿ [78,000 ×(1+ 8 %
12 )
33 ×12
]+
[ 1000
8 %
12
× {(1+ 8 %
12 )
33 ×12
−1 }]=¿$3,017,141
Total value of Investment at the age of retirement ($438,291+$3,017,141) = $3,455,432

6FINANCIAL MANAGEMENT
Part b:
Expected rate of return from the investment in retirement scheme = 5%
Interest compounded in a year = 12 times
Monthly annuity (A):
$ 120,000=
[ A
8 %
12
× {(1+ 8 %
12 )
18 ×12
−1 }]
$ 120,000= [ A
0.00667 × {(1+0.00667)18× 12−1 } ]
$ 120,000= [ A
0.00667 ×12.891 ]
A=
[ 120,000× 0.00667
12.891 ]
A = $23,949.22
Answer to question 5:
Face value of bond = $1,000
Annual coupon rate of the bond = 10%
Annual coupon payment of the bond ($1,000*10%) = $100
Semiannual coupon payment ($100/2) = $50
Term of the bond = 8 Years
Market Yield rate = 11.28%

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Part a:
Price of each bond
¿
[1,000 × 1
(1+ 11.28 %
2 )
8 ×2
]+
[ 50
11.28 %
2
×
{1− 1
(1+ 11.28 %
2 )
8 × 2
}]
= $102.36
Part b:
Total capital requirement = $2,800,000
Number of bonds to be issued ($2,800,000/$102.36) = 27,355 bonds
Part c:
If the bonds are issued at the face value, then there is no capital yield, only return is the
interest yield. Hence, if the bonds in the given case needs to be issued at face value, then the
coupon rate should be the market yield rate of 11.28% (Shapiro &Hanouna 2019).
Answer to question 6:
Part a:
Current dividend = $0.55
Required rate of return = 12%
Constant growth rate = 4%
Year 2020 2021 2022 2023 2024
Growth rate 27% 22% 15% 4%
Dividend (Last year’s
return*(1+rowth rate) $ 0.55 $ 0.70 $ 0.85 $ 0.98 $ 1.02
Value of share at January 2024* $ 13.25

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$ 0.55 $ 0.70 $ 0.85 $ 0.98 $ 14.27
Discounting factor @ 12% p.a. 1.0000 0.8929 0.7972 0.7118 0.6355
Discounted value $ 0.55 $ 0.62 $ 0.68 $ 0.70 $ 9.07
* Value of share at January 2024 = 1.02×(1+4 %)
12 %−4 % = $13.25
Value of share = 0.55+0.62+0.68+0.70+9.07 = 11.62
Part b:
Cash Flow Timeline
Jan
2020
Jan
2021
Jan
2022
Jan
2023
Jan
2024
Jan
2024
$ 0.55 $ 0.70 $ 0.85 $ 0.98 $ 1.02 $
13.25
Answer to question 7:
Part a:
Computation of incremental cash
flows:
Year 0 1 2 3 4
Increase in revenue $ - $ 2,50,000 $ 2,50,000 $
2,50,000 $ 2,50,000
Increase in variable costs $ - $ -60,000 $ -60,000 $ -60,000 $ -60,000
Annual depreciation $ - $ -1,12,500 $ -1,12,500 $ -1,12,500 $ -1,12,500
Interest expenses $ - $ -39,375 $ -39,375 $ -39,375 $ -39,375
Opportunity costs $ - $ -30,000 $ -30,000 $ -30,000 $ -30,000
Income tax $ - $ -2,438 $ -2,438 $ -2,438 $ -2,438
Subtotal $ - $ 5,688 $ 5,688 $
5,688 $ 5,688
Depreciation $ - $ 1,12,500 $ 1,12,500 $
1,12,500 $ 1,12,500
Lease compensation $ -33,000 $ - $ - $ - $ -
Additional working capital $ -35,000 $ - $ - $ - $ 35,000

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Investment $ -4,50,000 $ - $ - $ - $ 20,000
Incremental cash flows $ -5,18,000 $ 1,18,188 $ 1,18,188 $
1,18,188 $ 1,73,188
Internal calculations for payback period and discounted payback period:
Cumulative cash flow $ -5,18,000 $ -3,99,813 $ -2,81,625 $ -1,63,438 $ 9,750
Fraction in year 0.943702634
Discounting factor @ 10.25% 1.0000 0.9070 0.8227 0.7462 0.6768
Discounted cash flow
(Cash flow * Discounting factor) $ -5,18,000 $ 1,07,200 $ 97,233 $ 88,193 $ 1,17,220
Cumulative discounted cash flow $ -5,18,000 $ -4,10,800 $ -3,13,567 $ -2,25,374 $ -1,08,154
Fraction in year
Part b:
From the cumulative cash flow, it can be observed that, the cash flow converts into
positive in the year 4. Hence, it takes 3 years full and a part of the year 4 to recover back the
initial investment. Therefore, the payback period can be computed as follows.
Payback period = 3 + ($163,438/$173,118) = 3.94 Years.
Part c:
Net present value = Sum of discounted cash flows = (-518000+107200+97233+88193+117220)
= -$108,154
Part d:
Sum of discounted cash inflows = (107200+97233+88193+117220) = $409,846
Initial investment = $518,000
Present value index = Sum of discounted cash inflows/Initial investment
= 409846/518000 = 0.79

10FINANCIAL MANAGEMENT
Part e:
From the internal calculation table above, it can be observed that, the cumulative
discounted cash flow is negative till the last year of the project. Hence, the discounted payback
period is beyond the project life.
Part f:
Discounting factor @1% 1.0000 0.9901 0.9803 0.9706 0.9610
Discounted cash flow $ -
5,18,000 $ 1,17,017 $ 1,15,859 $ 1,14,712 $ 1,66,430
Net present value = (-518000+117017+115859+114712+166430) = -3983
Discounting factor
@0.5% 1.0000 0.9950 0.9901 0.9851 0.9802
Discounted cash flow $ -
5,18,000
$
1,17,600
$
1,17,014
$
1,16,432
$
1,69,767
Net present value = (-518000+117600+117014+116432+169767) = 2813
At IRR the net present value is 0.
Hence, by applying simple interpolation technique,
1%-IRR/IRR-0.5% = -3983-0/0-2813
Solving the above equation we get, IRR = 0.71%
Part g:
There are various other factors which needs to be considered for the appraisal investment
in the proposed project. It can be observed that the land which will be used for the project is
giving a return of $30,000 per annum. The incremental cash flows are also not sufficient to give

11FINANCIAL MANAGEMENT
a fair return to meet the return expectancy. On the other hand there might be any other social and
environmental perspective of the newly proposed project. All those perspective must be taken
care before deciding whether to go for the project or not (Shapiro& Hanouna2019).