Accounting and Financial Management Assignment - UTas 2019

This assignment solution addresses two key questions in financial management. Question 1 explores the relationship between discounted payback period and Net Present Value (NPV), explaining that a discounted payback period shorter than the maximum acceptable period implies a positive NPV. Question 2 involves a case study of Gio's Restaurant, evaluating two potential projects. The solution calculates the NPV, payback period, and Internal Rate of Return (IRR) for each project. Based on these metrics, it determines which project is preferable under mutually exclusive conditions, considering factors like the time to recover the initial investment and the rate of return. The solution uses a trial-and-error approach to determine the IRR and provides a clear rationale for project selection based on the financial analysis.

Running Head: Accounting & Financial Management 1
Accounting & Financial Management

Accounting & Financial Management 2
Contents
Question 1...................................................................................................................................................3
Question 2...................................................................................................................................................3
References...................................................................................................................................................5

Accounting & Financial Management 3
Question 1
If the discounted payback period is less than the maximum payback period that the firm
accepts in that case the net present value of the project will be having positive net present value
as the present value of the annual cash flows will be recoverable and in the opposite case the net
present value will be negative (Hopkinson, 2017).
Question 2
Year Project CF1
Discounting factor
15%
Present
Value
Cumulative cash
flows
0 -200000 1.000 -200000 -200000
1 70000 0.870 60870 -139130
2 50000 0.756 37807 -101323
3 75000 0.658 49314 -52010
4 70000 0.572 40023 -11987
5 50000 0.497 24859 12872
Net present
value 12872
Payback period 4.48 years
Year Project CF 2
Discounting factor
15%
Present
Value
Cumulative cash
flows
0 -200000 1.000 -200000 -200000
1 45000 0.870 39130 -160870
2 60000 0.756 45369 -115501
3 60000 0.658 39451 -76050
4 70000 0.572 40023 -36027
5 80000 0.497 39774 3747

Accounting & Financial Management 4
Net present
value 3747
Payback period 4.91 years
IRR TRIAL AND ERROR
METHOD Proposal 1 Proposal 2
23.18% 35.71%
A. According to Net Present value the project cash flow 1 shall be chosen as the net present
value is greater at $12872 than project cash flow 2 at $3747.
B. If the projects are mutually exclusive than on the basis of the payback period the first
proposal shall be chosen as it can recover the cost of the investment much earlier in 4.48
years as compared to the second proposal, taking 4.91 years to payback.
C. On the basis of IRR proposal 2 shall be accepted as it has higher rate of return at 35.71%
than proposal 1 which has 23.18% return only (Gallo, 2016).

Accounting & Financial Management 5
References
Gallo, A. (2016). A refresher on internal rate of return. Harvard Business Review Digital
Articles, 2-4.
Hopkinson, M. (2017). Net Present value and risk modelling for projects. Routledge.