FINC1001 Principles of Finance: Capital Budgeting Analysis & Maldives

This report provides an analysis of capital budgeting methods and the opportunities and challenges faced by the Maldives in developing its financial sector. It begins by outlining the importance of financial inclusion and the country's efforts to promote digital payments. The report then details the challenges Maldives faces, such as low account ownership rates and existing barriers to financial inclusion. Furthermore, it includes a calculation and interpretation of various capital budgeting methods, including payback period, net present value (NPV), internal rate of return (IRR), and average rate of return (ARR) for two projects, X and Z, to determine their profitability. The analysis concludes that project Z is more suitable based on its higher average yearly returns. The report emphasizes the importance of capital budgeting for evaluating potential business ventures and making informed investment decisions. Desklib offers a wealth of similar solved assignments and resources for students.

Finance

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
1. Opportunities and challenges faced by Maldives in financial sectors.....................................3
2. Calculate and Interpret the various capital budgeting methods...............................................4
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Capital budgeting is a procedure that undertakes to evaluate the possible outcomes of the
projects. A project may include buying of a new machinery or purchase of land, its profitability
is ascertained in capital Budgeting method (Abitbol and et.al., 2020). The following report
includes challenges faced by Maldives in improving and developing its financial sector. It also
states how Maldives expand its digital financial services. Further it calculated the Net present
value, payback period Average Rate of return and Internal Rate of return to know the
profitability of the project.
MAIN BODY
1. Opportunities and challenges faced by Maldives in financial sectors.
Maldives set goal of financial inclusion is to help people to manage their income, so
people can escape poverty and invest in the future. They are able to secure itself against
economic emergencies. Maldives promotes digital payments like receipt of wages, agricultural
payments, government payments and retail transaction not only made through mobile and
internet.
Maldives always have high mobile ownerships across Asia. Maldives government
encourage mobile user to accept new technology and create a digital environment for the people.
New technology gives long term profits to the people, it makes everting very easy to handle by
own hands. Government encourage people by various digital programs, people gathering and
welfare programs. Government also encourage people about online shopping. There are many
benefits of online shopping like people no need to go outside to purchase something, they can
save their time also. Maldives rapidly increase digital inclusions (Beygi, Tabesh and Liu, 2019).
Maldives suffer many problems in this financial inclusion are like gender inequality in
account holders, poverty and lowest account rates etc. There is massive increase in the bank and
their branches. Maldives also improve their infrastructure and create a positive environment for
people meet with digital inclusions.
Intricacies and challenges face by Maldives to expend digital financial services are
1. low rates of account ownerships: Maldives face challenge of lowest financial
account rate in Asia. Most of the adult population is not having account is

financial institutions like a bank, credit union and micro finance institution. Due
to low number of bank user people of Maldives not aware about digital banking
and mobile banking.
Barriers to financial inclusion: There is about 1 in 5 people not having account in bank or any
financial institution all over country. Half of the unbanked said they don't need any accounts
because one member in whole family have an account. People itself stand as a barrier in
Maldives financial inclusions.
(b) In Maldives online shopping is more advanced in the rest of the region. Report states
that out of every 3 adults in Maldives 1 person shops using online shopping. Shopping online
does not mean that the payment would also be made through online method. But in Maldives
shoppers prefer to pay online using internet banking. In the country more than 80% of the
residents have account in the banks. It is highly mobile penetrate region which have most
number of mobiles per 100 people in the sub Saharan region (Marques, Teixeira Brandão and
Gomes, 2019).
In the country more than 68% of the total population receive money and pay their
liabilities by using online payment. These payments are not only restricted to the retail
transactions. The payments made to the labourer are also paid on online basis. On an average 4
out of every 10 receives their payment on online basis. 82% of the people receive their salary
into their financial institution account. In Maldives 47% of adults received domestic remittances
adults sending and receiving the amount. People also uses domestic remittances in different
ways.
2. Calculate and Interpret the various capital budgeting methods.
Pay Back Period
Project X Project Z
Year
Annual
Cash
Inflow
Cumulativ
e Cash
Inflows
Annual
Cash
Inflow
Cumulative
Cash Inflows
0 -655000 0 -725000 0
1 175000 175000 265000 265000
2 175000 350000 255000 520000
3 175000 525000 230000 750000
4 175000 700000 175000 925000

5 225000 925000 135000 1060000
Pay Back Period = Number of years completed + (Initial investment - Cumulative cash inflow)/
Inflow of next year
Project X = 3 years + (655000 – 525000) / 175000
= 3 years + 130000 / 175000
= 3 years + 0.74
= 3.74 years.
Project Z = 2 years + (725000 – 520000) / 230000
= 2 years + 195000 / 230000
= 2 years + 0.85
= 2.85 Years
Payback period of the Project Z is comparatively lower which is 2.85 years which means
that the company will recover its initial investment within a period of 3 years. In project X, it
will take approximately 3.74 years to recover its initial investment.
Payback period: payback period is the time in which investment take to reach on no profit no
loss position. It is the time taken to acquire the cost of investments.
Advantages
 With the help of payback period a company can evaluate projects promptly.
 Payback period provide safeguard to a company from future losses (Muthomi and
Thurmaier, 2021).
Disadvantage
In the calculation of payback period the future value of money is not examined. Due to
which company can suffer losses.
Net Present Value:
Years Net Cash
Inflows
Discounting
Factor @
10%
PV of Cash Inflows
(Project X)
Net Cash
Inflows
Discounting
Factor @
10%
PV of
Cash
Inflows
(Projec
t Z)
1 175000 0.909 159075 265000 0.909 240885
2 175000 0.826 144550 255000 0.826 210630

3 175000 0.751 131425 230000 0.751 172730
4 175000 0.683 119525 175000 0.683 119525
5 225000 0.621 139725 135000 0.621 83835
5 (SV) 50000 0.621 31050 25000 0.621 15525
PV of
Cash
Inflow
(A) 725350 843130
PV of
Cash
Outflo
w (B) 655000 725000
Net
Present
Value
(A-B) 70350 118130
According to Net present value method, the project whose present value is more is
considered as good. According to this Project Z should be selected because its net present value
is more than project X. Thus according to this project Z should be selected.
Net present value: Net present value is related to cash-flow. It is the difference between present
cash inflows and outflows (Pra and et.al., 2019).
Advantages
 It is regarding to the value of money for a certain period of time.
 It helps a company to take future decision to maintain cash inflows and outflows
Disadvantage
 Net present value is not able to use for comparison of different sizes projects.
 Net present value does not consider invisible costs.
Net present value not set any guidance to measure necessary rate of return.
Internal rate of Return
Project X
Years
Cash
inflows
Discounting Factor
@10%
PV value of cash
inflow
1 175000 0.909 159075
2 175000 0.826 144550
3 175000 0.751 131425

4 175000 0.683 119525
5 225000 0.621 139725
5 (SV) 50000 0.621 31050
Total Cash inflow 725350
Total Cash outflow 655000
NPV (A-B) 70350
Years
Cash
inflows Discounting Factor 15%
PV value of cash
inflow
1 175000 0.87 152250
2 175000 0.756 132300
3 175000 0.658 115150
4 175000 0.572 100100
5 225000 0.497 111825
5 (SV) 50000 0.497 24850
Total Cash inflow 636475
Total Cash outflow 655000
NPV (A-B) -18525
IRR of Project X = Lower rate + Lower Rate NPV/ (Lower Rate NPV – Higher Rate NPV) *
Diff. in Rates
Project X = 10 % + 70350 / (70350 + 18525) * (15-10)
= 10% + (70350 / 88875) * 5
= 10% + 0.79 * 5
= 10% + 3.95
= 13.95 %
Project Z
Years
Cash
inflows
Discounting Factor
@10%
PV value of cash
inflow
1 265000 0.909 240885
2 255000 0.826 210630
3 230000 0.751 172730
4 175000 0.683 119525
5 135000 0.621 83835
5 (SV) 25000 0.621 15525
Total Cash inflow 843130
Total Cash outflow 655000

NPV (A-B) 188130
Years
Cash
inflows Discounting Factor 15%
PV value of cash
inflow
1 265000 0.87 230550
2 255000 0.756 192780
3 230000 0.658 151340
4 175000 0.572 100100
5 135000 0.497 67095
5 (SV) 25000 0.497 12425
Total Cash inflow 754290
Total Cash outflow 655000
NPV (A-B) 99290
IRR of Project Z = Lower rate + Lower Rate NPV/ (Lower Rate NPV – Higher Rate NPV) *
Diff. in Rates
Project A = 10 % + 188130 / (188130 - 99290) * (15-10)
= 10% + (70350 / 88840) * 5
= 10% + 0.79 * 5
= 10% + 3.95
= 13.95 %
Internal rate of return: it is a method of calculating rate of return over an investment of a
certain period of time. if internal rate of return is low then the investment is cancelled.
Advantages
 Internal rate of return considers time value of money in calculation which decrease risk of
future losses.
 Internal rate of return is very simple to calculate. If it is more than the cost of capital, then
it is beneficial to invest in such investment.
Disadvantage
 Sometimes internal rate of return depends upon other supported investment so if
supported investment changes then IRR also changed (Gold and Ali 2019).
Average Rate of Return = Annual profits / Initial Investment * 100
Project X = 195000 / 655000 * 100

= 0.2977 * 100
= 29.77 %
Project Z = 217000 / 725000 * 100
= 0.2993 * 100
= 29.93 %
According to this method Project Z should be selected as its average yearly returns are
more than of project X. Thus Project Z should be selected.
Accounting rate of return: Accounting rate of return generally used to calculate multiple
investment rate of return. It can calculate each project's rate of return separately.
Advantages
 It is a simple way to measure return on investments using profits.
 It creates a comparison of several projects of competitive existence.
Disadvantage
 This method is not suitable for long term investments because it gives different return
rate of same project.
 Accounting rate of return method is only based upon profits and it is not considering
cash-flows of an investment (Makina 2019).
CONCLUSION
From the above report it is concluded that capital budgeting is defined as the process which
helps in evaluating the possible outcomes of a business enterprise. The completion of project
may include the purchase of machinery, land raw material etc. there are various opportunities
and challenges which is faced by Maldives in its financial sector. It is easy to grab the wide
market share of online shopping for the organisation. It is very important for the Maldives to
expand its digital financial services in order to attract customers. The various calculations show
that it is very important for an organisation to develop themselves in order to improve the
methods of payments. The calculations show that the project z is suitable as a average yearly
returns are more as compared to project x. it is very important to calculate the profitability of the
project in order to know whether the company should invest in the project or not.

REFERENCES
Books and Journals
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