International Finance: NPV, Risk Assessment, Project Ranking

This report provides a detailed analysis of international financial business concepts, focusing on net present value (NPV), risk assessment, and project ranking. It begins by calculating the expected NPV and standard deviation for a given project, determining its viability. The report then assesses the expected NPV for RJW Corporate entity, including probabilities of avoiding liquidation and achieving an NPV greater than £100m. Finally, it ranks projects based on NPV and discusses the differences between the NPV and internal rate of return (IRR) methods. Desklib provides access to similar solved assignments and study resources for students.

International Financial
Business

Contents
INTRODUCTION...........................................................................................................................................3
QUESTION 1.................................................................................................................................................3
a. The expected NPV:...............................................................................................................................3
b. The standard deviation of NPV:...........................................................................................................5
QUESTION 2.................................................................................................................................................6
a. Expected net present value.................................................................................................................6
b. Probability of avoiding liquidation.....................................................................................................11
c. Probability of NPV greater than £100m.............................................................................................11
QUESTION 3...............................................................................................................................................12
CONCLUSION.............................................................................................................................................17
REFERENCES..............................................................................................................................................18

INTRODUCTION
In recent times, global financial organization, typically visible and successful corporation
finance, is a regularly referenced concept. It most often focuses on financial management in a
worldwide business context. Due to the obvious various factors responsible for financial
management, such as currency, political situations, fluctuating commodities, and other incentive
products, it ranges (Guo and Lu, 2021). Management is a significant technique in either
organisation. It is a way of planning, combining, directing, and reporting capital instruments in
terms of fulfilling an association's objectives. This is an important part of managing a business'
future affairs, also including resource recruitment, resource administration, auditing, operations,
quantitative risk, and almost everything else has to do with currency. Each enterprise, large or
little, requires efficient management procedures. That's like the lifeblood of the firm. This is a
crucial task that must be completed in any organisation. On the other side, financial management
is the process of creating, integrating, reporting, and controlling an investor's economic means.
The aim is to enable to meet the business's strategy or ambitions inside that framework
established (Notz and Rosenkran, 2021). Financial management is essentially procedure in the
finance industry. Management requires monitoring a business' future reserves to insure that there
is very little inefficiency. The research covered multiple aspect of financial supervision including
specific activities such as assessing estimated net present value, point difference of net present
value of businesses, chances of escaping enterprise insolvency, and so forth.
QUESTION 1
a. The expected NPV:
Anticipate net present value (intended NPV) is an investment appraisal approach that factors for
volatility by determining net enterprise value under a few assumptions and scoring them to
obtain the optimum NPV. Even though scheduled NPV recognises the volatility inherent in
predicting the future results, it is a more dependable calculation than normal NPV. Expected
NPV is the percentage of NPVs throughout high levels of uncertainty, along with their inherent
probabilities. The procedure underneath is often used to determine the estimated NPV (Thottoli,
2021) (Muthukannan and et.al, 2021).

The NPV under a particular circumstance is refers to as premise NPV, wherein p is the
chances from every possibility unfolding. As a company's growth, it must execute appropriate
choices that would need greater financial resources. A corporation's core evolution and fraction
of cost can be well. In most cases, the firm would implement Capital Management procedures,
these are one of the very effective NPV approaches, to identify the highest valuable or realistic
investment.
The definition "net present value" corresponds to an investment appraisal method that
would be used to establish the success of a project or expenditure. It is defined as the variation
seen between net value of income and expenses beyond a span of years. As the term suggests,
NPV is the methodology of earning out just the PV of revenues and expenses by disregarding
flows at a set rate (Azmi and et.al, 2021).
Year 1 Year 2
Returns Probabilitie
s
Expected
returns Returns Probabilitie
s
Expecte
d returns
£ 8000 0.1 £ 800 £ 4000 0.3 £ 1200
£ 10000 0.6 £ 6000 £ 8000 0.7 £ 5600
£ 12000 0.3 £ 3600
Total expected return = £ 10,400 Total expected return = £ 6,800
Periods Expected
Returns
Discounting factor @11% NPV
Year 0 £ -15,000 1 £ -15,000
Year 1 £ 10,400 0.9009 £ 9,369
Year 2 £ 6,800 0.8116 £ 5,519
Expected NPV £ - 112

As computed above Expected NPV is negative which indicates that project would not be
viable for company.
b. The standard deviation of NPV:
The standard deviation of an agency's net present value (NPV) is a calculation of what it
will diverge from the expected yield. This is a significant predictor that also takes into account a
sensation of utter confusion. Involved parties might use standard error as financial schemes to
see just how highly unstable securities have been in the ancient times. The higher the area error,
the worse and maybe less sure the entire purchase (Gowhor, 2021). The standard deviation of a
development activity is a major predictor of the possibility that it may overshoot its estimated
profit. The lower the overall variance of a program, the less riskily it is. The greater dispersion,
the more distributed evenly the earnings will be, making the transaction more unpredictable. In
this context following is calculation of standard deviation of NPV, as follows:
Year 1
Return (x) Probability (p) Expected
return
x – mean (x-mean)2 p*(x-
mean)2
£ 8000 0.1 £ 800 - 2,400 5760000 576000
£ 10000 0.6 £ 6000 -400 160000 96000
£ 12000 0.3 £ 3600 1,600 2560000 768000
Expected
Return (Mean)
=
£ 10,400 8,480,000 £ 1,440,000
Year 2
Returns Probabilities Expected
returns
x - mean (x-mean)2 p*(x-
mean)2
£ 4000 0.3 1200 -2,800 7840000 2352000

£ 8000 0.7 5600 1,200 1440000 1008000
6,800 9,280,000 £ 3,360,000
Sd of NPV = √{(1440000/1.11) + [3360000/(1.11)2]}
= √1297297.29 + 2727051.37
= √4024348.67
= 2006.08
QUESTION 2
a. Expected net present value
RJW Corporate entity is a listed firm’s organization in Wales that owns and controls ten
lignite mines. It does have a net asset assessment of £50 million and a current value of £90
million in securities. RJW plc's company's board perceives the UK country's restructuring
initiative as a prime opportunity. They've had exploratory conversations only with authorities
about acquiring England's twenty-five lignite plants. A £900 million obtained from the current
was also considered by Budget (Gambetta and et.al, 2021). The board of trustees has been on an
investments expedition for the last 2 months, going to influence City financial companies to
commit £500 million in new equity capital, as well as £400 million in fixed-rate debt wealth in
the economy of bank loans to RJW. There is also statistics well about development's financial
transactions and efficiency. The following is a method to calculate the agency's probable net
present value:
Year 1
Cash
inflows Probabilities Expected returns
Pessimistic £ 96.67 0.2 £ 19.33
Most likely £ 130 0.5 £65.00
Optimistic £ 260 0.3 £ 78.00

£ 162.33
Year 2
Cash
inflows Probabilities Expected returns
Pessimistic £ 111.7 0.2 £ 22.34
Most likely £ 145 0.5 £ 72.50
Optimistic £ 276.7 0.3 £ 83.01
£ 177.85
Year 3
Cash
inflow Probability Expected return
Pessimistic £ 116.67 0.2 £ 23.33
Most likely £ 150 0.5 £ 75.00
Optimistic £ 283.33 0.3 £ 85.00
£ 183.33
Year 4
Cash
inflow Probability Expected return
Pessimistic £ -21 0.2 £ (4.20)
Most likely £ 130 0.5 £ 65.00
Optimistic £ 271 0.3 £ 81.30
£ 142.10
Year 5
Cash
inflow Probability Expected return
Pessimistic £ 20 0.2 £ 4
Most likely £ 150 0.5 £ 75
Optimistic £ 280 0.3 £ 84
£ 163

Year Cash inflows
Discounting
rate @14% NPV
0 -£ 900 -£ 900
1 £ 162 0.87719298 £ 142.40
2 £ 178 0.76946753 £ 136.85
3 £ 183 0.67497152 £ 123.74
4 £ 142 0.59208028 £ 84.13
5 £ 163 0.51936866 £ 84.66
Total NPV -£ 328
Expected net present value = - £328m
Standard deviation of NPV
Return (x) Probability
Expected
return x - ū (x - ū)2 P(x - ū)2
£ 96.67… 0.2… 19.334… (66) … 4,297 … 859 …
£ 130… 0.5… 65… (32) … 1,038… 519 …
£ 260… 0.3… 78… 98 … 9,560… 2,868 …
487 … 4,247 …
Mean (ū) = 487/3
=
…
162
Standard deviation = …√4,247
Year 1
…
65.17

Return (x)
Probabilit
y
Expected
return x - ū (x - ū)2 P(x - ū)2
£ 111.7 0.2… 22.34 (66) 4,369 874
£ 145 0.5… 72.5 (33) 1,076 538
£ 276.7 0.3… 83.01 99 9,781 2,934
£ 533 4,346
Mean (ū) = 533/3
= 178
Standard deviation = √4,346
Year 2 65.93
Return (x) Probability
Expected
return x - ū (x - ū)2 P(x - ū)2
£
116.67… 0.2… 23.334… (67) … 4,444 … 889 …
£ 150… 0.5… 75… (33) … 1,111 … 556 …
£
283.33… 0.3… 84.999… 100… 9,999 3,000…
£ 550… 4,444 …
Mean (ū) = 550/3

= 183
Standard deviation = √4,444
Year 3 66.66
Return (x)
Probabilit
y
Expected
return x - ū (x - ū)2 P(x - ū)2
…£ -21 0.2… -4.2… (148) … 21,805…
…
4,361…
…£ 130 0.5… 65… 3 … 11 … …6 …
…£ 271 0.3… 81.3… 144 … 20,832 …
…
6,250 …
… £ 380
…
10,616
Mean (ū) = 380/3
= 127
Standard deviation = √10,616
Year 4 103.04
Return (x)
Probabilit
y
Expected
return x - ū (x - ū)2 P(x - ū)2
£ 20 0.2 4 (130) 16,900 3,380
£ 150 0.5 75 - - -
£ 280 0.3 84

130 16,900 5,070
£ 450 8,450
Mean (ū) = 450/3
=
…
150
Standard deviation = √8,450
Year 5
…
91.92
Standard deviation of NPV = Year 1 + Year 2 + Year 3 + Year 4 + Year 5
= …65.17 + …65.93 + …66.66 + …103.04 + …91.92
= …£392.72 Million
b. Probability of avoiding liquidation
Mean of net present value = - £328m
Standard deviation = 392.72
Applying normal distribution:
Probability of avoiding liquidation that is (x < -£550m):
P (x < -£550m) = −550 – (−328)
392.72 =¿- 0.57
Value of -0.57 in z table = 0.28434 or 28.43% chance to avoid liquidity.
c. Probability of NPV greater than £100m
Mean of net present value = - £328m
Standard deviation = 392.72
Applying normal distribution: