Investment Decisions: NPV, IRR, Bond Valuation & Risk Assessment

This assignment solution covers key principles of finance, including the calculation of Internal Rate of Return (IRR) and Net Present Value (NPV) for project evaluation. It demonstrates how to calculate IRR by finding the discount rate at which NPV is zero and provides detailed NPV calculations for two projects at a 10% discount rate, determining project favorability based on higher NPV. The assignment also addresses bond valuation, including calculating bond prices at issuance and when coupon rates equal yield to maturity, alongside the impact of yield to maturity on bond value and risk assessment. Further topics include calculating the salvage value of fixed assets, operating cash flow, cash flow from assets, and NPV for a three-year project, alongside analysis of stock returns and calculation of the Weighted Average Cost of Capital (WACC) to determine the viability of a project based on its net cash inflow and present value. Desklib offers this document, contributed by a student, along with other solved assignments and study resources.

PRINCIPLES OF FINANCE

Table of Contents
SECTION A.....................................................................................................................................3
Question 1....................................................................................................................................3
(a) calculation of IRR..................................................................................................................3
(b) calculation of NPV.................................................................................................................5
Question 2....................................................................................................................................6
Question 3....................................................................................................................................7
Question 4....................................................................................................................................7
a....................................................................................................................................................7
Question 4.b.................................................................................................................................7
Question 4.c.................................................................................................................................7
Question 5....................................................................................................................................8
Question 6....................................................................................................................................8
a)..................................................................................................................................................8
b)..................................................................................................................................................9
c)..................................................................................................................................................9
d)..................................................................................................................................................9
Question 7..................................................................................................................................10
Question 8..................................................................................................................................10
SECTION B...................................................................................................................................12
Question 1..................................................................................................................................12
Question 3..................................................................................................................................12
REFERENCES................................................................................................................................1

SECTION A
Question 1
(a) calculation of IRR
Project 1
Discount rate (r) 35%
Year (t)
Project 1
cash flow Present value factor
Present value of cash
flow
(1/1+r)^t
(cash flow* present
value factor)
0 -20000 0
1 10000 0.7407407407 7407.4074074074
2 10000 0.548696845 5486.9684499314
3 10000 0.4064421074 4064.4210740233
4 10000 0.3010682277 3010.6822770543
Total 19969.4792084164
NPV -30.5207915836
IRR
Discount rate (t) 34.00%
present value factor present value
Year (t)
Project 1
cash flow (1/1+r)^t
(cash flow* present
value factor)
0 -20000 0
1 10000 0.7462686567 7462.6865671642
2 10000 0.556916908 5569.1690799733
3 10000 0.4156096328 4156.0963283383
4 10000 0.3101564424 3101.564424133

20289.5163996087
NPV 289.5163996087
The value of NPV is calculated by taking the difference of present value of cash inflow and cash-
outflow. So at the rate of 35% (discount rate), the value of NPV is negative. IRR is existed where
NPV is zero. Which means that IRR is existed between 34% and 35%. Moreover, the rate of IRR
is 34.90%.
project 2
Discount rate (r) 31.00%
Year (t) Cash flow Present value factor Present value
(1/1+r)^t
(cash flow* present
value factor)
0 -20000 0 -0
1 0 0.7633587786 0
2 0 0.5827166249 0
3 0 0.4448218511 0
4 60000 0.3395586649 20373.519896462
20373.519896462
NPV 373.5198
Discount rate 32.00%
year Project 2 present value factor present value
0 -20000 0 -0
1 0 0.7575757576 0
2 0 0.5739210285 0

3 0 0.4347886579 0
4 60000 0.3293853469 19763.1208149615
Total 19763.1208149615
NPV -236.8791850385
From the above analysis it can be interpreted that when discount rate is 31%, the value of NPV is
positive. Moreover, as it is increased to 32% the value of NPV becomes negative. The rate of
IRR lies at the place where the value of NPV becomes ZERO. Therefore, the rate of IRR lies
between 31% and 32%. So the rate of IRR is 31.61%.
(b) calculation of NPV
Project 1
Discount rate (r) 10.00%
Year (t)
Project 1
cash flow present value factor present value
(1/1+r)^t
(cash flow* present
value factor)
0 -20000 0
1 10000 0.9090909091 9090.9090909091
2 10000 0.826446281 8264.4628099174
3 10000 0.7513148009 7513.1480090158
4 10000 0.6830134554 6830.1345536507
Total 31698.6544634929
NPV 11698.6544634929
NPV =31698.6544 – 20000
=11698.65 (positive is favourable)
Project 2
Discount rate (r) 10.00%
Year (t) Cash flow present value factor present value
(1/1+r)^t (cash flow* present

value factor)
0 -20000 0 -0
1 0 0.9090909091 0
2 0 0.826446281 0
3 0 0.7513148009 0
4 60000 0.6830134554 40980.8073219042
40980.8073219042
NPV 20980.8073219042
NPV= 40980.807 – 20000
=20980.80 (Positive is favourable)
When company select the project on the basis of positive and higher NPV. Moreover, NPV
shows how much return company is getting back a positive NPV shows favourable project. In
order to decide which project is more favourable( in terms of return ). Out of these two project,
project 2 is providing higher return because it has better NPV then project A.
Question 2
6%
Risk
Rf
10%
20%
Exp. Return
30%
11%

Question 3
a)
Bond price = Coupon 1 / (1 + YTM / 2)1 + Coupon 2 / (1 + YTM / 2)2 +........Coupon 40 / (1 +
YTM / 2)40 + Face value / (1 + YTM)20
Coupon = 1000 * 5% = 50 / 2 = 25 every half year
YTM = 6% / 2 = 3%
= 25 / (1 + 3%)1 + 25 / (1 + 3%)2......25 / (1 + 3%)40 + 1000 / (1 + 6%)20
= 884.43 would be the bond price at issuance.
b) The price of the bond at this point where coupon rate is equivalent to yield to maturity would
be equals to its par or face value that is, 1000.
Question 4
a
Interest = 1000 * 8%
= 800
Price of bond: interest / risk rate
= 800 / 10%
= 800
Question 4.b
5.548%
Question 4.c
(1)
Bond C
6% = [80 + {(1000 – price) / 2 }] / [{1000 + Price} / 2]
.06 = 160 + 1000 – price / 1000 + price
= 785
Bond D
6% = [80 + {(1000 – price) / 8}] / [{1000 + Price} / 2]
6% = 640 + 1000 – Price / 4 (1000 + price)
= 280
(2)
7

Bond C
10% = [80 + {(1000 – price) / 2 }] / [{1000 + Price} / 2]
= 963
Bond D
10% = [80 + {(1000 – price) / 8}] / [{1000 + Price} / 2]
= 308
(3)
The above stated calculation clearly indicate that yield to maturity certainly increases or
decreases the value of the bond. If it is increased than the value of bond will also improve and in
case it is decreased than the value of bond of reduce. The bond D has a greater risk element as
the maturity is more which also reflect in the price of bond. The risk also depict in the prices of
the bond.
Question 5
Expected future cash flow:
40000 / 11%
= 363636
Question 6
a)
Calculation of Savage value of fixed assets
The expenditure of the fixed assets at the beginning of the project which is also known as the
actual cost of fixed assets would be = $1000.
The depreciation on fixed assets in year 1 = $280, year 2 = $280 and year 3 = $280.
So, the total depreciation on fixed asset over the three years = $280 + $280 + $280 = 840.
Formula to calculate the carrying value of the fixed assets after three years = Original cost –
Depreciation
= $1000 - $840 = $160
Market value of the retired assets = $500 which is also known as salvage value before tax.
The after-tax savage value of the fixed assets = market value of the retired assets * (1 – tax rate)
= $500* (1 – 0.3) = $500* 0.7
= $350
8

The after-tax savage value of the fixed assets is $350.
b)
Calculation of operating cash flow of each year of the project
Particulars Year 1 Year 2 Year 3
Operating income 540 540 540
Add Depreciation 280 280 280
Less investment in net
working capital
-500 -100 -100
Add recovered from
net working capital
- - 700
Less Income tax -162 -162 -162
Operating cash flow 158 558 1258
c)
Calculation of Cash flow from assets or financing activities in each year of the projects
Particulars Year 1 Year 2 Year 3
Purchase of assets -1000 0 0
Sale of assets 0 0 500
Cash flow from assets -1000 0 500
d)
Calculation of NPV
Years Cash flow Discounting factor
@10%
Present value of cash
flow
0 -1500 0 -1500
9

1 658 – 100 = 558 0.9 502.2
2 658 – 100 = 558 0.82 457.56
3 658 – 100 + 350 + 500
= 1408
0.75 1056
Present value of cash inflow – Initial investment = 2015.76 – 1500 = 515.76.
If the required rate of return of this project is 10%, then it is advisable to the company to accept
this project because at 10% return the company will earn profit. It is because the net present
value of the three-year project is positive.
Question 7
Date Cipl
a
Rt Idea Rt Won
derla
Rt PVR Rt Alke
m
Rt Cipla Idea Won
derla
PVR Alke
m
21-
02-17
593.
1
0.06
%
108.
35
-
0.09
%
374.1
5
0.32
%
1268 -
0.04
%
2000
.05
-
1.73
%
0.00% -
0.66
%
0.26
%
-
0.19
%
-
2.02%
22-
02-17
589.
25
-
0.65
%
112.
6
3.92
%
374.4
5
0.08
%
1263.
35
-
0.37
%
2022
.55
1.12
%
-
0.71%
3.36
%
0.02
%
-
0.52
%
0.84%
23-
02-17
592.
4
0.53
%
119.
6
6.22
%
373.4 -
0.28
%
1260.
1
-
0.26
%
2076
.85
2.68
%
0.47% 5.65
%
-
0.34
%
-
0.41
%
2.40%
27-
02-17
585.
25
-
1.21
%
114.
55
-
4.22
%
373.8
5
0.12
%
1278.
1
1.43
%
2154
.75
3.75
%
-
1.27%
-
4.79
%
0.06
%
1.27
%
3.46%
28-
02-17
583.
7
-
0.26
%
115.
85
1.13
%
372.4 -
0.39
%
1295.
55
1.37
%
2141
.55
-
0.61
%
-
0.33%
0.57
%
-
0.45
%
1.21
%
-
0.90%
1-03- 586. 0.45 113. - 373.8 0.38 1296. 0.05 2144 0.12 0.38% - 0.32 - -
10

17 3 % 25 2.24
%
% 25 % .15 % 2.81
%
% 0.10
%
0.17%
2-03-
17
589.
25
0.50
%
109.
6
-
3.22
%
375.3 0.40
%
1303.
65
0.57
%
2142
.1
-
0.10
%
0.44% -
3.79
%
0.34
%
0.42
%
-
0.38%
3-03-
17
588.
6
-
0.11
%
110.
55
0.87
%
378.2
5
0.79
%
1310.
05
0.49
%
2138.95[
-0.15%]
-
0.17%
0.30
%
0.73
%
0.34%1=K1
28-$K$131
6-03-
17
590.
1
0.25
%
109.
75
·0.7
2%
380.2 0.52
%
1331.
9
1.67
%
2110.2
·1.34%
0.19% ·1.2
9%
0.46
%
1.51%
·1.63%
7-03-
17
588.
05
·0.3
5%
108.
6
·l.05
%
381.2 0.26
%
1344.
6
0.95
%
2048.6
·2.92%
·0.41
%
·l.61
%
0.21
%
0.80%
·3.21%
Avera
ge
daily
rate
0.06
%
0.57
%
0.06
%
0.15
%
0.
29
%
X = Excess Retun matrix
Alkem Rt cieta Idea Wonderl
a
PVR Alkem
1569.85
1636.5 4.25
%
-
0.27%
0.39% -0.23% 7.27
%
3.96%
1644.75 0.50
%
0.05% -
0.09%
-0.78% -
1.13
%
0.22%
11

1616.9 -
1.69
%
0.31% -
1.92%
-0.30% -
1.69
%
-
1.98%
I Ciola Idea Wonderla PVR Alkem
TRANSPOSE{LS:P130),LS:P130)
Idea Wonderla PVR
Alkem
1635.9 1.18% 2.42% 0.39% -0.06% -0.46% =MMULT{TR
1602.. 85 ·2.02% ·2.52% ·1.63% ·0.32% ·1.62% ·2.31%
1616.35 0.84% ·1.85% ·1.52% ·1.06% ·3.47" 0.55%
1624.3 0.49% 1.24% 0.58% ·0.12% ·0.63% 0.20%
1622.35 ·0.12% 1.31% 0.33% ·0.21% ·1.43% ·0.41%
X transpose multipied by X
Cipla Cipla
0.02788
Idea
0.00679
Wonderla
0.00425
PVR
0.00515
Alkem
0.00804
Idea 0.00679 0.14084 0.00497 0.00289 0.00475
Wonderla 0.00425 0.00497 0.03055 0.00500 0.00351
PVR 0.00515 0.00289 0.00500 0.05109 0.00338
Alkem 0.00804 0.00475 0.00351 0.00338 0.04310
transpose multipied by X
Cipla Cipla
0.02788
Idea
0.00679
Wonderla
0.00425
PVR
0.00515
Alkem
0.00804
Idea 0.00679 0.14084 0.00497 0.00289 0.00475
12