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Problem No. 1 A(N,I) FACTOR = (1+i)^n – 1 / i Here, (1.1)^4 – 1 / 0.1 = 4.641 FVA = A * A(N,i) = 4000 * 4.641 = 18,564/- Problem No.2 10000(1+i)^4 = 12625.

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Presentation on theme: "Problem No. 1 A(N,I) FACTOR = (1+i)^n – 1 / i Here, (1.1)^4 – 1 / 0.1 = 4.641 FVA = A * A(N,i) = 4000 * 4.641 = 18,564/- Problem No.2 10000(1+i)^4 = 12625."— Presentation transcript:

1 Problem No. 1 A(N,I) FACTOR = (1+i)^n – 1 / i Here, (1.1)^4 – 1 / 0.1 = FVA = A * A(N,i) = 4000 * = 18,564/- Problem No (1+i)^4 =  i = 6% hly or 12% pa

2 If compounded qly, then Maturity = 10000(1.03)^8 = 12668/- Problem No.3 (i) 2000(1.08)^2 = (ii) 2000 (1.04)^4 = (iii) 2000 (1.02)^8 =

3 Problem No.4 3P = P (1+i)^7 (1+i)^7 = 3 or (1+i) = 3^(1/7) 1+ i = or i = 16.99%

4 Problem No.5 P(n,i) factor = [(1.03)^12-1]/[0.03 * (1.03)^12] = Instalment = Loan / P(n,i) = / =

5 Problem No.6 Value of Pepetuity = Interest / rate of interest = 5000 / 0.833% = ` 6,00,240 Add: First Month Pension = ` 6,05,240/-

6 Problem No.7 PV of Money outflow under Outright purchase = ` 500,000 PV of Money Outflow under instalment option = * = 4,21,378 Note: Instalment : / 6 = Conclusion: Instalment Option is better.

7 Problem No.8 Maturity = (1.08)^5 = Interest = ` Problem No. 9 Effective ROI = [(1.03)^4 -1] * 100 = 12.55%

8 Problem No.10 PV of ` = / = `29012/=

9  Problem No. 1 YearCFAT (`) 10%DCFAT (` )( ` ) 1300, , , ,504570, , ,390795, , ,312975, , ,0161,124,952 Initial investment of ` 10 lakhs is exceeded in Year 5.Hence the payback period on time proportion basis as follows:- DCAFT earned during the Year 4 = ` 1, 49,016( ` 11, 24,952 - ` 9, 75,936), for a period of 12 months. Hence, time period for earning ` 24,064 in order to recover the initial investment would be : - Payback period = ` 24,064 / ` 1,49,016 * 12 months = 2 months (approx.) Hence, Payback period = 4 years, 2 months

10  Accept / Reject Criteria for NPV (Net Present Value): If the NPV of the Project is +, then the project may be accepted else rejected. NPV = Cum. PVCIF – Initial Cash Out Flow (ICOF)   Points to be noted:  Cum. PVCIF = Sum of Discounted Cash Flows (Cash Flow * PVF) of all the years.  When Working Capital Requirement is given, remember to take the same in Initial Cash Outflow and also in Terminal (Last Year) Cash Inflow.  Remember to take the salvage value of Plant in the last year if given.  Cash Inflow = PAT + Depreciation  If the cash flows are uniform Cum. PVCIF = Cash Flow * Cum. PVF  In case of Capital Rationing, If the projects are divisible the Allocation of Funds should be based on Ranking of PI. Else Allocation should be considered for various alternatives (mix of Projects). We should ensure that maximum funds are utilized and maximum NPV achieved.

11  Accept/Reject Rule for PI: PI = Cum. PVCIF / ICOF. IF PI > 1 then Accept the Project, else Reject. Please note that if PI > 1 then NPV is +.   Accept/Reject Rule for IRR: IF IRR > Cost of Capital, then Accept the Project, else Reject.  Three Important Points about IRR:  Internal Rate of Return is the Rate of Return from the Project.  It is the maximum rate upto which funds can be borrowed to finance the project.  When IRR = COC then PI = 1, NPV = 0. That is when we take the IRR as the Cost of capital of the Project (for Discounting Purpose) then NPV is NIL.

12  Problem No. 2  Computation of NPV for Project X ( `. Lacs) 50% PAT CFAT (PAT+DEPN) Present Value of Cash Inflows Less: Initial Investment Net Present Value 8.22

13  Problem No. 2  Computation of NPV for Project Y ( `. Lacs)  Conclusion: As project Y has a higher NPV, hence it is suggested to take up Project Y. 50% PAT CFAT (PAT+DEPN) Present Value of Cash Inflows Less: Initial Investment Net Present Value 10.33

14  Problem No. 3  Initial investment + Working Capital = = `. 135 Lakhs  Additional Equipment required ( beginning of Year 3 = end of Year 2) = `. 10 Lakhs  Total Cash Outflows ( ) = `. 145 Lakhs

15  Problem No. 3 Cont…  Note:  Depreciation = ( Original Cost – Scrap Value) / Useful Life  First Equipment = `. 120 Lakhs / 8 years = Rs. 15 Lakhs p.a.  Second Equipment = ( `. 10 Lakhs – ` 1 Lakhs) / 6 years = ` Lakhs p.a.  In the 8th year, there will be additional cash flows to the extent of scrap value of additional equipment `. 1 Lakhs and recovery of working capital `. 15 Lakhs

16  Problem No. 3 Cont… Sl. no. ParticularsYear 1Year 2Year 3-5Year 6-8 1Sales Quantity ( Capacity x ) in units 80,000120,000300,000200,000 2Sales Value Rs. 100 per unit (Rs. Lacs) Variable 40% of Sales Contribution (2-3) Fixed Cost Production16.00 Selling (Advertisement) Depreciation ( See note) Total Fixed Cost PBT (4-5)(13.00) % PAT (6-7)(13.00) Depreciation CFAT (8+9)

17  Problem No. 3 Cont…  Computation of NPV YearCFAT (Rs. 12%DCFAT (Rs. Lacs) = ( ) TotalDiscounted Cash Inflows Initial Investment Net Present Value

18  Problem No. 4 Sales40000 Less: Operating cost + Depn16750 Profit Before Tax Less: Tax – 30% Assumed6975 Profit After Tax16275 Net cash inflow (PAT + Depn – Loss of Commission Income)14025 In 8th year : New cash inflow after tax14,025 Add: Salvage value of machine6,000 Net cash inflow in year 8 :20,025

19  Problem No. 4 Calculation of Net present value (NPV) Profitability Index = Cum. Disc CIF / ICOF = 77612/80000 =0.97 Advise: Since the net present value is negative and profitability index is < 1, the hospital should not purchase the diagnostic machine. YearCFATPV 10% Present value of cash inflows 1 to 714, , Less: Cash Outflows80,000 NPV-2388

20  Problem No. 5 YearCFATPVF at 10%DCFATPVF at 12%DCFAT 130, , , , , , , , , , , , , , ,348 Total DCFAT138, ,796 Less: Initial Investment136, Net Present Value2,315.00(4,204)

21  Problem No. 5  From the above i.e. with one positive NPV and negative NPV, IRR is estimated using the interpolation method as under:-   10% = 2315 (Positive NPV)  12% = 4204 (Negative NPV)  Diff 2% = 6519   2315 / 6519 * 2 = 0.71%  IRR (from the +ve side)= 10% % =10.71%   4204 / 6519 * 2 = 1.21%  IRR (from the –ve side) = 12% % =10.71%

22  Problem No. 6 Year Initial Cost (680)---(Rs. ‘ 000)- Before tax Cash Flows % After Tax cash flows Tax Saving on Depn. ( Depreciation * Tc ) -42 Working Capital Released Net Cash Flow % PV (680) NPV % PV (680) NPV (20.26)

23  Problem No. 6  Internal Rate of return  IRR = 12% + (29.12/49.38) * 3%  = 13.77%  Discounted Payback Period  Discounted Cash Flows at K = 12% considered  = * 99.13/  = 4 years and 9.28 months   Payback Period (Net Cash flows are considered)  = * 82.75/159  = 3 years and 6.25 months 

24  Problem No. 7  Calculation of Annualised CF for Machine A  Annualized cash Outflow = 8,98,416 /  = Rs. 3,61,274  YearCash OutflowDep. 10%Dep. Factor 06,00, ,20, ,09,092 21,20, ,168 31,20, , ,98,416

25  Problem No. 7  Calculation of Annualised CF for Machine B  Annualized cash Outflow = 7,12,400 /  = Rs. 4,10,486  Conclusion: Machine ‘A’s Annualized cash out flow is lower than machine ‘B’. Therefore machine ‘A’ should be purchased.  YearCash OutflowDep. 10%Dep. Factor 04,00, ,80, ,63,638 21,80, ,48, ,12,400

26  Problem No. 8 Sl.no.ProjectABCDE 1Initial Investment (Rs. in Lakhs) NPV PI Rank based on PI IIIVIIVII

27  Problem No. 8  If the Projects are Divisible then  If the projects are divisible, then allocation should be based on Rank. RankProjectInvestment (Rs. In Lacs) Cum. Investment (Rs. In Lacs) NPV (Rs. In Lacs) 1 C E A D (1/4) Total0.72

28  Problem No.8  If the Projects are Indivisible then  If the projects are indivisible, then various combination of investsments should be considered. Combination with maximum NPV should be chosen. OptionCombination of ProjectsTotal Investment (Rs. In Lacs) NPV (Rs. In Lacs) 1A,D B D,E A,C,E C,D

29  Problem No.1  Cost of Equity  Ke = (1 / 20) * = 10%  Cost of Pref. Share  Kp = [ 5 + (100 – 108)/10]/ [( )/2] = 4.04%  Cost of Debenture  Kd = [10 (1 – 0.5) + (100 – 101)/10] / [ ( )/2]  = 4.88%

30  Problem No.1  COMPUTATION OF WACC – BV WEIGHTS  WACC = [ 10 * * *1] / 4 = 7.23% CAPITALCOSTAMOUNT IN RS.WEIGHT EQUITY ,000, PREFERENCE , DEBENTURE ,

31  Problem No.1  COMPUTATION OF WACC – MV WEIGHTS  WACC = [ 10 * * *21] / 139 = 8.28% CAPITALCOSTAMOUNT IN RS.WEIGHT EQUITY ,00,00096 PREFERENCE ,50,00022 DEBENTURE ,25,00021

32  Problem No.2  I = 16, t = 35%  Kd = I ( 1 – t) / NP * 100 %  (a) If issued at par: Kd = 16(.65) / 100 = 10.4%  (b) If issued at 10% Discount Kd = 16(.65) / 90 = 11.56%  (c) If issued at 10% Premium Kd = 16(.65) / 110 = 9.45%

33  Problem No.3  D 0 = 2; G = 10%, D 1 = 2*(1.10) = 2.20  P 0 = 40  Ke = (2.2 / 40) * 100% + 5% = 15.50%  (ii) Ke = 15.50%, D 0 = 2, G = 11%, then D1 = 2 * 1.11 = 2.22  P 0 = D1 / (Ke – g) = 2.22 / 4.5% = Rs  (iii) Ke = 16%, G – 10%, D = 2, then P = ?  P = 2 / (16% - 10%) = Rs.33.33

34 Let the Equity Capital be 10x Debt Funds = 6x Total Capital Employed = 16x Given ROCE = 20%, Hence EBIT = 3.20x Less: Interest 6x * 10%= 0.60x Profit Before Tax= 2.60x Less: Tax 40%= 1.04x Profit after tax= 1.56x Equity Capital = 10x Return on Equity = 1.56x / 10x = 15.60% Problem No. 1

35 Problem No. 2 Net Sales: Rs. 30 crores EBIT Rs % on sales ROI = EBIT  Capital Employed = {3.6  (10+2+6)  100} = 20% 2. Degree of Financial Leverage= EBIT / EBIT- Interest = {3.6  ( )} = Degree of Combined Leverage= DFL  DOL 3 =  DOL  DOL= 3  Degree of Operating Leverage = 2.25

36 Rs.( In Crores) EBIT3.6 Add: Interest on Debt0.9 EBT2.7 Less: 40%1.08 EAT1.62 Less: Preference dividend0.26 Earnings available for Equity Shareholders1.36 Problem No. 2 ROE = 1.36 / 10 = 13.6%

37 Problem No. 3 (i) Financial leverage: Combined Leverage= Operating Leverage (OL) x Financial Leverage (FL) 2.8 = 1.4 x FL FL = 2 Financial Leverage = 2

38  Sales = 30,00,000  Less: Variable Cost = 22,86,000  Contribution = 7,14,000  Less: Fixed Cost = 2,04,000  EBIT = 5,10,000  Less: Interest = 2,55,000  EBT =2,55,000  Less: Tax = 76,500  EAT = 1,78,500  PV Ratio = 23.8%  EPS = 1,78,500 / = Rs.1.05 Problem No.3 OL = 1.40 C / C – = 1.40 C =

39 Problem No. 3 (iii)

40  To Find, Sales Value at which EBIT = NIL  Contribution = EBIT + Interest + Fixed Cost = = 4.59  Sales = Contribution / PVR = 4.59/23.8%  = Rs Lacs Problem No.3

41  SALES  LESS: VARIABLE COST  CONTRIBUTION  LESS: FIXED COST  EBIT  LESS: INTEREST  EBT  LESS: TAX  EAT Problem No.4  COMPANY A        3000  900  2100  COMPANY B       9000  1500  450  1050

42 NET INCOME APPROACH NET OPERATING APPROACH MODIGLIANI – MILLER APPROACH TRADITIONAL APPROACH

43 CAPITAL STRUCTURE IS NOT RELEVANT TO THE VALUE OF THE FIRM S = V - D V = VALUE OF THE FIRM S = VALUE OF EQUITY D = VALUE OF DEBT

44 CAPITAL STRUCTURE IS RELEVANT TO THE VALUE OF THE FIRM V = S + D V = VALUE OF THE FIRM S = VALUE OF EQUITY D = VALUE OF DEBT

45 NOI / EBIT5,00,000 Less: Interest on Deb 10% on Rs.15 Lacs1,50,000 Earnings available to ESH3,50,000 Overall cost of capital15% Value of the Firm = / ,33,333 Market Value of Debt15,00,000 Total Value of the Firm (V = S + D)18,33,333 Cost of Equity = / 18,33, % Problem No. 5

46 NOI / EBIT5,00,000 Less: Interest on Deb 10% on Rs.20 Lacs2,00,000 Earnings available to ESH3,00,000 Equity Capitalisation Rate16% Market Value of Equity (350000/16%)18,75,000 Market Value of Debt20,00,000 Total Value of the Firm (V = S + D)38,75,000 Overall Cost of Capital = EBIT / Value of Firm = / % Problem No. 6

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50  Problem No. 7  EBIT – EPS INDIFF. (PLAN 1 & PLAN 2)  [(E-0)*.6 – 0] / = [(E )*.6 – 0] /  SOLVING THIS E = /=

51  Problem No. 7  EBIT – EPS INDIFF. (PLAN 1 & PLAN 3)  [(E-0)*.6 – 0] / = [(E-0)*.6 – ] /  SOLVING THIS E = 416,667/=

52  Problem No. 8  PLAN 1:  NO. EQUITY SHARES =  INT. ON DEB =  PLAN 2:  NO. EQUITY SHARES =  INT. ON DEB =  PREF. DIVIDEND = RS  EBIT – EPS INDIFF. (PLAN 1 & PLAN 2)  [(E-48000)*.65 – 0] / = [(E-48000)*.65 – 28000] /  SOLVING THIS E = 1,77,231/=

53  Problem No. 9

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56 Indifference Point Between Plan P & Q [(EBIT – I 1 )(1 – t) – Preference Dividend] / N1 = [(EBIT – I 2 ) (1 – t) – Pref. Dividend] / N2 (EBIT – NIL) (1 – 0.50) –NIL/ 2, 00,000 = (EBIT – 2, 00,000) (1 – 0.50) – NIL / 1, 00, EBIT / 2= 0.50 EBIT – 1, 00, EBIT= EBIT – 2, 00,000 EBIT= 2, 00,000 / 0.50 EBIT= Rs. 4, 00,000

57  Problem No. 9 Between Plan P & R (EBIT – NIL) (1 – 0.50) – NIL / 2, 00,000 = (EBIT – NIL) (1 – 0.50) – 2, 00,000 / 1, 00, EBIT / 2= 0.50 EBIT – 2, 00, EBIT= EBIT – 4, 00,000 EBIT= 4, 00,000 / 0.50 EBIT= Rs. 8, 00,000

58  Problem No. 9 Between Plan Q & R (EBIT –2, 00,000)(1 – 0.50) –NIL/1, 00,000 = (EBIT–NIL) (1 – 0.50) – 2, 00,000/ 1, 00, EBIT – 1, 00,000 = 0.50EBIT – 2, 00,000 Indifference point is not possible for this plan. Plan Q is best among others because EPS is Maximum in this case.

59 Working Capital Days =Day CA - Day CL Days Raw Material *360= Work in Progress *360= Finished goods *360= Debtors Less: Creditors Period -30 No. of Cycles 85 No. of Operating Cycles = 360 /85= 4.24 times

60 Cash Cost Current AssetsAmount (inRs.) Raw materials ( 9,00,000 * 1/12 ) 75,000 Debtors ( Refer WN ) 4,90,000 Finished goods ( Refer WN ) 2,35,000 Cash 1,00,000 Sales promotion expenses ( * 1/4 ) 30,000 CA 9,30,000 Less: Current Liabilities Creditors ( 9,00,000 * 2/12 ) 1,50,000 Wages ( 7,20,000 * 1/12 ) 60,000 Mfg. Overheads 80,000 Admn. Overheads ( 2,40,000 * 1/12 ) 20,000 CL 3,10,000 Working Capital ( CA - CL ) 6,20,000 Add:Safety Margin 20% 1,24,000 Working Capital Requirement 7,44,000

61  WN – 1 Debtors (Cash Cost)  Sales = 36,00,000  Less: GP = 9,00,000  Fact. Cost = 27,00,000  Less: Mat, Lab, Manu. Exp  Depn = Rs.1,20,000  Fact. Cash Cost = 27,00,000 – 1,20,000  = 25,80,000  Add: Admn. Exp = 2,40,000  Add: Selling Exp = 1,20,000  Cash Cost of Sales = 29,40,000  Debtors = 29,40,000 * 60/360 = 4,90,000

62  WN – 2 Finished Goods (Cash Cost)  Fact. Cash Cost = 27,00,000 – 1,20,000  = 25,80,000  Add: Admn. Exp = 2,40,000  Cash Production = 28,20,000  Finished Goods = 28,20,000 * 30/360 = 2,35,000

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67 Current Delay in Invoicing: 3*20% + 4*10% + 5*40% + 6*30% = 4.8 Days Delay on Account of Outsourcing: 0*40% + 1 * 40% + 3 * 20% = 1.0 Day Saving in Delay by outsourcing = 3.8 Days Debtors Equivalent = 730 * 3.8 / 365 = 7.6 Lacs Saving in 20% = 7.6 * 20% = ` 1,52,000 Saving in Postage = 4000 * 12 = ` 48,000 Total Saving on Account of O/s = ` 2,00,000

68 Current Collection Period: 36 Days Collection Period Account of Outsourcing: 30 Saving in Colln Period by O/s = 6 Days Debtors Equivalent = 730 * 6 / 365 = 12 Lacs Saving in 20% = 12 * 20% = `.2,40,000

69 ParticularsCost ` Benefit ` Net Benefit ` Remarks Invoicing2,00,000 0 Indifferent Monitoring Collections 2,50,0002,40,000(10,000) Reject Both4,00,000 (after discount of Rs.50000) 4,40,00040,000 Accept


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