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Individual Assignment 2

Submission Date: 2nd October 2018 before 5 pm on VLE Total Marks: 5 Marks
Marking Rubrics:
Criteria/Score Max Score
Question No 1 2
Question No 2 2
Question No 3 3
Question No 4 2
Overall Structure and Format 1
Total Score 10
Format: 12 Times New Roman, it should be justified and converted into pdf for submission. Line
Spacing of 1.5.

Question 1
Yangki Limited is a leading manufacturer of automotive components. It supplies to the original
equipment manufacturers as well as replacement market. Its projects typically have a short life as
it introduces new model periodically.
You have recently joined Yangki Limited as a financial analyst reporting to Tshering Penjor, the
Chief Finance Officer of the company. He has provided the following information about three
projects, A, B and C that are being considered by the Executive Committee of Yangki Limited.
 Project A is an extension of an existing line. Its cash flow will decrease over time.
 Project B involves a new product. Building its market will take some time and hence its
cash flow will increase over time.
 Project C is concerned with sponsoring a pavilion at a Trade Fair. It will entail a cost
initially which will be followed by a huge benefit for one year. However, in the year
following that some cost will be incurred to raze the pavilion.
The expected net cash flows of the three project are as follows:
Year Project A (Nu.) Project B (Nu.) Project C (Nu.)
0 (15000) (15000) (15000)
1 11000 3500 42000
2 7000 8000 (4000)
3 4800 13000 __

Tshering Penjor believes that all the three projects have risk characteristics similar to the average
risk of the firm and hence the firm’s cost of capital viz 12 percent will apply to them.
You have been asked to prepare a report for the executive committee, covering the following;
A. What is the payback period and discounted payback period? Find the payback period and
the discounted payback period of Project A and B.
B. What is net present value (NPV)? What are the properties of NPV? Calculate the NPV of
projects A, B and C.
C. What is internal rate of return (IRR)? Calculate the IRR for Project A B and C.
D. What is modified internal rate of return (MIRR)? What are the pros and cons of MIRR in
relation to IRR and NPV? Calculate the MIRR for project A, B and C assuming the
intermediate cash flows can be reinvested at 12 percent rate of return.
Question 2
Following the date on a capital Project M being evaluated by the management of X Ltd;
Annual Cost Saving Nu.40, 000
Useful life 4 years
IRR 15%
Profitability Index 1.064
NPV ?
Cost of Capital ?
Cost of project ?
Payback ?
Salvage Value 0
Find the missing values considering the following table of discount factor only;
Discount 15% 14% 13% 12%
Factor
1 Year 0.869 0.877 0.885 0.893
2 Year 0.756 0.769 0.783 0.797
3 Year 0.685 0.675 0.693 0.712
4 Year 0.572 0.592 0.613 0.636
2.855 2.913 2.974 3.038

Question 3
Generally while evaluating investment proposals, the IRR and NVP may lead to similar decision
in selection of project while in some situations they may give conflicting decisions. Explain using
practical examples, why IRR and NVP method may lead to conflicting results for capital budgeting
decisions and how do we overcomes such situations.
Question 4

1. Summarize the decision making rules for all methods of Capital Budgeting evaluation
techniques.
2. Is it possible for a project to have a payback period of 2 years and yet have a negative net
present value? Explain.
3. What is the decision-criteria for the profitability index? Do these criteria agree with that
of the net present value technique?
4. Is it possible for a project to not pay back, according to the discounted payback period
method, and yet have a positive net present value? Explain.