ASSIGNMENT 5

docx

School

University Canada West *

*We aren’t endorsed by this school

Course

MISC

Subject

Business

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by ProfessorMask18863

Assignment 5 University Canada West BUSI 623: Financial Management (ONS-Winter 23-48) Instructor’s Name: Sujatha Selvaraj Due Date: 8th March 2023

Chapter 9 2. Answer: We Know, The payback period is = initial cost/ annual cash flow = $1700 / $585 = 2.91 years For an initial cost of $3300 , the payback The payback period is = initial cost/ annual cash flow =$3300 / $ 585 = 5.64 years. For an initial cost of $4900, the payback period is a little more complicated. Note that after eight years, the total cash inflows will be Total cash inflows = 8 ($585) = $ 4680 If the initial cost is $ 4900 , the project never pays back , Notice that for annuity cash flows Payback = $ 4900 /$ 585 = 8.38 years. Since the cash flow stops after 8 years, this response is illogical, and we must once more draw the conclusion that there is never a payback period.

4. We must determine the current value of all cash flows to employ discounted payback. The project's cash flows during the first four years are worth the following today: Value today of Year 1 cash flow = $4,200/1.14 = $3,684.21 Value today of Year 2 cash flow = $5,300/1.142 = $4,078.18 Value today of Year 3 cash flow = $6,100/1.143 = $4117.33 Value today of Year 4 cash flow = $7,400/1.144 = $4381.39 We utilize these variables to determine the payback duration and the discounted repayment. The discounted payback for an initial investment of $7,000 is $3,684.21 based on the discounted first year cashflow. Discounted payback = 1 + ($7,000 – 3,684.21)/$4,078.18 = 1.813 years For an initial cost of $10,000, the discounted payback is: Discounted payback = 2 + ($10,000 – 3,684.21– 4,078.18)/$4,117.33 = 2.54 years A capital budgeting method known as the discounted payback period estimates how long an investment will take to recoup its initial cost while accounting for the time value of money. There are two steps to the calculation: first, we must find the discounted cash flow for each year of the project, and then we must identify the year in which the discounted cash flows pay back the initial investment.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

The deferred payback computation is visible. Since the payback period is expected to last between two and three years, the starting cost is reduced by the discounted values of the cash flows for years one and two. The discounted sum we still need to pay to recoup our initial investment is represented by the numerator, which is the number. To get the portion of the fractional payback, we divide this sum by the discounted amount we will earn in Year 3. If the initial cost is $13,000, the discounted payback is: Discounted payback = 3 + ($13,000 - 3684.21 - 4078.18 - 4117.33) / $4,381.39 = 3.26 years 12. a. The IRR is the interest rate at which the project's NPV equals zero. The formula for Project A's IRR is: 0 = – $29,000 + $14,400/(1+IRR) + $12,300/(1+IRR) 2 +$9,200/(1+IRR) 3 + $5,100/(1+IRR) 4 Get the equation's root by using a spreadsheet, a financial calculator, or trial and error. IRR = 18.56% The equation for the IRR of Project B is: 0 = –$29,000 + $4,300/(1+IRR) + $9,800/(1+IRR)2 + $15,200/(1+IRR)3 + $16,800/(1+IRR)4 We discover that the equation's root is

IRR = 17.42% by using a spreadsheet, financial calculator, or trial and error. By comparing the IRRs of the projects, we can determine that project A should be approved because its IRR is bigger than its IRR. However, because the IRR criterion has a ranking issue for projects that are mutually exclusive, this may not be the best course of action. We must assess the project NPVs to determine whether the IRR determination rule is accurate. b. The NPV of Project A is as follows: NPVA = –$29,000 + $14,400/1.11+ $12,300/1.112 + $9,200/1.113 + $5,100/1.114 NPVA = $4,042.42 And the NPV of Project B is: NPVB = –$29,000 + $4,300/1.11 + $9,800/1.112 + $15,200/1.113 + $16,800/1.114 NPVB = $5,008.56 Here, As Project B has a higher NPVB than NPVA, we should approve it. c. By deducting the cash flows from one project from the cash flows of the other project, we can determine the crossover rate. Here, we shall deduct Project B's cash flows from Project A's

cash flows. After identifying these disparate cash flows, we calculate the IRR. The crossover rate's equation is: the crossover rate: 0 = $10,100/(1+R) + $2,500/(1+R)2 – $6,000/(1+R)3 – $11,700/(1+R)4 Finding the equation's root with the aid of a spreadsheet, financial calculator, or trial and error, we discover that: R = 14.83% Choose project A at discount rates over 14.83 percent; choose project B at discount rates below 14.83 percent; and at a discount rate of 14.83 percent, choose neither A nor B. Chapter 12 1. Ans: We Know that, Dividend yield = $ 1.45 / $ 79 = 1.8 % Per share capital gain is $ 9, So the capital gains yield is: Capita; gains yield = (P t + 1 - P t ) / P t = ($88 -$79)/ $ 79 = 11.4 % The total percentage return is = 1.8 %+ 11.4 % = 13.2 %

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

The equation for the IRR of Project B is: 0 = –$29,000 + $4,300/(1+IRR) + $9,800/(1+IRR) 2 + $15,200/(1+IRR) 3 + $16,800/(1+IRR) 4 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 17.42% The equation for the IRR of Project B is: 0 = –$29,000 + $4,300/(1+IRR) + $9,800/(1+IRR) 2 + $15,200/(1+IRR) 3 + $16,800/(1+IRR) 4 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 17.42% The equation for the IRR of Project B is: 0 = –$29,000 + $4,300/(1+IRR) + $9,800/(1+IRR) 2 + $15,200/(1+IRR) 3 + $16,800/(1+IRR) 4 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 17.42% 7. Ans: We know that, Arithmetic Average Return = R 1 + R 2 + ... + R n N

= 15%+ 7%+26% -13% +11% 5 = 9.20 % 0r 0.0920% = 21%+ 36%+13% -26% +15% 5 = 11.80% 0r 0.1180 Standard Deviation Observation X X mean (X-X mean)^2 1 15% 9.20% 0.0034 2 26% 9.20% 0.0282 3 7% 9.20 % 0.0005 4 - 13% 9.20% 0.0493

5 11% 9.20% 0.0003 N-1 4 Variance 0.2042 Standard 14.29% Deviation Standard Deviation Observation Y Y mean (Y-Y mean)^2 1 31% 11.80% 0.0085 2 36% 11.80% 0.0586 3 13% 11.80 % 0.0001 4 - 26% 11.80% 0.1429 5 15% 11.80% 0.0010 N-1 4 Variance 0.05277 Standard 22.97% Deviation

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

16. Answer: We must first determine the returns for each year in order to determine the arithmetic and geometric average returns. The following formula can be used to determine the returns. Return is equal to (Ending Value – Starting Value + Income) / Beginning Value. Where: Ending Value: The investment's worth at the end of the time frame Beginning Value: the cost of the investment at the start of the time period. Income: any money earned within the time period (e.g., dividends, interest) R1 = ($73.66 – 60.18 + 0.60) / $60.18 = 0.2339 or 23.39% R2 = ($94.18 – 73.66 + 0.64) / $73.66 = 0.2873 or 28.73% R3 = ($89.35 – 94.18 + 0.72) / $94.18 = –0.0436 or –4.36% R4 = ($78.49 – 89.35 + 0.80)/ $89.35 = -0.1126 or -11.26% R5 = ($95.05 – 78.49 + 1.20) / $78.49 = 0.2263 or 22.63% The return's arithmetic average was: RA = (0.2339 + 0.2873 – 0.0436 - 0.1126 + 0.2263)/5 = 0.11825 or 11.825% And the geometric average return was: RG = [(1 + 0.2339)(1 + 0.2873)(1 – 0.0436)(1-0.1126)(1 + 0.2263)]1/5 – 1 = 0.1058 or 10.58%

Reference: Westerfield, R. W., Roberts, G., Holloway, T., Ross, S. A., Jordan, B. D., & Pandes, J. A. (2019). Fundamentals of Corporate Finance . McGraw-Hill Ryerson. Cfa, O. J. A. (2019, April 8). Arithmetic Average Return . XPLAIND.com. https://xplaind.com/407248/arithmetic-average-return Schmidt, J. (2023, March 4). Internal Rate of Return (IRR) . Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/valuation/internal-rate-return-irr/ Fernando, J. (2022, November 15). Net Present Value (NPV): What It Means and Steps to Calculate It . Investopedia. https://www.investopedia.com/terms/n/npv.asp

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Related Documents

5070- Assessment 3.docx

Swot analysis- LUSH.docx

ICA #2 FV(1).docx

Crombie REIT.docx

Strategic Management Ploicy (BUS-4795-01) Homework 2(Raymond Rolle) (1).docx

Assignment 3 of HR and Entrepreneur.docx

Recommended textbooks for you

BUSN 11 Introduction to Business Student Edition

Business

ISBN:9781337407137

Author:Kelly

Publisher:Cengage Learning

Essentials of Business Communication (MindTap Cou...

Business

ISBN:9781337386494

Author:Mary Ellen Guffey, Dana Loewy

Publisher:Cengage Learning

Accounting Information Systems (14th Edition)

Business

ISBN:9780134474021

Author:Marshall B. Romney, Paul J. Steinbart

Publisher:PEARSON

Introduction to Business

Business

ISBN:9781947172548

Author:OpenStax

Publisher:OpenStax College

International Business: Competing in the Global M...

Business

ISBN:9781259929441

Author:Charles W. L. Hill Dr, G. Tomas M. Hult

Publisher:McGraw-Hill Education

Bcom

Business

ISBN:9780357026595

Author:LEHMAN, Carol M.

Publisher:Cengage Learning,

SEE MORE TEXTBOOKS

Recommended textbooks for you

BUSN 11 Introduction to Business Student Edition
Business
ISBN:9781337407137
Author:Kelly
Publisher:Cengage Learning
Essentials of Business Communication (MindTap Cou...
Business
ISBN:9781337386494
Author:Mary Ellen Guffey, Dana Loewy
Publisher:Cengage Learning
Accounting Information Systems (14th Edition)
Business
ISBN:9780134474021
Author:Marshall B. Romney, Paul J. Steinbart
Publisher:PEARSON
Introduction to Business
Business
ISBN:9781947172548
Author:OpenStax
Publisher:OpenStax College
International Business: Competing in the Global M...
Business
ISBN:9781259929441
Author:Charles W. L. Hill Dr, G. Tomas M. Hult
Publisher:McGraw-Hill Education
Bcom
Business
ISBN:9780357026595
Author:LEHMAN, Carol M.
Publisher:Cengage Learning,