Fatima Zubair Warriach Assignment no.

4:Capital Budgeting 7/18/20

Question no. 1

Part 1)
Given data

1) Intitial Investment= $ 3,000,000.00

2) Cash flows
Year Cashflow obtained
Year 1 $ 700,000
Year 2 $ 700,000
Year 3 $ 700,000
Year 4 $ 700,000
Year 5 $ (1,300,000)
Year 6 $ 700,000
Year 7 $ 700,000
Year 8 $ 700,000
Year 9 $ 700,000
Year 10 $ 900,000
3) Discount Rate= 10%

Solution

NPV= $ 1,750,858.43

This value of NPV supports business' decision to buy a production unit for enhanced
operational activities thus increasing efficiency and ascertained profitability

Part 2)
Given data
Investment opporyunity 1 Investment opporyunity 2
Intitial
1) Investment= $ 110,000 Intitial Investment= $ 110,000
2) Cash flows Cash flows
Year Cashflow obtained Year Cashflow obtained
Fatima Zubair Warriach Assignment no. 4:Capital Budgeting 7/18/20

Year 1 $ 20,000 Year 1 $ 40,000

Year 2 $ 30,000 Year 2 $ 40,000
Year 3 $ 40,000 Year 3 $ 40,000
Year 4 $ 50,000 Year 4 $ 40,000
Year 5 $ 70,000 Year 5 $ 40,000
Solution
n
CFt

t 0  1  IRR  t  0.

Investment opporyunity 1 Investment opporyunity 2

Total cash flows= $ 210,000 Total cash flows= $ 200,000

IRR= 10.59962258654 10.4869835499704

Investment opporyunity 1 Investment opporyunity 2

Profitability 1.796% 3.4675%

Index=

ANALYSIS: The profitability index suggests the 2nd investement suggested to the
business is more profitable as compared to the other investment

Part 3)
Given data
Investment (Days/Weeks/Months) - Initial Amount
Payback= Total Cash Received
Investment opporyunity 1 Investment opporyunity 2

Cash Flow Cash Flow

Annual Cumulative Annual Cumulative
Initial Outlay -$110,000 -$110,000 -$110,000 -$110,000
Year 1 $20,000 -$90,000 $40,000 -$70,000
Year 2 $30,000 -$60,000 $40,000 -$30,000
Year 3 $40,000 -$20,000 $40,000 $10,000
Year 4 $50,000 $30,000 $40,000 $50,000
Year 5 $70,000 $100,000 $40,000 $90,000

The project will generate its initial The project will generate its initial
Intrepretation= investment amount in nearly 3 investment amount in nearly 2 years
years afters profits are expected afters profits are expected
Fatima Zubair Warriach Assignment no. 4:Capital Budgeting 7/18/20

The project will generate its initial The project will generate its initial
Intrepretation= investment amount in nearly 3 investment amount in nearly 2 years
years afters profits are expected afters profits are expected

Part 3)
Given data
Discount rate= 10%
Discounted Cash Flow= FV/(1+i)^n
Investment Proposal no. 1
Discounted Cumulative
Annual Cumulative
CF Discounted CF
Initial Outlay -$110,000 -$110,000 -$110,000 -$110,000
Year 1 $20,000 -$90,000 $1,818.18 ($108,181.82)
Year 2 $30,000 -$60,000 $27,272.73 ($80,909.09)
Year 3 $40,000 -$20,000 $36,363.64 ($44,545.45)
Year 4 $50,000 $30,000 $45,454.55 $909.09
Year 5 $70,000 $100,000 $63,636.36 $64,545.45
Investment Proposal no. 2
Discounted Cumulative
Annual Cumulative
CF Discounted CF
Initial Outlay -$110,000 -$110,000 -$110,000 -$110,000
Year 1 $40,000 -$70,000 $1,818.18 ($108,181.82)
Year 2 $40,000 -$30,000 $36,363.64 ($71,818.18)
Year 3 $40,000 $10,000 $36,363.64 ($35,454.55)
Year 4 $40,000 $50,000 $36,363.64 $909.09
Year 5 $40,000 $90,000 $36,363.64 $37,272.73

Both the Investment will take 3 years to cover initial investment costs of
Evaluation= the project
Fatima Zubair Warriach Assignment no. 4:Capital Budgeting 7/18/20

Question-2

PMT $ 80
nper 30
rate 7%
FV $ 1,000
PV = $1,124

D0 $ 2.50
g 6%
P0 $ 35
Ks= 13.57%

Pref stock $ 19.00

Pref Div $ 1.50

Kp= 7.89%
Fatima Zubair Warriach Assignment no. 4:Capital Budgeting 7/18/20

Cost of purchase ($M) $ 40

Floatation
Weights Amount
cost
Bonds 38% $ 15.20 0.50%
Common stock 47% $ 18.80 5%
Pref Stock 15% $ 6.00 2%
Total 100% $ 40.00

Tax rate 34%

WACC = 9.32%

Total Amount raised $ 40.00 Million

Floatation cost $ 1.136 Million
Net Amt Raised $ 38.864 Million

Floatation
Floatation cost % Amt Raised Weight
cost
Bonds 0.50% $ 0.076 $ 15.124 39%
Common stock 5% $ 0.940 $ 17.860 46%
Pref Stock 2% $ 0.120 $ 5.880 15%
Total $ 38.864 100%

WACC with Floatation cost 9.23%