Corporate Finance Coursework

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= $2.5564million

Payback period = 4 years + [pic 12]

= 4.166years or 4.17years

Discounted payback period

Yr

0

1

2

3

4

5

-12.5

3

3

3

3

3

-12.5

3/1.15

3/1.152

3/1.153

3/1.154

3/1.155

2.61

2.27

1.97

1.72

1.49

Yr

6

7

8

9

10

3

3

3

3

3

3/1.156

3/1.157

3/1.158

3/1.159

3/1.1510

1.3

1.13

0.98

0.85

0.74

Discounted PP = 7years + ()[pic 13]

= 7.01 years

Internal rate of returns = -COST + PV

NPV = 0

IRR = -12.5 + 3/(1+R) + 3/(1+R)2 +..... + 3/(1+R)10

12.5 = 3 (N = 10, R = ?)

12.5/3 = (N=10, R=?)

4.166 = (N =10, R= 0.20 or 0.21)

Annuity Factor should be between 4.1925 (20%) or 4.0541 (21%)

NPV of 20% = -12.5 + [3(4.1925)]

= 0.0775 ≈ $77,500K

NPV of 21% = -12.5 + [3(4.0541)]

= - 0.3377 ≈ -$337,700K

[pic 14]

So IRR = 20% + [pic 15]

=20% + [pic 16]

= 20.186% ≈ 20.19%

1a) As per above Table 2

1b) NPV for option B = $2.5564m, Payback Periods for option B = 4.166years or 4.17years, IRR for option B = 20.186% or 20.19%

1c) Both option A and B the NPV is greater than zero as such both are acceptable. Option A the payback period is about 3.2years and Option B the payback period is about 4.17years. There is a difference of 0.97years which is about 354days. Reason for this difference is because for option A the initial investment is $8m compared to option B the initial investment is $12.5m and the yearly net cash in-flow is only $0.5m difference, as such the payback period for option B is naturally longer. When payback period is less than the benchmark, we will accept but in this investment appraisal, Flowton did not mentioned on the ideal payback period. Both option A and B, the first cash flow is negative and remaining cash flow is positive as such the internal rate of return is to be accepted because it is greater than discount rate 15% or 0.15.

From my personal point of view, I will recommend Flowton to choose option B because yearly the net cash-in flow is $3m which is additional $0.5m compared to option A. It is true that option B, the payback period is longer than option A but if Flowton is not looking serious on the payback period than this shall not be an issue. On the other hand, the NPV for option B is to $0.1554m more than option A. As for the PV for option B is also $4.6554 more than option A. The internal rate of return for option A is higher than option B but with the discount rate of 15% or 0.15. It shall not be an issue, because IRR for option B is still greater than 15% or 0.15

2) In finance, the net present value (NPV) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity.

In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting and widely used throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, above the cost of funds.

NPV can be described as the “difference amount” between the sums of discounted: cash inflows and cash outflows. It compares the present value of money today to the present value of money in the future, taking inflation and returns into account

The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price; the converse process in DCF analysis — taking a sequence of cash flows and a price as input and inferring as output a discount rate (the discount rate which would yield the given price as NPV) — is called the yield and is more widely used in bond trading.

If...