Investment analysis
Part a)
|
Year |
Profits of Company |
Dividend Income |
Opening Balance |
Interest @8% |
Total available balance |
Consumption |
Closing balance |
|
2016-17 |
$ 8,00,000.00 |
$ 64,000.00 |
$ – |
$ 5,120.00 |
$ 69,120.00 |
$ 53,327.41 |
$ 15,792.59 |
|
2017-18 |
$ 9,60,000.00 |
$ 76,800.00 |
$ 15,792.59 |
$ 7,407.41 |
$ 1,00,000.00 |
$ 1,00,000.00 |
$ – |
Dividend: 800000*80%*10%= $64000
960000*80%*10%= $76800
Therefore, the consumption that can be made by Jillian Black in year 2016-17 is $53327.41
Part b)
|
Year |
Dividend |
DCF |
PV of Dividends |
|
2018 |
$ 3.00 |
1 |
|
|
2019 |
$ 3.60 |
0.885 |
$ 3.19 |
|
2020 |
$ 4.18 |
0.783 |
$ 3.27 |
|
2021 |
$ 4.68 |
0.693 |
$ 3.24 |
|
2022 |
$ 4.91 |
0.613 |
$ 3.01 |
|
Total |
$ 12.71 |
Dividend growth model= D1
|
Price= |
$ 4.91 |
|
|
0.13-0.05 |
||
|
$ 4.91 = |
$ 61.39 |
|
|
0.08 |
|
Present Value |
$ 61.39 |
|
PV of dividends |
$ 12.71 |
|
Expected Market Price |
$ 74.10 |
Question 2:
Part a)
i)
No. of years of deposits = 65-40
= 25 Years
As compounding is done monthly the years will be converted to months.
No. of month of deposits = 25 x 1
Rate per annum= 6%
Rate per month = 0.06/12
0.5%
Refer to the table in Appendix 1:
Amount available in fund after 65th birthday= $2,078,981.89
Amount required= $ 2,000,000
Surplus available= $ 78,981.89
Surplus funds = $ 78,981.89
Rate of interest= 6% p.a.
No. of years (85 – 65) 20
No. of months (20 x 12) 240
Amount of pension payable monthly can be determined using the following formula:
P = I (1+ r) m
78981.89 =I (1+.005)240
I= 78981.89/139.581
Note: 139.581 is the cumulative discounting factor at 0.05% for 240 months
Therefore the pension payable every month will be =$ 565.851
Note: Refer Table 2 in Appendices
Part b)
i)
|
Effective Rate Formula: I = (1+ (r/m) )m −1 (1 + (0.048/12))12-1 4.907%
|
iii)
For the first 12 months the instalment will be $3500. In this instalment, both principle and interest will be calculated on the opening balance of loan every year.
After 12 months, the instalment amount will be changed and it will be $3750. This instalment will also include the principle and interest.
Remaining period will be calculated as follows:
Retirement age= 65th year.
Pension fund will be fully paid at the end of 85th year
Number of years = 20 years.
Number of months= 20 x 12 = 240 months.
Remaining months= 240 – 12-12
= 216 Months.
Cumulative discounting factor @ 0.04% per month = 144.50
Therefore, the instalment amount will be= Amount outstanding after 24th Month
Cumulative discounting factor @ 0.04%
=$ 571,856.23/144.50
=$3958.85
The above calculated amount also includes both principle and interest amount.
Note= Refer Table 3 in Appendices
- iv)
Loan amount= $ 600000
Interest rate= 4.8% p.a.
Loan = Instalment (1+r)t
600000= Instalment (1 + .004)t
Time year= 24.17 Years
24 years and 2.04 months.
Note: Refer Table 4 in Appendices
v)
|
The extra amount paid over and above the loan is $ 204.231 due to the rounding off factor used in calculation. |
||||
|
Therefore, the amount of final repayment is $ 600204.231 |
Note: Refer Table 4 in Appendices
Question 3
Part i)
As cash flows are given uneven in the question the average cash flow of 3 years is assumed to occur evenly for the purpose of calculation of payback period.
|
=12000+18000+27000 |
|||||||||||||||||||||||||
|
3 =19000
|
Note: Project X will be preferred over Project Y as it has lower payback period.
Part ii)
|
Investment X |
Investment Y |
||
|
Year |
Cash Flows |
Cumulative CFs |
Cash Flows |
|
0 |
$ -42,000.00 |
$ -42,000.00 |
$ -42,000.00 |
|
1 |
$ 12,000.00 |
$ -30,000.00 |
$ 18,000.00 |
|
2 |
$ 18,000.00 |
$ -12,000.00 |
$ 18,000.00 |
|
3 |
$ 27,000.00 |
$ 15,000.00 |
$ 18,000.00 |
|
Payback Period (Years) |
2.44 |
2.33 |
Yes, the payback period would be different in case of uneven cash flows and it will be increased.
Series 1= Investment X
Series 2= Investment Y
Note: Refer Table 5 in Appendices
|
Part iv) |
PROJECT X NPV TABLE |
||||||
|
Year |
Cash Flows |
PVF @ 14% |
PV |
PVF @ 15% |
PV |
PVF @ 14.75% |
PV |
|
0 |
$ -42,000.00 |
1.000 |
$ -42,000.00 |
1.000 |
$ -42,000.00 |
1.000 |
$ -42,000.00 |
|
1 |
$ 12,000.00 |
0.877 |
$ 10,526.32 |
0.870 |
$ 9,153.32 |
0.871 |
$ 10,457.89 |
|
2 |
$ 18,000.00 |
0.769 |
$ 13,850.42 |
0.756 |
$ 10,472.90 |
0.759 |
$ 13,670.94 |
|
3 |
$ 27,000.00 |
0.675 |
$ 18,224.23 |
0.658 |
$ 11,982.73 |
0.662 |
$ 17,871.16 |
|
NPV |
$ 600.96 |
$ -10,391.05 |
$ – |
|
IRR= |
LDR+ |
NPV at LDR |
x (UDR-LDR) |
|
NPV at LDR- NPV at UDR |
|||
|
IRR= |
14.75% |
INVESTMENT Y
NPV TABLE
|
Year |
Cash Flows |
PVF @ 13% |
PV |
PVF @ 14% |
PV |
PVF @ 13.70% |
PV |
|
0 |
$ -42,000.00 |
1.000 |
$ -42,000.00 |
1.000 |
$ -42,000.00 |
1.000 |
$ -42,000.00 |
|
1 |
$ 18,000.00 |
0.885 |
$ 15,929.20 |
0.877 |
$ 15,789.47 |
0.880 |
$ 15,831.13 |
|
2 |
$ 18,000.00 |
0.783 |
$ 14,096.64 |
0.769 |
$ 13,850.42 |
0.774 |
$ 13,923.60 |
|
3 |
$ 18,000.00 |
0.693 |
$ 12,474.90 |
0.675 |
$ 12,149.49 |
0.680 |
$ 12,245.91 |
|
NPV |
$ 500.75 |
$ -210.62 |
$ 0.65 |
|
IRR= |
LDR+ |
NPV at LDR |
x (UDR-LDR) |
|
NPV at LDR- NPV at UDR |
|||
|
IRR= |
13.70% |
Series 1= Investment X
Series 2= Investment Y
Note: Refer Table 6 in appendices.
Part v)
|
Project X Cash Flows |
Project Y Cash Flows |
Difference |
|
|
0 |
$ -42,000.00 |
$ -42,000.00 |
$ – |
|
1 |
$ 12,000.00 |
$ 18,000.00 |
$ -6,000.00 |
|
2 |
$ 18,000.00 |
$ 18,000.00 |
$ – |
|
3 |
$ 27,000.00 |
$ 18,000.00 |
$ 9,000.00 |
|
Crossover Point |
22.47% |
Series 1= Investment X
Series 2= Investment Y
Part vi)
As the IRR of investment X is higher than that of investment Y, it must be accepted.
Question 4
|
Amount |
Tax effect |
Amount |
net cost |
|
|
Reduction in Labour costs(cost savings) |
$ 2,50,000.00 |
Loss of tax benefits |
$ -75,000.00 |
$ 1,75,000.00 |
|
Depreciation per year |
$ 1,65,000.00 |
tax benefit |
$ 49,500.00 |
$ 1,15,500.00 |
|
Depreciation |
700000-40000 |
|
4 |
|
|
$ 6,60,000.00 |
|
|
4 |
|
|
Depreciation per year |
$ 1,65,000.00 |
|
Tax Benefit per year |
$ 49,500.00 |
|
Initial Investment |
$ 7,00,000.00 |
|
Working capital investment |
$ 40,000.00 |
|
Total initial outlay |
$ 7,40,000.00 |
|
Year |
$ – |
$ 1.00 |
$ 2.00 |
$ 3.00 |
$ 4.00 |
|
Decrease In Labour Cost |
$ 2,50,000.00 |
$ 2,50,000.00 |
$ 2,50,000.00 |
$ 2,50,000.00 |
|
|
Depreciation |
$ -1,65,000.00 |
$ -1,65,000.00 |
$ -1,65,000.00 |
$ -1,65,000.00 |
|
|
Overhauling Cost |
$ -30,000.00 |
||||
|
Increase In Expenses |
$ -70,000.00 |
$ -70,000.00 |
$ -70,000.00 |
$ -70,000.00 |
|
|
Working Capital |
$ 40,000.00 |
||||
|
Residual Value |
$ 40,000.00 |
||||
|
Income Before Taxes |
$ 15,000.00 |
$ -15,000.00 |
$ 15,000.00 |
$ 95,000.00 |
|
|
Tax [email protected] 30% |
$ 4,500.00 |
$ -4,500.00 |
$ 4,500.00 |
$ 28,500.00 |
|
|
Incremental Net Income |
$ 10,500.00 |
$ -10,500.00 |
$ 10,500.00 |
$ 66,500.00 |
|
|
Add: Depreciation |
$ 1,65,000.00 |
$ 1,65,000.00 |
$ 1,65,000.00 |
$ 1,65,000.00 |
|
|
Cash Flows From Operations |
$ -7,40,000.00 |
$ 1,75,500.00 |
$ 1,54,500.00 |
$ 1,75,500.00 |
$ 2,31,500.00 |
|
PVF |
1 |
0.892 |
0.797 |
0.712 |
0.636 |
|
Present Value Of Cash Flows |
$ -7,40,000.00 |
$ 1,56,696.43 |
$ 1,23,166.45 |
$ 1,24,917.43 |
$ 1,47,122.44 |
|
NPV |
-$188097.2487 |
Part b)
No the company should not purchase the technology as it will result in negative NPV which means that the new technology will not generate profits for the company rather the expenses will increase and the income will reduce.
References:
Bierman Jr, H., & Smidt, S., 2012. The capital budgeting decision: economic analysis of investment projects. Routledge.
Titman, S., Keown, A.J. and Martin, J.D., 2011. Financial management: Principles and applications.
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