MGT201 Assignment # 1 Solution

Financial Management MGT201



Assignment 1

ABC Corporation, a maker of electronics equipments, is considering selling the rights to market its products to a well_known advertising firm.

The proposed deal calls for annual year end payments of Rs.15,000 in years 1 through 7 and

payments of Rs.30,000 and Rs.25,000 at the end of 8th and 9th year respectively . A final payment of Rs. 10,000 would be due at the end of year 10.

1. If ABC Corporation applies a required rate of return of 12% to them, what is the present value of this series of payments?

Solution:

Year Cash Flows Present Value of Cash Flows

PV = FV / (1+i)^n

1 15,000 13,392.86

2 15,000 11,957.91

3 15,000 10,676.70

4 15,000 9,532.77

5 15,000 8,511.40

6 15,000 7,599.47

7 15,000 6,785.24

8 30,000 12,116.50

9 25,000 9,015.25

10 10,000 3,219.73

Present Value of series of payments 92,807.83

2. A second company has offered ABC Corporation a payment of Rs.30,000 now and

another final payment of Rs.80,000 at the end of year 3 for the rights to market the

products. Which offer should ABC Corporation accept?

Year Cash Flows Present Value of Cash Flows

PV = FV / (1+i)^n

1 30,000 30,000.00 (As this payment was

made immediately, therefore

carries no interest)

3 80,000 56,942.42

Present Value of series of payments 86,942.42

ABC corporation must accept the proposal whose Present Value of Series of Payment is higher

i.e. 92,807.83