ACC501 GDB # 2 Solution

ACC501 GDB # 2 Solution:
The following four mutually exclusive projects are under consideration by the ABC Company:

Approach Project A Project B Project C Project D
Payback period 2.88 3.2 2.88 2.89
NPV -1,280 2,560 2,560 -2,240
On the basis of results of above approaches which project you think is “The best one” and why?


Note: Your answer should be concise and to the point and give one line answer as
Project ________________
Reason: _______________

Solution:
Project = C

Reason = as it is higher NPV and short payback period so project C will be chosen

ACC501 Assignment Solution

ACC501 GDB

Market value of a firm is determined by below ratios. By calculating them we can see that XYZ's capital strcuture is more efficient that that of ABC


1. Earnings per share of XYZ is = EPS=Retained earnings/No of Shares = 200,000/85,000 = Rs 2.35

Earnings per share of ABC is =EPS = Retained earnings/No of Shares = 250,000/140,000 = Rs 1.78

2. Book Value per share = Common equity/shares outstanding

XYZ BV= (850,000+320,000+200,000)/85000= Rs 16.11

ABC BV = (1400,000+500,000+250,000)/140,000=Rs 15.35

3. Market price to Book value Ratio = Market value per share/BV per share

XYZ M/B = 15/16.11= 0.93

ABC M/B = 12/15.35 = 0.78

ACC501

ACC501 Assignment Solution:

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ACC501

ACC501 Assignment # 2
Answer:
i) Calculate the Payback Period for each project.
Initial Investment = 100,000
Payback Period for Project A:
In year one, 40,000 will be covered, and (100,000-40,000) = 60,000 should be covered.
In year two, further 25,000 will be covered, and (60,000-25,000) = 35,000 should be
covered.
In year three, 35,000 will be covered, which we have to cover from the project.
So, our payback period is 3 years for Project A.
Payback Period for Project B:
In year one, 45,000 will be covered, and (100,000-45,000) = 55,000 should be covered.
In year two, further 25,000 will be covered, and (55,000-25,000) = 30,000 should be
covered.
In year three, 20,000 will be covered, and (30,000-20,000) = 10,000 should be covered
yet.
In year four, 20,000 will be covered, but we have to cover 10,000 only,
So these 10,000 will take the time in years = 10,000/20,000 = 0.5 years
OR 10,000 will take the time in months = 10,000/20,000 * 12 = 6 months
OR 10,000 will take the time in days = 10,000/20,000 * 365 = 182.5 days
So, payback period for Project B is 3.5 years, or 3 years and 6 months or 3 years and
182.5 days.
ii) Calculate the Net Present Value (NPV) of each project.
NPV for Project A:
NPV = -Initial Investment +? Cash Flows / (1+r) t
NPV = -100,000 + [40,000 / (1+0.13) 1] + [25,000 / (1+0.13) 2] + [35,000 / (1+0.13) 3] +
[25,000 / (1+0.13) 4] + [20,000 / (1+0.13) 5]
NPV = -100,000 + [40,000 / (1.13) 1] + [25,000 / (1.13) 2] + [35,000 / (1.13) 3] +
[25,000 / (1.13) 4] + [20,000 / (1.13) 5]
NPV = -100,000 + [40,000 / 1.13] + [25,000 / 1.2769] + [35,000 / 1.442897] + [25,000 /
1.63047361] + [20,000 / 1.8424351793]
NPV = -100,000 + [35398.23] + [19578.67] + [24256.76] + [15332.97] + [10855.2]
NPV = 5421.83
NPV for Project B:
NPV = -Initial Investment + ? Cash Flows / (1+r) t
NPV = -100,000 + [45,000 / (1+0.13) 1] + [25,000 / (1+0.13) 2] + [20,000 / (1+0.13) 3] +
[20,000 / (1+0.13) 4] + [20,000 / (1+0.13) 5]
NPV = -100,000 + [45,000 / (1.13) 1] + [25,000 / (1.13) 2] + [20,000 / (1.13) 3] +
[20,000 / (1.13) 4] + [20,000 / (1.13) 5]
NPV = -100,000 + [45,000 / 1.13] + [25,000 / 1.2769] + [20,000 / 1.442897] + [20,000 /
1.63047361] + [20,000 / 1.8424351793]
NPV = -100,000 + [39823] + [19578.67] + [13861] + [12266.37] + [10855.2]
NPV = -3615.76
iii) Calculate the Internal Rate of Return (IRR) for each project.
Internal rate of return (IRR) is a rate where, NPV becomes zero let’s compute IRR for [LEFT]both projects,