Financial Management FULL TIM...

Question $1($OVERVIEW OF FINANCIAL MANAGEMENT$)(10$marks$)$

$1\mathrm{.}1$ Discuss the agency shareholder conflict

$[5$ Marks$]$

$1\mathrm{.}2$ For what three basic reasons is profit maximization inconsistent with wealth maximization?

$[5$ Marks$]$

Question $2($CAPITAL BUDGETING$)(25$ marks$)$

The Finance Department of Ishka $($Pty$)$ Ltd is faced with a choice between two machines, A and B$,$ which differ in their production characteristics and capabilities.

The current cost of capital of the company is $12\%.$

The following information regarding the two machines is available:

$\backslash$table$[[$Details$,$Machine A$($R$),\backslash$table$[[$Machine$],[$B$($R$)]]],[$Cost price,$2000000,3000000],[$Residual value,$220000,320000],[\backslash$table$[[$Annual income after depreciation and$],[$income tax$]],304000,366000],[$Required working capital,$360000,440000],[$Expected useful life,$10$ years,$10$ years$]]$

Required

a$.$ Apply the following methods in capital budgeting to evaluate the two mutually exclusive options available to Ishka $($Pty$)$ Ltd and comment on the results of each.

i$.$ Net Present Value $[5$ marks$]$

Round off your present value interest factor to $4$ decimal place as illustrated in the table below. Round off the Present Value amount to $2$ decimal place.

$\backslash$table$[[$Year$,$Cashflow,$\backslash$table$[[$Present value Interest$],[$factor at $12\%]],$Present Value$],[$Year $1,,0\mathrm{.}8929,$R$660456\mathrm{.}23]]$

Damelin$($C$)$

Individual Assignment

Page $2$ of $5$

ii$.$ Internal Rate of Return $($IRR$)$ using $12\%$ and $20\%$ to interpolate $($Round of your answer to $4$ decimal places$)[5$ marks$]$

iii. Payback Period

$[5$ marks$]$

iv$.$ Accounting Rate of Return $[5$ marks$]$

b$.$ Make a final recommendation to the management of Ishka $($Pty$)$ Ltd based on the Net Present value and advise whether to invest in Project A or Project B$.[5$ marks$]$