PART3:
Part I Q1. Read the following problem and apply the best method to find the cash flows by making efficient capital investment decisions Tommy Inc., has identified an investment project with following cash flows. If the discount rate is 8%, what is the future value of cash flows in Year 4? What is the future value at a discount rate of 11% and at 24%? (10 marks) Year 1 2 3 4 Cash Flow $1.375 1,495 1.580 1.630 The time line is: 0 3 2 4 1 $1,375 $1,495 $1,580 $1,630 To solve this problem, we must find the FV of each cash flow and add them To find the FV of a lump sum, we use: Notice we are finding the value at Year 4, the cash flow at Year 4 is simply added to the FV of the other cash flows. In other words, we do not need to compound this cash flow. Part II DT consultancy is considering an investment of $100,000. The useful life of the project is 10 years. The cutoff period is three (3) years. The board of directors has identified two alternatives A and B. The expected annual cash flows are as follows: Cost or Cash Flow Alternative A Alternative B Initial cost ($100,000) ($100,000) Cash flow year 1 35,000 35,000 Cash flow year 2 28,000 35,000 Cash flow year 3 32,000 35,000 Cash flow year 4 40,000 35,000 Q2. Suggest DT Consultancy which project is feasible to choose?(7 marks) Q3. Mentions any three valid reasons for choosing the particular project (3 Marks) Finance is the supply of funds, which regulates the activities and operations of the industry. Adequate finance is required besides the requirement of fixed and working capital for undertaking the program of extension, reorganization or expansion. Finance regulates the activities and operations of the industry. Adequate finance is required besides the requirement of fixed and working capital for undertaking the program of extension, reorganization or expansion. There are various source of raising funds. Since, now-a-days market is open, so both domestic and international market are available for procuring the funds. Finance is being raised through issue of shares, debenture, bond and retained earnings (internal source) from domestic as well as international capital market in the form of Global Deposit Receipts, American Deposit Receipts and Foreign Currency Convertible Bonds and from the wide range of financial institutions. However, the finance is not free of cost. The charge on each source capital is known as cost of capital. The cost of capital of any investment is the rate of return the suppliers of capital would expect to receive if the capital were invested elsewhere in an investment of comparable risk. Q4. Why is important for firms to consider the cost of capital when making decisions to invest in long term projects?(5 marks) Q5. Explain what sources of funds should be considered in computing the weighted average cost of capital.(5 marks) Part I Q1. Read the following problem and apply the best method to find the cash flows by making efficient capital investment decisions Tommy Inc., has identified an investment project with following cash flows. If the discount rate is 8%, what is the future value of cash flows in Year 4? What is the future value at a discount rate of 11% and at 24%? (10 marks) Year 1 2 3 4 Cash Flow $1.375 1,495 1.580 1.630 The time line is: 0 3 2 4 1 $1,375 $1,495 $1,580 $1,630 To solve this problem, we must find the FV of each cash flow and add them To find the FV of a lump sum, we use: Notice we are finding the value at Year 4, the cash flow at Year 4 is simply added to the FV of the other cash flows. In other words, we do not need to compound this cash flow. Part II DT consultancy is considering an investment of $100,000. The useful life of the project is 10 years. The cutoff period is three (3) years. The board of directors has identified two alternatives A and B. The expected annual cash flows are as follows: Cost or Cash Flow Alternative A Alternative B Initial cost ($100,000) ($100,000) Cash flow year 1 35,000 35,000 Cash flow year 2 28,000 35,000 Cash flow year 3 32,000 35,000 Cash flow year 4 40,000 35,000 Q2. Suggest DT Consultancy which project is feasible to choose?(7 marks) Q3. Mentions any three valid reasons for choosing the particular project (3 Marks) Finance is the supply of funds, which regulates the activities and operations of the industry. Adequate finance is required besides the requirement of fixed and working capital for undertaking the program of extension, reorganization or expansion. Finance regulates the activities and operations of the industry. Adequate finance is required besides the requirement of fixed and working capital for undertaking the program of extension, reorganization or expansion. There are various source of raising funds. Since, now-a-days market is open, so both domestic and international market are available for procuring the funds. Finance is being raised through issue of shares, debenture, bond and retained earnings (internal source) from domestic as well as international capital market in the form of Global Deposit Receipts, American Deposit Receipts and Foreign Currency Convertible Bonds and from the wide range of financial institutions. However, the finance is not free of cost. The charge on each source capital is known as cost of capital. The cost of capital of any investment is the rate of return the suppliers of capital would expect to receive if the capital were invested elsewhere in an investment of comparable risk. Q4. Why is important for firms to consider the cost of capital when making decisions to invest in long term projects?(5 marks) Q5. Explain what sources of funds should be considered in computing the weighted average cost of capital
