Q2.1Fraiser International has decided to purchase a pressing machine for Rs. 1,000,000. The machine is expected to generate a cash flow of Rs. 25,000 per month and requires a monthly cost of Rs. 8,000 to run. The expected useful life of the machine is 15 years with no salvage value. The discount rate is 8%. Please calculate NPV and advise Fraiser International about WHY they should invest or reject the project.

Q2.3A machine costs Rs. 10,000 with useful life of 5 years. It has a salvage value of Rs. 2,000 at the end of its useful life. The machine is expected to generate the following cash flows;

Year Cash Flow (PKR)

1 5,000

2 6,000

3 8,000

4 6,500

5 4,000

Calculate Accounting Rate of Return? Tax is applied at 30% per annum. Why Accounting Rate of Return is not among the favorite methodology to evaluate a project? In what circumstances results from accounting rate of return can prove useful.

Q2.4Explain the concept of Internal Rate of Return? What does IRR of 20% per year represent for an investment opportunity you are considering to invest? Calculate Internal Rate of Return by Trial & Error using data from Question No. 2.1.

Q2.5Being an Investment Manager for Star International please advise the CFO regarding how to invest a fund of Rs. 500 Million in the following options. Build your case with strong financial reasoning justifying your selection of projects.

Project

Initial Outlay (Rs in Mn) Initial Outlay (Rs in Mn) NPV (Rs in Mn)

A 50 2

B 100 5

C 120 7

D 250 10

E 380 15

F 100 7

Arrange the Projects in Question 2.4 based on their profitability index (PI). How profitability index helps financial manager make better investment decision?