1. You are the financial manager of a growing firm situated in Lahore. You have recently hired a assistant manager as your firm is looking to make a lot of long term investments in the coming year. The assistant manager is pretty confused about the calculation of initial investment and terminal values of these projects . He can not recall working on this in detail in his under graduate program. Explain in detail how initial cost and terminal values can be estimated and what points he should be considering.
2. As an assistant manager you feel that the manager is very optimistic about one of the project. What problems can occur in project evaluation if the manager is biased and not consistant. Discuss in detail.
3. Ali Haider has a lot just outside Lahore and is considering building a Brands store. His idea is to open a big store that sells discounted products of the local brands. He also plans to have space for some nice restaurants and a play ground so that families can have a fun day out for shopping. His grandfather bought the land for 15 million. He estimates the current cost of land will be 75 million. The land is pretty uneven and rocky. In order to clear up the land he will have to spend 8 million. The construction cost is estimated to be 15 million and the cash flows are expected to be 5.5 million in the first year, 15 million in the 2nd year. After that the cash flows will grow at a rate of 5 percent forever. Do you think Ali haider should take up the project if 12 percent is the required rate of return? If Ali Haider does not make the play ground his initial investment will rise to 20 million , the cash flow in the first year will be 5 million and the cash flow in the second year will be 15 million but the growth rate will be 3 percent. Do you think Ali haider should take up the investment if he does not make a play ground? Show all working clearly and give reasons for your answers.
4. provide a complete solution to question 4 that we solved in class on May 5th.