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Managerial Finance - QUIZ#2

1. The document appears to be a student assignment containing multiple questions related to finance concepts. It includes calculations for net present value, cash flow statements, and analysis of investment projects. 2. For one question, the student calculates the NPV of a technology investment project that costs $50,000 and is expected to generate $22,000 per year in inventory cost savings over 4 years. The student determines the NPV is positive so the project should be accepted. 3. Another question asks the student to choose between two investment projects, A and B, based on NPV calculations using different discount rates. Project A has a higher NPV at 11% but Project B is better at 16%.

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Simranjeet Kaur
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329 views6 pages

Managerial Finance - QUIZ#2

1. The document appears to be a student assignment containing multiple questions related to finance concepts. It includes calculations for net present value, cash flow statements, and analysis of investment projects. 2. For one question, the student calculates the NPV of a technology investment project that costs $50,000 and is expected to generate $22,000 per year in inventory cost savings over 4 years. The student determines the NPV is positive so the project should be accepted. 3. Another question asks the student to choose between two investment projects, A and B, based on NPV calculations using different discount rates. Project A has a higher NPV at 11% but Project B is better at 16%.

Uploaded by

Simranjeet Kaur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Running head: QUIZ #2

Simranjeet Kaur

Student ID: 2018091485

Email: [email protected]

Unit # 6

BUSI 2093 Introduction to Managerial Finance

Yorkville University – New Westminster Campus

Submission Date: November 15, 2020


1

1. Obsolete Technology is considering purchase of a new computer system to help handle


its warehouse inventories. The system costs $50,000, is expected to last 4 years, and
should reduce the cost of managing inventories by $22,000 a year. The opportunity cost
of capital is 10%. Should Obsolete go ahead?

As per the given statement, we have Total cost = $50,000


Time Period = 4 year
Cost of capital = 10%
Inventories = $ 22,000
For the First year Pv: 22,000/ 1+ 0.1^1 = 20,000
Second year: 22000/ 1+0.1^2 = 18,181.81
Third Year : 22,000/ 1+0.1^3 =16,528.92
Fourth year : 22,000/ 1+ 0.1^4 = 15,026.29
PVF In total = 69,735

Net PV = Present values of inflaws – PV of outflows


= 69,735 – 50,000
= 19735
Obsolete should go to help warehouse inventories by having positive amount.

2. From the table below


Year Project A Project B
0 -100 -100
1 40 50
2 40 50
3 40 50
4 40

a) If the opportunity cost of capital is 11% which of these projects is worth


pursuing?
b) Which project would you choose if the opportunity cost of capital is 16%?

a) If the opportunity cost of capital is 11%, then Project A will be good


because of having higher PVF
Year Project A PV @11% Discounted f
0 -100 1 -100
1 40 0.9009 36.03
2 40 0.8116 32.44
3 40 0.7311 29.244
4 40 0.658 26.32
NPV 24.32
2

Year Project B PV @11% DF


0 -100 1 -100
1 50 0.9009 45.045
2 50 0.811 40.55
3 50 0.7311 36.55
NPV 22.14

b) Project B has higher PVF than Project A through having 16%.

Year Project A PV @16% Df


0 -100 1 100
1 40 0.8620 34.48
2 40 0.7431 29.6
3 40 0.640 25.6
4 40 0.552 22.08
NPV 11.76

Year Project B PV @ 16% DF


0 -100 1 100
1 50 0.8620 43.1
2 50 0.7431 37.155
3 50 0.640 32
NPV 12

3. A house painting business had revenues of $16,000 and expenses of $9,000. There were
no depreciation expenses. However, the business reported the following changes in
various components of working capital:
Beginning End

Accounts Receivable $1,200 $4,500

Accounts Payable $600 $200

Calculate Net Cash Flow for the business for this period

Answer: As per the given statement, we will find out first Net Working Capital to know
the Cash Flow Statement.

NWC = Accounts Receivable – Accounts Payable


3

= (4500 -1200) – (200- 600)

= 3300 – (-400)

= 3700

Cash Flow: Sales- expenses – NWC

= 16000 – 9000- 3700

= 3300

4. A regional super market chain is deciding whether to install a machine in each of its
stores. Each machine costs $250,000. Projected income per machine is as follows: Figs
are all in $

Year 1 2 3 4 5
Sales 250,000 300,000 300,000 250,000 250,000
Operating Expenses 200,000 200,000 200,000 200,000 200,000
Depreciation 50,000 50,000 50,000 50,000 50,000
Accounting Income 0 50,000 50,000 0 0

a) Why would the store continue to operate a machine in Year 4 and 5 if it produces no
profits?
b) What are the cash flows for investing in a machine? Assume each machine is
completely depreciated and has no salvage value at the end of its 5 years life.

Answer: As per my concern, store should operate a machine in year 4 and 5 if there
is no possibility of making any profit. On the other words, it will help to recover the
depreciation amount of store.

Cash Flow Statement:

Year 1 Year 2 Year 3 Year 4 Year5

Sales 250,000 300,000 300,000 250,00 250,000


Operating 200,000 200,000 200,000 200,000 200,000
Expenses
Net cash 50,000 100,000 100,000 50,000 50,000
flow from
4

operating
Machine 250,000
Net cash 250,000
flow
Operating
activities
So, net cash flow will be 250,000 100,000 100,000 50,000 50,000
5

Reference

Ross, S. A., Wester field, R., Jordan, B. D., & Roberts, G. S. (2016). Fundamentals of
corporate finance (9th Canadian ed.).  McGraw-Hill Ryerson..

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