Course: Corporate Finance

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NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Corporate Finance
Internal Assignment Applicable for December 2015 Examination

Assignment Marks: 30

1. Suppose, a prospective client who wants to invest certain amount of money comes to you but does not know anything about ‘Time Value of Money’. So, please explain to the person the concept of ‘Time Value of Money’ in detail.

Answer : The time value of money is one of the basic theories of financial management. The theory of states that the value of money you have now is greater than a reliable promise to receive the same amount of money at a future date. This may sound simple, but it underpins the concept of interest, and can be used to compare investments, such as loans, bonds, mortgages, leases and savings.

Definition





2. A limited company is considering investing a project requiring a capital outlay of Rs. 2, 00,000. Forecast for annual income after depreciation but before tax is as follows :


Year

Rs.

1
1,00,000

2
1,00,000

3
80,000

4
80,000

5
40,000




Depreciation may be taken as 20% on original cost taxation at 50% of net income.
You are required to evaluate the project according to each of the following methods:


Answer :  Profitability Statement

Year       Profit after
Depreciation
$
1             1,00,000
2            1,00,000
3               80,000
        Less
Tax
$
50,000
50,000
      PAT
$

50,00
      Add                    Profit before
Depreciation          Depreciation
$.                    but after tax $
40,000                           90,000
40,000                            90,000
40,0






a) Pay back method
Answer : I    year                        90,000
II   year                       90,000
1,80,000
Balance                       20,000





b) Rate of return on original investment method
Answer : Year                                        Net Profit after
Tax and depreciation ($)
1                                              50,000
2                                              50,000




Return represents the Average Return






c) Rate of return on average investment method
Answer :  Return = Average Investment x 100
Return = $ 40,000





d) Discounted cash flow method taking cost of capital as 10%

Answer : Year                Cash Inflows              Discount Factor                      Present Value
At 10% p.a.                                         $

1                      90,000                         0.909                                                   81,810
2                      90,000                         0.826                                                  74,340


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