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NMIMS
Global Access
School
for Continuing Education (NGA-SCE)
Course:
Strategic Financial Management
Internal
Assignment Applicable for September 2020 Examination
1. A Project costs Rs 1,00,000 and is
expected to generate cash inflows as:
|
Year |
1 |
2 |
3 |
4 |
5 |
6 |
|
Cash
Inflows(Rs) |
20,000 |
25,000 |
28,000 |
31,000 |
35,000 |
40,000 |
Calculate Net Present Value and Profitability
Index. Comment whether project should be accepted or not. Assume cost of
capital is 12%. Enumerate the steps of calculation of NPV.
Ans:
INTRODUCTION:
Net present value and the profitability index are helpful
tools that allow investors and companies make decisions about where to allocate
their money for the best return. Net present value tells us what a stream of
cash flows is worth based on a discount rate, or the rate of return needed to
justify an investment. The profitability index helps make it possible to
directly compare the NPV of one project to the NPV of another to find the
project that offers the best rate of return.A positive net present value
indicates that the projected earnings
2. Calculate EVA if the Earnings before
interest and tax is Rs 15,00,000 and applicable tax rate is 30%. The capital
structure of the firm consists of 75% Equity and 25% debt capital. After tax
cost of debt is 7% and cost of equity is 12%. Total borrowed capital of the
firm is Rs 25,00,000. Explain EVA and comment on the value of EVA(calculated).
Ans:
INTRO0DUCTION:
Economic value added (EVA) is a measure of a company's financial
performance based on the residual wealth calculated by deducting its cost of
capital from its operating profit, adjusted for taxes on a cash basis. EVA can
also be referred to as economic profit, as it attempts to capture the true
economic profit of a company.Economic Value Added (EVA) is important because it
is used as
3a. A firm wanted to understand what is the
importance of debt in the capital structure on the value of the firm. Company’s
current operating income is ₹7 lakhs and cost of equity capital is estimated to
be 12%. Assume tax rate as 30%. If you are the Finance Manager of the company
determine the value of the firm using Net Income Approach and comment on the
results:
a. if the firm has ₹5 lakhs of 10 percent
debt outstanding
Ans:
INTRODUCTION:
The
net income approach makes the simplest assumptions, that neither creditors nor
investors increase their required rates of return as a company takes on debt.
The cost of capital declines as higher-cost equity is replaced with lower-cost
debt. This approach concludes that the optimal financing mix is all debt.Net
income approach (NI) Net Income Approach was presented by Dear students, get
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