SEMESTER FALL 2012 BUSINESS FINANCE (ACC501) ASSIGNMENT # 02

DUE DATE: 22ND JANUARY 2013

Learning Objectives: After attempting this assignment whole-heartedly, the students will be able to: Calculate net cash flows by incorporating the effects of depreciation and tax. Evaluate any proposed project by using different capital budgeting techniques. Derive inferences regarding the acceptance/rejections of the project.

MARKS: 30

Assignment: Mr. Ali wants to start Rent -A-Car business. He wants to start this business with at least 20 cars. He estimates that the required investment for the business is Rs. 30 Million. He projects that revenue (before tax and depreciation) from the business will be Rs. 6 Million for the first year and it will keep on growing at a rate of 5% annually till the 10th year. Some other information regarding the project is as follows: Annual depreciation will be Rs. 3 Million under the straight line method. Cost of capital is 10% while the rate of tax is 35%.

Suppose you are running a financial consultancy firm, Mr. Ali wants to get his project evaluated by your firm. You have to suggest Mr. Ali about the feasibility of the project after applying different capital budgeting techniques. Requirement: Keeping your task into consideration, provide answers to the following: 1. Calculate net cash flows for 10 years. 2. Evaluate the project by using the following capital budgeting techniques: a. Payback Period (The desired payback period is 5 years) b. Net Present Value c. Profitability Index
(04 Marks) (10 Marks) (03 Marks) (10 Marks)

3. Is there any contradiction among the results of above used techniques? What would be your final recommendation regarding the acceptance/rejection of the project? Support your recommendation with financial rationale.
(03 Marks)

Special Note: Complete calculations are required for Part (1) and Part (2). Incomplete calculations will result in loss of marks.

SOLUTION GUIDELINES: Please read the following instructions carefully before preparing the assignment solution: Do prepare the solution after completely reading and understanding the questions. Put your genuine efforts in order to understand the concepts thoroughly. Provide complete calculations first two parts of the question. IMPORTANT: 24 hours extra / grace period after the due date is usually available to overcome uploading difficulties. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience. OTHER IMPORTANT INSTRUCTIONS: DEADLINE: Make sure to upload the solution file before the due date on VULMS. Any submission made via email after the due date will not be accepted. FORMATTING GUIDELINES: Use the font style Times New Roman or Arial and font size 12. It is advised to compose your document in MS-Word format. You may also compose your assignment in Open Office format. Use black and blue font colors only. RULES FOR MARKING Please note that your assignment will not be graded or graded as Zero (0), if: It is submitted after the due date. The file you uploaded does not open or is corrupt. It is in any format other than MS-Word or Open Office; e.g. Excel, PowerPoint, PDF etc. It is cheated or copied from other students, internet, books, journals etc. Dear students! As you know that Post Mid-Term semester activities have been started and load shedding problem is also prevailing in our country now a days. Keeping in view the fact, you all are advised to post your activities as early as possible without waiting for the due date. For your convenience; activity schedule has already been uploaded on VULMS for the current semester, therefore no excuse will be entertained after due date of assignments, quizzes or GDBs. Note related to load shedding: Please be proactive