QUES 1  

If you are CEO of a company and you are analyzing a given project with prospective revenues, what are some o

ANSWER The qualitative factors that I will consider for capital budgeting methods while analyzing a project are as follows
1. Social and economic trends: - Social and economic status of population would,help in knowing the emerging
2. Policies: - The government policies would help in knowing the if the project meets the guidelines of governm
3. Political factors : - Like what is the manisfesto of the political parties that is ruling to identify which project wo
4. Emerging technology: - The newer technology would help in knowing if the current project is good or the alte
5. Chance of backward and forward integration: - Withn the help of initial project is there chance for opting for
 ospective revenues, what are some of the qualitative factors you will consider besides the quantitative capital budgeting methods?

while analyzing a project are as follows: -

would,help in knowing the emerging opportunities.
ject meets the guidelines of government.
t is ruling to identify which project would suit better.
the current project is good or the alternative is better.
project is there chance for opting for an sub project under that same project to increase profit margin.
e capital budgeting methods?
QUES 2 2. Washington Tenters Inc. specializes in making advanced camping tents. The company is expanding its operations

0.15
YEAR CUMMULATIVE
0 $ -600,000.00
1 $ 120,000.00 $ 120,000.00
2 $ 150,000.00 $ 270,000.00
3 $ 160,000.00 $ 430,000.00
4 $ 170,000.00 $ 600,000.00
5 $ 100,000.00 $ 700,000.00
PAYBACK PERIOD= 4YEARS
$ 469,887.70
NPV $ -130,112.30
any is expanding its operations and wants to open a new plant costing $600,000. The company expects varying annual net cash flows as fo
ing annual net cash flows as follows?
QUES 3 3. Kimco LLC. is tossing the idea of investing in a given project. Kimco wants to invest in a project worthy $250,000 and wants its money back

Investment Cash flow of 5 Years

250000 50000
250,000 and wants its money back within five years and nothing more than 5 years. What is the expected annual cash flows that Kimco will get in order to accept the pro
co will get in order to accept the project?
QUES 4 4. Medical Experts Inc. is considering to contract an outside company to supply medical equipments for its clients. Medical Experts' managers
Rate 0.1
Supplier Supplier 1 Supplier 2
Investment -150,000 -100,000 Cummulative
Year 1 $ 50,000.00 $ 50,000.00 $ 25,000.00 $ 25,000.00
Year 2 $ 50,000.00 $ 100,000.00 $ 25,000.00 $ 50,000.00
Year 3 $ 50,000.00 $ 150,000.00 $ 25,000.00 $ 75,000.00
Year 4 $ 25,000.00 $ 100,000.00

Payback Pe3 Years 4 Years

$ 124,342.60 $ 79,246.64
NPV $ -25,657.40 $ -20,753.36
ients. Medical Experts' managers want to make a decision of choosing between two suppliers who will be contracted for a period of 4 years. The following are the details
4 years. The following are the details of the two options:
QUES 5 5.Vedavyas Ltd is considering two mutually exclusive project M and project N. The finance director thinks that the
The company anticipates a cost of capital of 10% and the net after tax cash flow of the projects are as follows:
PART 1 Year Cash flows of project M Cash flows of project N
0 $-400,000.00 $ -400,000.00
1 $ 70,000.00 $ 436,000.00
2 $ 160,000.00 $ 20,000.00
3 $ 180,000.00 $ 20,000.00
4 $ 150,000.00 $ 8,000.00
5 $ 40,000.00 $ 6,000.00
$ 458,393.30 $ 437,108.49
NPV $ 58,393.30 $ 37,108.49
IRR $ 0.16 $ 0.19

PART 2    State with reasons, which project you would recommend?

We should recommend project m because there project value is high so here we shou

PART 3     Explain the inconsistency in the ranking of two projects?

The inconsistency in the ranking of projects is that the value of NPV and IRR is giving opposite results
and also the cash flow received from project N in initial years is very high but for last two years the value
of the cash flow has decreased drastically but for porject M the value doesnot change drastically.
e finance director thinks that the project with higher NPV should be chosen, whereas the managing director thinks that the one with the hi
of the projects are as follows:

t value is high so here we should give IRR 16%

R is giving opposite results

ut for last two years the value
t change drastically.
thinks that the one with the higher IRR should be undertaken, especially as both the projects have the same initial outlay and length of life
initial outlay and length of life.
QUES 6 1. Murugappa & Co has the equity capitalization rate of their organization at 10 %. The net income of 8% debentures for $2,00,000 is $80,000
Amount
Net Income $ 80,000.00
Less interest on debentures 8% of 200000 $ 16,000.00
Earning left $ 64,000.00
Market capitalization Rate $ 0.10
Market value of equity $ 640,000.00
Market value of Debt $ 200,000.00
Total Value of firm $ 840,000.00
Weight of Equity $ 0.76
Weight of Debt $ 0.24
Overall cost of firm $ 0.10
$ 0.10
anization at 10 %. The net income of 8% debentures for $2,00,000 is $80,000. Determine as per NI Approach:
Amount Amount
Net Income $ 80,000.00
Less interest on debentures 8% of 300000 $ 24,000.00
Earning left $ 56,000.00
Market capitalization Rate $ 0.10
Market value of equity $ 560,000.00
Market value of Debt $ 300,000.00
Total Value of firm $ 860,000.00
Weight of Equity $ 0.65
Weight of Debt $ 0.35
Overall cost of firm $ 0.09
$ 0.09
QUES 7 Two firms B and S have 6% of debt of Rs 3.00 Lakhs and zero debt respectively. Both the firms are identical in all other aspects and earn an EB
FIRM FIRM B FIRM S
EBIT $ 120,000.00 $ 138,000.00
Less interest on debentures 8% of 200000 $ - $ 18,000.00
EBT $ 120,000.00 $ 120,000.00
Tax Rate at 60% $ 72,000.00 $ 72,000.00
PAT $ 48,000.00 $ 48,000.00
Market capitalization Rate $ 0.10 $ 0.10
Market value of equity $ 480,000.00 $ 480,000.00
Market value of Debt $ - $ 300,000.00
Total Value of firm $ 480,000.00 $ 780,000.00
Weight of Equity $ 1.00 $ 0.62
Weight of Debt $ - $ 0.38
Overall cost of firm $ 0.10 $ 0.08
$ 0.10 $ 0.85
other aspects and earn an EBT of Rs 1,20,000 each. Calculate the market value of both these firms considering corporate tax of 60% and equity capitalization rate of 10%
and equity capitalization rate of 10%.
QUES 8 1. SLM Ltd. has 6% debenture for $10,00,000 of its net operating income Rs 2,00,000. Its overall capitalization rate i
PART A
Net Operating Income $ 200,000.00
Less interest on debentures 6% of 1000000 $ 60,000.00
Income after deducting interest cost $ 140,000.00
Overall Capitalization Rate $ 0.10
Value of Firm $ 2,000,000.00
Vlaue of equity $ 1,000,000.00
Equity capitalization Rate $ 0.14
$ 0.14

1. Calculate the equity capitalization rate and value of firm if debenture is decreased to Rs 7,50,000.

PART B
Net Operating Income $ 200,000.00
Less interest on debentures 6% of 1000000 $ 45,000.00
Income after deducting interest cost $ 155,000.00
Overall Capitalization Rate $ 0.10
Value of Firm $ 2,000,000.00
Vlaue of equity $ 1,000,000.00
Equity capitalization Rate $ 0.16
$ 0.16
000. Its overall capitalization rate is 10%. Determine the market value of firm and calculate the equity capitalization rate as per NOI Appro

sed to Rs 7,50,000.
lization rate as per NOI Approach