HAWASSA UNIVERSITY

AWADA BUSINESS AND

ECONOMICS COLLEGE

DEPARTMENT OF
ACCOUNTING AND FINANCE

GROUP ASSIGNMENT

COURSE TITTLE:
Financial modeling

NAME ID NO

2. EMEBET HAILU.........................................................................0265/13

2. EPHREM SILESHI.....................................................................0273/13

3. ESUBALEW TILAHUN...............................................................0288/13

4. FEYISO GEMEDI........................................................................0311/13

5. FIRAOL MOSISA........................................................................0319/13

6. GETE ESKEZYA..........................................................................0355/13

7. HUNDAOL GELAN.....................................................................0415/13

8. KEYREDIN HUSEN.....................................................................0448/13

9. KONJIT KISO..............................................................................0459/13

10. MLKAMU AEMIRO...................................................................0523/13

 1. Consider the following mutually exclusive project alternatives, together with their cash flows.
Alternative Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
A (60,000) 15,000 23,000 22,000 31,000 19,000
B (80,000) 24,000 22,000 25,000 32,000 35,000
Calculate the NPV & IRR

SOLUTION
Assume the required rate of return on both projects is 10 percent. Then, evaluate these projects using
the net present value method. The evaluation of these two projects requires the computation of the net
preset values for both projects.
➡Net Present Value (NPV)
▪ It is an investment project proposals evaluating and ranking
method using the net present value, which is the difference
between the present values of future cash inflows and thdifferenc
value of cash outflows, discounted at the given cost of capidifferecopportunity cost of capital.
In order to use this method properly, the following procedures are
followed.
1. Find the present value of each cash flow (both inflows and out
flows) using the cost of capital of the project for discounting.
2. Sum the discounted cash inflows and the discounted cash
outflows separately.
3. Obtain the difference between the sum of the cash inflows and
the sum of the cash outflows.
Decision Rule; The decision rule here is; accept a project if the NPV is
positive and reject if it is negative
➡NPV > Zero Accept
➡ NPV = Zero Indifference
➡ NPV < Zero Reject
✔ If the projects are independent, the projects with positive net present
values are the ones whose implementation maximizes the wealth of
shareholders.
Hence, such projects should be accepted for implementation.
✔ If the projects, on the other hand, are mutually exclusive, the one
with the higher positive NPV should be accepted leading to the
rejection of the projects with lower positive NPV.
➡NPV of zero imply that the cash flows of the project are just
sufficient to repay the invested capital and to provide the required
rate of return, no more, no less.
➡Projects with negative NPV should not be considered for
acceptance in the first place.
Firm A

Year Cash flow Discount factor Present value

(PVOA)

0 ETB(60,000) 10%

1 15,000 0.9090 13,635

2 23,000 0.8264 19,007.2

3 22,000 0.7513 16,528.6

4 31,000 0.6830 21,173

5 19,000 0.6209 11,797

PV of cash in flow 82,140.8

PV of cash outflow (60,000)

Net present value 22,140.08

IRR 22.64%
Firm B

Year Cash flow Discount factor Present value

(PVOA)

0 ETB(80,000) 10%

1 24,000 0.9090 21,816

2 22,000 0.8264 18,180.08

3 25,000 0.7513 18,782.5

4 32,000 0.6830 21,856

5 35,000 0.6209 21,731.5

PV of cash in flow 102,366.08

PV of cash outflow (80,000)

Net present value 22,366.08

IRR 19.61%

2. Evermaster Corporation issued €100,000 of 8 percent term bonds on January 1, 2015, due on
January 1, 2020, with interest payable each July 1 and January 1. If the investors required an
effective-interest rate of 10 percent. What is the value of the bonds?.
Solution
To calculate the value of the bonds issued by Evermaster Corporation, we need to find the present
value of the bond's future cash flows. Given that the bonds have an effective-interest rate of 10% and a
face value of €100,000, we can calculate the value using a present value formula:

Value = (Interest Payments Present Value Interest Factor) + (Face Value Present Value Factor)

Interest Payments = €100,000 * 8% = €8,000 (annually)

Present Value Interest Factor (n = 5, i = 10%) = 3.791
Present Value Factor (n = 5, i = 10%) = 0.6209

Value = (€8,000 * 3.791) + (€100,000 *0.6209)

Value=30,328+62,090=92,418
 3. Assume the following statement of financial position or BALANCE SHEET
For Ethio company ,Dec 31,2015
Asseets Liabilities
Short Term Assets Short Term liability
1,500.0
Cash 2,000.00 Accounts payable 0
1,200.0
Marketable Seurities 1,500.00 Taxes Payable 0
1,000.0
Inventories 1,500.00 Current Portions of Long term debt 0
1,500.0
Accounts Receivables 4,000.00 Short Term Debt 0

1,500.0
Fixed Asses Long Term Debt 0
1,800.0
Land 1,150.00 Pension Liabilties 0
PPE at cost 2,500.00
Minus Accumulated Depreciations -700.00 Prefered Stock 200.00
Net Fixed Assets Minority Interest 100.00

Equity
1,000.0
Goodwill 1,000.00 Stock at Par 0
3,500.0
Accumulated Retained Earning 0
Stock Repurchases -350.00
9,950.0
Total Assets 9,950.00 Total Liabilioties and Equity 0
REQUIRED:
A.Determine the enterprise value usig the Accounting Book Values for Ethio company . (6pt)
B,Determine the amount of liquid asset(2pt)
C.determine the Net working capital (2pt)
D,Determine the Net debt for 2015 (2pt)
E.Compute the lefthand side balance sheet for Ethio company (4pt)
F.compute the rights hand side balance sheet for Ethio company (4Pt)

SOLUTION
 ETHIO COMPANY BALANCE SHEET
December 31,2015
Assets Liabilities and equity
Liquid assets (cash + 3500 Financial debt
marketable securities)

current asset Current portion of long- term 1000

debt

inventory 1500 short term debt 1500

accounts 4000 long term debt 1500

receivable

less current Total financial debt 4000

liability

account payable 1500 pension liability 1800

tax payable 1200 preferred stock 200

Net working 2800 minority interest 100

capital

fixed asset 2950

Goodwill 1000 Equity 4150

Lefthand balance Right handside balance

sheet sheet

ETHIO ENTERPRISE VALUE BALANCE SHEET

Assets LIABILITY AND EQUITY

Net working 2800 Total financial debt 4000

Fixed asset 2950 Less Liquid asset 3500

Goodwill 1000 Net debt 500

 Pension liability 1800

preferred stock 200

Minority interest 100

Equiy 4150

Enterprise value 6,750 Enterprise value 6750

4. let us assume that project A and project B have the same initial investments, 10,000 birr. The
RRR is for the firm 10 percent.
Year Project A Project B
0 (10,000) (10,000)
1 - 6,000
2 13,924 7,200

Which project should be selected? (use IRR or NPV)

If the IRR criterion is used to rank projects, then the decision rules are as
follows.
➡ Independent projects: If IRR exceeds the project’s WACC, then the project
should be accepted. If IRR is less than the project’s WACC, reject it.
➡ Mutually exclusive projects: Accept the mutually exclusive project with
the highest IRR, provided that the project’s IRR is greater than its WACC.
Reject any project whose best IRR does not exceed the firm’s WACC

Year A B Discount PV of A PV of B
factor(10%)

0 ETB(10,000) ETB(10,000)

1 - 6,000 0.9090 - 5,454

2 13,924 7,200 0.8264 11,506.79 5,950.04

PV of cash in flow =11,506.8 =11,404.04

PV of cash outflow

Net present value ( 10,000) (10,000)

=1,506.79 =1,404.04

If mutually exclusive project then firm A selected

If independent peodect both of them selected Blc NPV >0