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SMOD ASSIGNMENT 3

PGP-I 2014 (Sec E & F)

Question 1: Consider a simple investment proposal which involves making a certain


investment at the beginning and receiving cash at the end of each year of the period under
consideration. The investment and the cash to be received at the end of the first year are
known with certainty; they are Rs 10,000 and Rs 4,000 respectively. The amount to be
received at the end of the second and third years is not known exactly; it is however known
that from the first year onwards, the amount received at the end of each year increases by a
constant amount, say X. That is, at the end of the second year the cash inflow would be Rs
4000 + X, and at the end of the third year Rs 4000 + 2X. The life of the investment is only
three years. All you know about X is that it lies in the range Rs 500 to 1300. Analyze the
above data and find whether the investment proposal is financially acceptable for various
possible values of X. Use in your analysis the discount rate Rs 0.18 per rupee per year.
Let us now extend the example to include one more investment proposal. Call the two
proposals under consideration project A and project B. As in the previous case, here also for
each project you know with certainty the initial investment and first years inflow; these are
Rs 10,000 and 4000 for project A and Rs 15,000 and 3000 for B. From the second year
onwards, the inflow each year increases at the constant rate of Rs X per year in project A and
Rs Y in B; X can vary from 700 to 1200 and Y from 4500 to 4700. Using the NPV criterion
find for different values of X and Y which of the two projects is the better.

Question 2: You have a company producing units of Product A. Your fixed costs for a year
are Rs. 100,000. The cost of making one unit is Rs. 3.40. You can sell a unit for Rs. 5.00.
Assume you can sell as many units as you produce. If you make 100,000 units per year how
much profit will you make? Create a worksheet to answer this question. Use Excel tools to
determine how many units you need to produce in order to break even (i.e. to have zero
profit). Also determine what the lowest selling price is for you to break even if you sell
100,000 units per year.

Question 3: A four-year project consists of making an investment at time zero, and receiving
revenues at times 1, 2, 3, and 4. A spreadsheet is to be setup to analyse the above cash flows.
With respect to the above context, answer the following two questions, which are
independent of each other.
Question 3a. Suppose, as in the following figure, the following are given as inputs (ie the
corresponding cells are filled with numerical values as mentioned):

Revenues at times 1, 2, 3, and 4 in cells B4, C4, D4 and E4 respectively;


Discount rate in cell Bl; and
Value of NPV in cell G4.

1
2
3
4
5

A
DiscRate

B
0.18

Investment
at 0

Revenue
at 1
1000

Revenue
at 2
2000

Revenue
at 3
3000

Revenue
at 4
4000

NPV
2000

Write a formula in A4, which should work for any valid inputs, to compute the corresponding
investment, which is to be shown as a positive value:
Formula in A4: ___________________________________________
Question 3b. Suppose, as in the following figure, the following are given as inputs (ie the
corresponding cells are filled with numerical values as mentioned).
Discount rate in cell B1
Investment, a positive value, in cell A4,
Revenues at times 1, 2, and 3 in cells B4, C4, and D4 respectively, and
Value of NPV in cell G4.

1
2
3
4
5

A
DiscRate

B
0.18

Investment
at 0
4172.87

Revenue
at 1
1000

Revenue
at 2
2000

Revenue
at 3
3000

Revenue
at 4

NPV
2000

Write a formula in E4, which should work for any valid inputs, to compute the revenue at
time 4.
Formula in E4:___________________________________

Question 4: The information below is the stream of costs and benefits (in million dollars)
estimated for a proposed city baseball stadium. Year 0 represents the initial investment while
costs for years 1-10 are the maintenance costs incurred at the end of each year. The benefits
are the revenues from sport team contracts and revenues at the end of each year. Calculate the
NPV of the project if the interest rate is 10%. Also calculate the interest rate at which the
project ceases to be attractive.

Cost-Benefit
Stadium
Year
0
1
2
3
4
5
6
7
8
9
10

Analysis:

Cost
60
1
1
1
1
1.5
1.5
1.5
1.5
2
2

City

Benefits
0
3
3
10
10
12.5
12.5
12.5
15
15
15

Question 5: You own Craven book store and have 100 books in storage. You sell a certain %
for the higher profit of $50 and a certain % for the lower profit of $20. Create different
scenario summaries as shown below to calculate the profit for each scenario and identify the
best and worst scenarios.

% of books
Scenario1 Scenario2 Scenario3 Scenario4
Higher
profit
60
Lower profit 40

70
30

80
20

50
50

Find out how many books you need to sell for the higher profit, to obtain a total profit of
exactly $4700?
Question 6: The Electro-Poly Corporation is the worlds leading manufacturer of slip rings.
A slip ring is an electrical coupling device that allows current to pass through a spinning or
rotating connection. The company recently received a $750,000 order for various quantities
of three types of slip rings. Each slip ring requires a certain amount of time to wire and
harness. This table summarizes the requirements for the three models of slip rings:

Model
1
Number Ordered
3000
Wiring/unit(hours)
2
Harnessing/unit(hours) 1

Model
2
2000
1.5
2

Model
3
900
3
1

Unfortunately, Electro-Poly doesnt have enough wiring and harnessing capacity to fill the
order by its due date. The company has only 10,000 hours of wiring capacity and 5,000 hours
of harnessing capacity available to devote to this order. However, the company can
subcontract any portion of the order. The unit costs of producing each model in-house and
buying the finished products from a subcontractor are summarized below:

Cost to make
Cost to buy

Model
1
$50
$60

Model
2
$83
$97

Model
3
$130
$145

Determine the number of slip rings to make and the number to buy in order to fill the
customer order at the least possible cost.
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