A firm is considering two investment projects, Project A requires a net outlay of Rs 6000, B required Rs 5000. Both projects years.

The net cash inflows have been estimated as for Proj A , Year 1 a 0.40 chance of Rs 2000 and a 0.60 chance of Rs 300 chance of Rs 4000 and a 0.70 chance of Rs 2000, Year 3 a 0.50 chance of Rs 3000 and a 0.50 chance of Rs 2200. Project B, of Rs 1000 and a 0.70 chance of Rs 2000, Year 2 a 0.20 chance of Rs 2000 and a 0.80 chance of Rs 1000, Year 3 a 0.40 cha 0.60 chance of Rs 4000. Assume a 10% discount rate. Which project would be accepted and why? Year 1 2 3 Project A Project B Cash Flow Probability Cash Flow Probability 2000 0.4 1000 0.3 3000 0.6 2000 0.7 4000 0.3 2000 0.2 2000 0.7 1000 0.8 3000 0.5 2000 0.4 2200 0.5 4000 0.6 Expected Value Proj A Proj B 2600 2600 2600 1700 1200 3200 Discount Rate 0.909091 0.826446 0.751315 PV (ENCF) Proj A 2,363.64 2,148.76 1,953.42

Total PV (ENCF) 6,465.82 Net Present Value 465.82 Standard Deviation 1113.553 Coefficient of Variation 17.22216

d Rs 5000. Both projects have an estimated life of 3 and a 0.60 chance of Rs 3000, Year 2 a 0.30 ance of Rs 2200. Project B, Year 1 a 0.30 chance Rs 1000, Year 3 a 0.40 chance of Rs 2000 and a

PV (ENCF) Proj B 1,545.45 991.74 2,404.21 4,941.40 (58.60) 1153.256 23.33867

Variance Proj A Proj B 240,000 840,000 160,000 210,000 160,000 960,000

Premier Industries Ltd has prepared the following budgeted profitability statement for the current year operations. Make a sensitivity analysis based on the above data. The changes in the sales revenue and costs on profit can be analyzed with the help of sensitivity analysis as follows: (a) If selling price is reduced by more than ____% of the budgeted, the company would incur loss (b) If the sales are reduced by more than ____% of the budgeted sales of 2500 units, the company would incur loss (c) If labour costs increase by more than ____% above the budgeted cost, the company would make a loss (d) If material cost increases by ___% or more of the budgeted cost, the company would make a loss (e) If the fixed costs increase by more than ___% of budgeted fixed cost, the company would incur loss Parameter No of units Sold Price per unit Sales Variable Cost Material Labour Contribution Less Fixed Cost Profit Given 2500 4 10000 4000 3000 3000 2000 1000 Factor New Value

Rate of change of profit Reduce the profit to zero by changing sales Rate of change of Material cost Reduce the profit to zero by changing material cost Rate of change of Labour cost Reduce the profit to zero by changing Labour Cost Rate of change of Fixed cost Reduce the profit to zero by changing fixed cost

nt year operations. Make a

y analysis as follows:

any would incur loss make a loss

Problem The financial controller of Super Stocks Ltd, has drawn the following projections with probability distribution Wages and Raw material Sales Revenue salaries (Rs 000) Probability (Rs 000) Probability (Rs 000) Probability 10 to 12 0.3 6 to 8 0.2 30 to 34 0.1 12 to 14 0.5 8 to 10 0.3 34 to 38 0.3 14 to 16 0.2 10 to 12 0.3 38 to 42 0.4 12 to 14 0.2 42 to 46 0.2 You are required to simulate the cashflow projection and expected cash balance at the end of the sixth month. Use the following random numbers Wages & Salaries 2 7 9 2 9 Raw Material 4 4 1 0 3 Sales Revenue 0 6 6 8 0 Solution Wages and salaries (Rs 000) Mid Point (Rs Cumulative Random 000) Probability Mumbers Raw Materials (Rs 000) Mid Point (Rs Cumulative Random 000) Probability Mumbers

Simulation of Cash Flow Wages & Month Salaries 1 2 3 4 5 6

Raw Materials

Sales Revenues

Fixed Costs

Net Cash Flows

e sixth month. Use the 8 4 2

Sales Revenue (Rs 000) Mid Point (Rs Cumulative Random 000) Probability Mumbers

Cash Balance (OB Rs 50)

XYZ Ltd is considering a project with the following expected cashflows. Initial investment Rs 100000. Expected cash inflows 1st year Rs 70,000; 2nd year Rs 60,000; 3rd year Rs 45,000. The cost of capital is 10%. Due to uncertainty of future cashflows, the management decides to reduce the cash inflows to certainty equivalents by taking only 80%, 70% and 60% respectively. Is it worth while to take up the project?

Calculation of Certainty Equivalents of Cash Inflows: Year Cash Flow Cert Eq Cert CF 1st years 70000 2nd year 60000 3rd year 45000 Calculation of risk adjusted NPV of the Project Year Cashflow PV Factor PV 0 (100,000) 1 2 3 NPV of the project

st of capital

Canon Ltd is a levered company with a single project e.w Project A is on hand. The equity had a Beta of 1.2 and debt has a beta of 0.9.The project cost is Rs 120 lakhs financed by a combination of Rs 72 lakhs debt and Rs 48 lakh equity. The risk free rate of return is 10% and expected market rate of return is 18%. You are required to calculate beta of the company in situations (a) No tax world and (b) in tax world (assume corporate tax @ 40%) Company of Beta of the Company in "No tax world" Betae 1.2 Betad Debt Equity Betacomp Company of Beta of the Company in "Tax world" Betae 1.2 Betad Debt Equity Tax Rate Betacomp 0.9 72 48 40% 0.9 72 48

had a Beta of 1.2 and debt has ebt and Rs 48 lakh equity. The to calculate beta of the