CF Assignment 2

Corporate Finance – Assignment 2
Balaji. T
1.Describe in your own words the importance of Corporate Finance

Importance of Corporate Finance
a) Decision making for most of the important decisions of business enterprises
are determined based on the availability of funds. It is difficult to perform any
function of a business enterprise independently without finance. Every decision in
the business is needed to be taken keeping in view of its impact on profitability.
b) Whenever a business firm wants to start a new venture, it needs to raise

capital. A business firm can raise funds by issuing shares, debentures, bonds or even
by taking loans from the banks.
c) Research and Development must be undertaken for the growth and expansion
of business. Detailed technical work is essential for the execution of projects.
Research and Development is a lengthy process and therefore funds have to be
made available throughout the research work. This would require continuous
financial support.
▪ Public Deposit
▪ Global Depository Receipt (GDR)
▪ Features of Shares
d) Smooth running of business firm and smooth flow of corporate finance is

needed so that salaries of employees are paid on time, loans are cleared on time,
raw material is purchased whenever required, sales promotion of existing products
is carried out smoothly and new products can be launched effectively.
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e) Brings co-ordination between various activities. For e.g., Production will suffer
if the finance department does not provide adequate finance for the purchase of
raw materials and meeting other day-to-day financial requirements for smooth
running of production unit. Due to this, sales will also suffer and consequently, the
income of concern, as well as the rate of profit, will be affected. Thus, the efficiency
of every department depends upon effective financial management.
f) Promotes expansion and diversification such as modern machines and modern

techniques are required for expansion and diversification. Corporate finance
provides money to purchase modern machines and technologies. Therefore, finance
becomes mandatory for expansion and diversification of a company.
g) Managing Risk Company must manage several risks, such as sudden fall in
sales, loss due to natural calamity, loss due to strikes, etc. The company needs
financial aid to manage such risks.
h) Replace old assets such as plants and machinery have become old and
outdated over the years. They must be replaced by new assets. Finance is required
to purchase new assets.
I) Payment of dividend and interest Finance is needed to pay dividends to

shareholders, interest to creditors, banks, etc.
j) Payment of taxes/fees the company must pay taxes to the Government such
as Income Tax, Goods and Service Tax (GST), and fees to the Registrar of Companies
on various occasions. Finance is needed for paying taxes and fees.
2. Considering a start-up of a “Masala Dosa hotel”, below is the projected cash
flow statement depicting the various operating, investing, and financing activities.
Operating Activities
Sale of Dosa Rs. 1,00,000
Payments to employees Rs 30,000
Cost of goods Rs. 25,000
Interest Payments Rs. 5,000
Total Rs. 40,000
Investing Activities
Purchase of Utensils Rs. 15,000
Purchase of furniture Rs. 40,000
Borewell Rs. 70,000
Total Rs. 1,25,000
Financing activities
Small business loan Rs. 25,000
Total Rs. 25,000
Net cash flow Rs. 1,40,000
3.By the time you submit the assignment, the classes will be over. Please highlight
your doubts both on theory and numericals in the following format
No Doubts Professor, Thank you.
Time Value of Money –
• What is the present value of Rs 100000 receivable after 3 years at 10 %

discount? (On annual basis)
Discount factor 0.7513 (but you have to write the formula to show how this is
arrived at to get full marks)
Answer:
Present Value = Future Value*[1 / (1+r)n]
Future Value = 1,00,000
Rate of return = 10% = 0.10
Number of periods = 3
Arrival at discount factor

Discount factor = 1 / (1+r)n
= 1 / (1+0.10)3
= 1 / (1.1)3
= 1 / 1.331
= 0.7513
Therefore, Present Value = Future Value * Discount Factor

= 100000 * 0.751314800901578
Present Value = 75,131.48
Amortization –
• Loan amount Rs 25,00,000. Repayment period 10 years (120 months). Rate

of Interest 8 %
Calculate the Equated Monthly Instalment using formula
Answer:
EMI = P * [r * (1+r)n / (1+r)n -1]

P=Principal Loan Amount = 25,00,000
R=Monthly rate of interest = (8% / 12) = (0.08/12)
N=number of months = 120 months
=25,00,000 * [0.00666667 * (1+0.00666667)120 / (1+0.00666667)120 - 1]
=25,00,000 * [0.00666667 * (1.00666667)120 / (1.00666667)120 - 1]
=25,00,000 * [0.00666667 * (2.219640235) / (2.219640235) – 1]
=25,00,000 * [0.014797602 / 1.219640235]
=25,00,000 * 0.012132759
Equated Monthly Instalment = 30331.89
Capital Budgeting -
Edelman Engineering is considering including two pieces of equipment, a truck, and

an overhead pulley system, in this year’s capital budget. The projects are
independent. The cash outlay for the truck is $17,100, and that for the pulley system
is $22,430. The firm’s cost of capital is 14%. After-tax cash flows, including
depreciation, are as follows:
Year Truck Pulley
1 US $ 5100 US $ 7500
2 US $ 5100 US $ 7500
3 US $ 5100 US $ 7500
4 US $ 5100 US $ 7500
5 US $ 5100 US $ 7500
Calculate IRR, MIRR and NPV

Indicate the correct accept / reject decision for each.
Answer:
NPV (NET PRESENT VALUE)-
Year Truck Pulley @14% NPV (Truck) NPV (Pulley)
1 5100 7500 CF 1 / (1.14)1 4473.684211 6578.947368
2 5100 7500 CF 1 / (1.14)2 3924.284395 5771.006464
3 5100 7500 CF 1 / (1.14)3 3442.354733 5062.286372
4 5100 7500 CF 1 / (1.14)4 3019.609415 4440.60208
5 5100 7500 CF 1 / (1.14)5 2648.780188 3895.264983
17508.71294 25748.10727
Outflow -17100 -22430
NPV@14% 408.7129412 3318.107266
NPV for Truck is Positive, hence it can be accepted.

NPV for Pulley is Positive, hence it can be accepted.
IRR (INTERNAL RATE OF RETURN)-
By trial and error – Assume IRR truck = 15%, IRR pulley = 20%
Therefore, NPV=
𝑻
𝑪𝒕 𝟓𝟏𝟎𝟎 𝟓𝟏𝟎𝟎 𝟓𝟏𝟎𝟎 𝟓𝟏𝟎𝟎 𝟓𝟏𝟎𝟎
∑ 𝒕
= 𝟏
+ 𝟐
+ 𝟑
+ 𝟒
+
(𝟏 + 𝑰𝑹𝑹) (𝟏 + 𝟎. 𝟏𝟓) (𝟏 + 𝟎. 𝟏𝟓) (𝟏 + 𝟎. 𝟏𝟓) (𝟏 + 𝟎. 𝟏𝟓) (𝟏 + 𝟎. 𝟏𝟓)𝟓
𝒕=𝒐
𝑻
𝑪𝒕 𝟕𝟓𝟎𝟎 𝟕𝟓𝟎𝟎 𝟕𝟓𝟎𝟎 𝟕𝟓𝟎𝟎 𝟕𝟓𝟎𝟎
∑ = + + + +
(𝟏 + 𝑰𝑹𝑹)𝒕 (𝟏 + 𝟎. 𝟐𝟎)𝟏 (𝟏 + 𝟎. 𝟐𝟎)𝟐 (𝟏 + 𝟎. 𝟐𝟎)𝟑 (𝟏 + 𝟎. 𝟐𝟎)𝟒 (𝟏 + 𝟎. 𝟐𝟎)𝟓
𝒕=𝒐
Year Truck Pulley NPV (Truck) NPV (Pulley)

@15% @20%
1 5100 7500 4434.782609 6250
2 5100 7500 3856.332703 5208.333333
3 5100 7500 3353.332785 4340.2777778
4 5100 7500 2915.941553 3616.898148
5 5100 7500 2535.60135 3014.08179
17095.991 22429.59105
Outflow -17100 -22430
NPV -4.009000142 -0.408950617
Working- IRR Truck Working- IRR Pulley

=408.7129412 - (-4.009000142) =3318.107266 - (-0.408950617)
=412.7219413 =3318.516217
= (408.7129412 / 412.7219413) * 1 = (3318.107266 / 3318.516217) * 6
=0.990286438 =5.999260602
IRR = 14 + 0.990286438 IRR = 14 + 5.999260602
IRR = 14.99% IRR = 19.99%
IRR for Truck is greater than cost of Capital. Hence, can be considered.
IRR for Pulley is greater than cost of capital. Hence, it can be accepted.
MIRR (MODIFIED INTERNAL RATE OF RETURN)-
For Truck:
Terminal Value:
=5100(1 + 14%)4 + 5100(1 + 14%)3 + 5100(1 + 14%)2+ 5100(1 + 14%)1 + 5100
=5100(1 + 0.14)4 + 5100(1 + 0.14)3 + 5100(1 + 0.14)2+ 5100(1 + 0.14)1 + 5100
= 8613.69 + 7555.87 + 6227.96 + 5814 + 5100
= 33711.52
MIRR for Truck = (33711.52 / 17100)(1/5) – 1
= 1.1453 – 1
= 0.145 = 14.5%
MIRR is greater than cost of Capital for Truck. Hence, it can be accepted.
For Pulley:
Terminal Value:
=7500(1 + 14%)4 + 7500 (1 + 14%)3 + 7500 (1 + 14%)2+ 7500 (1 + 14%)1 + 7500
=7500(1 + 0.14)4 + 7500 (1 + 0.14)3 + 7500 (1 + 0.14)2+ 7500 (1 + 0.14)1 + 7500
= 12667.20 + 11111.58 + 9747 + 8550 + 7500
= 49575.78
MIRR for Pulley = (49575.78 / 22430)(1/5) – 1
= 1.1718 – 1
= 0.171 = 17.1%
MIRR is greater than cost of Capital for Pulley. Hence, it can be accepted.
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Corporate Finance – Assignment 2

1.Describe in your own words the importance of Corporate Finance

b) Whenever a business firm wants to start a new venture, it needs to raise

d) Smooth running of business firm and smooth flow of corporate finance is

f) Promotes expansion and diversification such as modern machines and modern

I) Payment of dividend and interest Finance is needed to pay dividends to

No Doubts Professor, Thank you.

• What is the present value of Rs 100000 receivable after 3 years at 10 %

Arrival at discount factor

Therefore, Present Value = Future Value * Discount Factor

Present Value = 75,131.48

• Loan amount Rs 25,00,000. Repayment period 10 years (120 months). Rate

EMI = P * [r * (1+r)n / (1+r)n -1]

Equated Monthly Instalment = 30331.89

Edelman Engineering is considering including two pieces of equipment, a truck, and

Calculate IRR, MIRR and NPV

NPV for Truck is Positive, hence it can be accepted.

Year Truck Pulley NPV (Truck) NPV (Pulley)

Working- IRR Truck Working- IRR Pulley

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