Investment decision making.

Corporate Finance.
October 31, 2020
Distinguish between power and authority.
October 31, 2020

This course provides detailed critical treatment of the theory and practice of financial management within organizations. Topics covered include financial modeling, breakeven analysis investment decision-making (NPV, IRR, etc.), capital budgeting and capital structure, working capital management, analysis of financial statements, and risk analysis.

Regarding investment decision making, there are techniques that are often applied to make financial investment decisions. These techniques include those that are sophisticated such as Net Present Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI) and those that are not sophisticated such as payback period and accounting rate of return. This assignment  requires students to use the NPV technique to make investment decisions.

Use the following information to answer the questions that follow.

RAK manufacturing company plans to invest in plant and equipment to expand its operating activities to be ready for Dubai EXPO 20-22.The plant and equipment will be useful for five (5) years only.

The plant and equipment will cost $110,000. RAK expects to receive the following net cash flows in the next five years.

YEAR NET CASH FLOWS

$

1 10,000
2 30,000
3 50,000
4 10,000
5 60,000

The discount rate is expected to be 12%.

QUESTION 1                                                                                                            14 marks

  1. Calculate Net Present Value (NPV) 2 marks
  2. Based on your answer in a) above: would you be willing to invest in RAK? And why?

2 marks

  1. General question: What financial impact does a project that has a negative NPV have on the overall value of the firm? 2 marks.
  2. General question: Would you be willing to invest in a project that has a NPV of zero (0)? And why?                                                                                                 2 marks
  3. What are the differences between the sophisticated investment techniques and so called naïve or not sophisticated investment techniques?                                                2 marks
  4. Discuss two (2) other finance terms that mean discount rate 2 marks
  5. Compute the Profitability Index (PI) of this investment 2 marks

 

QUESTION 2                                                                                                            11 marks

 

PAYBACK PERIOD THECHNIQUE

 

Using payback period method RAK expects to recover its initial investment of $110,000 in three (3) years.

  1. Compute the payback period for this investment. 3marks
  2. Would you be willing to invest in this project using payback method? 3 marks
  3. Using both NPV and payback period methods, would you be willing to invest in this project? Why? Why not?     Please explain.                                                 3 marks
  4. What role does diversification play in capital investment? Explain.             2 marks

 

 

 

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