ZERO SOLUTION IS NOT AS PER REQUIREMENT Question No. 01 Calculate net cash flows for 10 years.

(10 Marks) Solution Net cash flows for 10 years = 59.51 NPV = -4.20 PI = 0.85 Payback period = 5.5 years or to be exact 5 years 193 days

Questio No. 02 Part a Evaluate the project by using the following capital budgeting techniques: a. Payback Period (The desired payback period is 5 years) (04 Marks) Payback Period Method for Capital Budgeting Decisions The payback is another method to evaluate an investment project. The payback method focuses on the payback period. The payback period is the length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates. This period is some times referred to as" the time that it takes for an investment to pay for itself." The basic premise of the payback method is that the more quickly the cost of an investment can be recovered, the more desirable is the investment. The payback period is expressed in years. When the net annual cash inflow is the same every year, the following formula can be used to calculate the payback period. Formula / Equation: The formula or equation for the calculation of payback period is as follows: Payback period = Investment required / Net annual cash inflow* *If new equipment is replacing old equipment, this becomes incremental net annual cash inflow. To illustrate the payback method, consider the following example: Example: York company needs a new milling machine. The company is considering two machines. Machine A and machine B. Machine A costs $15,000 and will reduce

operating cost by $5,000 per year. Machine B costs only $12,000 but will also reduce operating costs by $5,000 per year. Required: Calculate payback period. Which machine should be purchased according to payback method? Calculation: Machine A payback period = $15,000 / $5,000 = 3.0 years Machine B payback period = $12,000 / $5,000 = 2.4 years According to payback calculations, York company should purchase machine B, since it has a shorter payback period than machine A.

Questio No. 02 Part b b. Net Present Value (10 Marks)

Net Present Value - NPV' The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

Example of Net Present Value To provide an example of Net Present Value, consider company Shoes For You's who is determining whether they should invest in a new project. Shoes for You's will expect to invest $500,000 for the development of their new product. The company estimates that the first year cash flow will be $200,000, the second year cash flow will be $300,000, and the third year cash flow to be $200,000. The expected return of 10% is used as the discount rate. The following table provides each year's cash flow and the present value of each cash flow. Year Cash Flow Present Value 0 -$500,000 -$500,000 1 $200,000 $181,818.18

2 $300,000 $247,933.88 3 $200,000 $150,262.96 Net Present Value = $80,015.02 The net present value of this example can be shown in the formula