Mgt201 Assignment No. 1 solution FM
Wednesday, April 20, 2011 Posted In FM , MGT Edit ThisSemester Spring 2011
Financial Management MGT201)
Financial Management MGT201)
Assignment # 1 Marks:: 20
Capital Budgeting Techniques
Mr. Amir is planning to purchase a new car bearing the brand name of Honda civic (Model 2011). He visits a nearby car showroom ] Hijaz Motors, and comes to know that price of the car is Rs. 1,200,000. Amir thinks to take an optimistic decision, so he visits a local branch of Habib Bank Limited for seeking some information.
The branch manager tells him that he can purchase the car under a lease contract to be signed with HBL. Terms and conditions of the lease contract include: Down payment of Rs. 400,000 and monthly installment of Rs. 25,000 to be paid at the end of each month for next four years. The rate of interest to be charged by HBL on this lease will be equal to the discount rate as determined by State Bank of Pakistan, which is 15% at present.
Moreover, a friend of Mr. Amir tells him that he is interested to sell his car bearing the same model for reasonable terms including Rs. 400,000 at the time of delivery of car, Rs. 10,000 p.m. for the next two years, a fixed amount of Rs.300,000 after 6 months of 3rd year (2.5 years) and Rs.200,000 at the end of 3rd year.
You are required to guide Mr. Amir, as which option is better among the three options discussed above, i.e. to purchase from the car showroom, lease from HBL or buy form the friend.
(Show complete calculations and provide all formulas as they carry marks)
Important Tips
This Assignment can be best attempted from the knowledge acquired after watching video lecture# 1 to lecture # 12 and reading handouts as well as recommended text book.
Video lectures can be downloaded for free from Online VU Lectures
Schedule
Opening Date and Time
April 18, 2011 At 12:01 A.M. (Mid-Night)
Opening Date and Time
April 18, 2011 At 12:01 A.M. (Mid-Night)
Closing Date and Time
April 21, 2011 At 11:59 P.M. (Mid-Night)
Topic/Area for Discussion
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Please note that your assignment will not be graded or graded as Zero (0) if:
. It has been submitted after due date
. The file you have uploaded, does not open or is corrupt
. It is in any format other than .doc (MS. Word)
. It is cheated or copied from other students, internet, books, journals et
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Solution:
Purchase Value already given as = 1200000
2nd option
NPV = -Io + CFt / (1+i)t = -Io + CF1/(1+i) + CF2/(1+i) 2 + CF` /(1+i) 3 +..
NPV = 400000 + 300000/(1.15)*1 + 300000/(1.15)*2 + 300000/(1.15)*3 + 300000/(1.15)*4
NPV = 400000 + 260869.56 + 226843.10 + 197254.86 + 171525.97
NPV = 1256493.49
3rd Option
NPV = -Io + CFt / (1+i)t = -Io + CF1/(1+i) + CF2/(1+i) 2 + CF` /(1+i) 3 +..
NPV = 400000 + 120000/(1.15)*1 + 120000/(1.15)*2 + 300000/(1.15)*2.5 + 200000/(1.15)*3
NPV = 400000 + 104348 + 90738.24 + 211532.28 + 131503.24
NPV = 938121.76
3rd option is most suitable as Lowest NPV
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Option No. 1
Purchase value 1,200,000
Option No. 2
NPV = ICF + CFt/(1+r)^n
NPV =400,000 + 300000/1.15+300000/(1.15^2)+300000/(1.15^3)+300000/(1.15^4)
NPV = 400,000 + 260,869.56 + 226,843.10 + 197,254.86 + 171,526.59
NPV = 400,000 + 856494.11
NPV = 1,256,494.11
Option 3
NPV =120000/1.15+120000 / (1.15^2) + 300000/(1.15^2.5)+200000/(1.15^3) + 400,000
NPV =400,000 + 104,348 + 90,738.24 + 211,532.28 + 131,503.24
NPV = 400,000 + 538121.72
NPV = 938,121.72
Option 3 is the best Option as it has lowest NPV.
Note: students may not agree with this solution. Pls correct me if find any mistake.
