Mgt411 Assignment No. 1 solution
Monday, April 18, 2011 Posted In MGT Edit ThisSchedule
Opening Date and Time April 15 , 2011 At 12:01 A.M. (Mid-Night)
Due Date and Time April 20 , 2011 At 11:59 P.M. (Mid-Night)
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Question # 1:
(Marks: 08)
Mr Ahmad, the director of Supreme Textile Limited, is deciding to install a new plant for fiber spinning. Mr Ahmad has a choice to install a plant that will transform the raw cotton into yarn, project costs Rs 2,000,000/- and will generate revenue of Rs 550,000 for the next five years. Assume the company’s discount rate/cost of borrowing is 9%. Calculate IRR for above project by using trial and error method.
Question # 2:
(Marks: 08)
Find the present value of a coupon bond, having face value Rs 1000/-, coupon rate of 12.5% per annum with 7 years maturity. During current economic conditions the investor’s required rate of return is 5%.
Requirement: Calculate Present value of Coupon Bond.
Question # 3 (Marks: 04)
Prevailing interest rate in the country is 14%, if expected inflation rate is 11% calculate the real interest rate by using fisher equation.
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SOLUTION
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SOLUTION
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Solution 1
Assume the company’s discount rate/cost of borrowing is 9%.
Calculate IRR for above project by using trial and error method.
The IRR is calculated by a trial and error process
1. The NPV is calculated using discount rate r.
2. If the NPV is close to zero then r is the IRR.
3. If the NPV is positive r is increased.
4. If the NPV is negative r is decreased.
First we calculate the NPV using the discount rate which is 9% given in question
NPV = CF0 + CF1/ (1+r) + CF2/ (1+r) 2 + CF3/ (1+r) 3 +CF4/ (1+r) 4 + CF5/ (1+r) 5
0= -2000000+550000/ (1.09) +550000(1.09)2+550000(1.09) 3 +550000(1.09)4 +550000(1.09)5
0= -2000000+504587+462924+424700+389633+357462
0= 139306
It is Positive so we increased our r 9% to 12% and use 12% instead of 9%
NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 +CF4/(1+r)4 + CF5/(1+r)5
0= -2000000+550000/ (1.12) +550000(1.12)2+550000(1.12) 3 +550000(1.12)4 +550000(1.12)5
0= -2000000+491071+438456+391479+349534+312085
0= -17375
Now it is Negative so we decrease rate. Let’s try 11.648
NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 +CF4/(1+r)4 + CF5/(1+r)5
0= -2000000+550000/ (1.11648) +550000(1.11648)2+550000(1.11648) 3 +550000(1.11648)4 +550000(1.648)5
0= -2000000+492620+441226+395193+353964+317035
0= -2000000+2000038
This rate is NEARLY suitable at IRR 11.648
So IRR is 11.648
Solution 2
PV of Coupon Bond =C [(1-(1/1+i) n)/i] +m/(1+i)n
C= Coupon payment
I= Rate of return = 5%
M= Face value =1000
N= periods = 7 years
C= = Coupon Rate* Face value
= 12.5%*1000=125
Now putting value in Formula
PV of Coupon Bond =125[(1-(1/1+.05)7)/.05]+1000/(1+.05)7
PV of Coupon Bond =125[(1-(1/1.4071)/.05]+1000/1.4071
PV of Coupon Bond =125[(1-.7107)/.05] +711
PV of Coupon Bond =125[0.2893/.05] +711
PV of Coupon Bond =125[5.786]+711
PV of Coupon Bond = 723+711
PV of Coupon Bond =1434.25
Solution 3
interest rate by using fisher equation.
R=14%-11%
R=3%
Assume the company’s discount rate/cost of borrowing is 9%.
Calculate IRR for above project by using trial and error method.
The IRR is calculated by a trial and error process
1. The NPV is calculated using discount rate r.
2. If the NPV is close to zero then r is the IRR.
3. If the NPV is positive r is increased.
4. If the NPV is negative r is decreased.
First we calculate the NPV using the discount rate which is 9% given in question
NPV = CF0 + CF1/ (1+r) + CF2/ (1+r) 2 + CF3/ (1+r) 3 +CF4/ (1+r) 4 + CF5/ (1+r) 5
0= -2000000+550000/ (1.09) +550000(1.09)2+550000(1.09) 3 +550000(1.09)4 +550000(1.09)5
0= -2000000+504587+462924+424700+389633+357462
0= 139306
It is Positive so we increased our r 9% to 12% and use 12% instead of 9%
NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 +CF4/(1+r)4 + CF5/(1+r)5
0= -2000000+550000/ (1.12) +550000(1.12)2+550000(1.12) 3 +550000(1.12)4 +550000(1.12)5
0= -2000000+491071+438456+391479+349534+312085
0= -17375
Now it is Negative so we decrease rate. Let’s try 11.648
NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 +CF4/(1+r)4 + CF5/(1+r)5
0= -2000000+550000/ (1.11648) +550000(1.11648)2+550000(1.11648) 3 +550000(1.11648)4 +550000(1.648)5
0= -2000000+492620+441226+395193+353964+317035
0= -2000000+2000038
This rate is NEARLY suitable at IRR 11.648
So IRR is 11.648
Solution 2
PV of Coupon Bond =C [(1-(1/1+i) n)/i] +m/(1+i)n
C= Coupon payment
I= Rate of return = 5%
M= Face value =1000
N= periods = 7 years
C= = Coupon Rate* Face value
= 12.5%*1000=125
Now putting value in Formula
PV of Coupon Bond =125[(1-(1/1+.05)7)/.05]+1000/(1+.05)7
PV of Coupon Bond =125[(1-(1/1.4071)/.05]+1000/1.4071
PV of Coupon Bond =125[(1-.7107)/.05] +711
PV of Coupon Bond =125[0.2893/.05] +711
PV of Coupon Bond =125[5.786]+711
PV of Coupon Bond = 723+711
PV of Coupon Bond =1434.25
Solution 3
interest rate by using fisher equation.
R=14%-11%
R=3%
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Semester “Spring 2011”
“Money & Banking (MGT411)”
Question # 1: (Marks: 08)
Mr Ahmad, the director of Supreme Textile Limited, is deciding to install a new plant for fiber spinning. Mr Ahmad has a choice to install a plant that will transform the raw cotton into yarn, project costs Rs 2,000,000/- and will generate revenue of Rs 550,000 for the next five years.
Assume the company’s discount rate/cost of borrowing is 9%.
Calculate IRR for above project by using trial and error method.
The IRR is calculated by a trial and error process
1. The NPV is calculated using discount rate r.
2. If the NPV is close to zero then r is the IRR.
3. If the NPV is positive r is increased.
4. If the NPV is negative r is decreased.
First we calculate the NPV using the discount rate which is 9% given in question
NPV = CF0 + CF1/ (1+r) + CF2/ (1+r) 2 + CF3/ (1+r) 3 +CF4/ (1+r) 4 + CF5/ (1+r) 5
0= -2000000+550000/ (1.09) +550000(1.09)2+550000(1.09) 3 +550000(1.09)4 +550000(1.09)5
0= -2000000+504587+462924+424700+389633+357462
0= 139306
It is Positive so we increased our r 9% to 12% and use 12% instead of 9%
NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 +CF4/(1+r)4 + CF5/(1+r)5
0= -2000000+550000/ (1.12) +550000(1.12)2+550000(1.12) 3 +550000(1.12)4 +550000(1.12)5
0= -2000000+491071+438456+391479+349534+312085
0= -17375
Now it is Negative so we decrease rate. Let’s try 11.648
NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 +CF4/(1+r)4 + CF5/(1+r)5
0= -2000000+550000/ (1.11648) +550000(1.11648)2+550000(1.11648) 3 +550000(1.11648)4 +550000(1.648)5
0= -2000000+492620+441226+395193+353964+317035
0= -2000000+2000038
This rate is NEARLY suitable at IRR 11.648
So IRR is 11.648
Question # 2: (Marks: 08)
Find the present value of a coupon bond, having face value Rs 1000/-, coupon rate of 12.5% per annum with 7 years maturity. During current economic conditions the investor’s required rate of return is 5%.
Requirement: Calculate Present value of Coupon Bond.
PV of Coupon Bond =C [(1-(1/1+i) n)/i] +m/(1+i)n
C= Coupon payment
I= Rate of return = 5%
M= Face value =1000
N= periods = 7 years
C= = Coupon Rate* Face value
= 12.5%*1000=125
Now putting value in Formula
PV of Coupon Bond =125[(1-(1/1+.05)7)/.05]+1000/(1+.05)7
PV of Coupon Bond =125[(1-(1/1.4071)/.05]+1000/1.4071
PV of Coupon Bond =125[(1-.7107)/.05] +711
PV of Coupon Bond =125[0.2893/.05] +711
PV of Coupon Bond =125[5.786]+711
PV of Coupon Bond = 723+711
PV of Coupon Bond =1434.25
Question # 3 (Marks: 04)
Prevailing interest rate in the country is 14%, if expected inflation rate is 11% calculate the real
interest rate by using fisher equation.
R=i+𝜋e
R=14%-11%
R=3%
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