HAWASSA UNIVERSITY
AWADA BUSINESS AND ECONOMICS COLLEGE
DEPARTMENT OF ACCOUNTING AND FINANCE
GROUP ASSIGNMENT
COURSE TITTLE: Financial modeling
NAME ID NO
2. EMEBET HAILU.........................................................................0265/13
2. EPHREM SILESHI.....................................................................0273/13
3. ESUBALEW TILAHUN...............................................................0288/13
4. FEYISO GEMEDI........................................................................0311/13
5. FIRAOL MOSISA........................................................................0319/13
6. GETE ESKEZYA..........................................................................0355/13
7. HUNDAOL GELAN.....................................................................0415/13
8. KEYREDIN HUSEN.....................................................................0448/13
9. KONJIT KISO..............................................................................0459/13
10. MLKAMU AEMIRO...................................................................0523/13
Q1.Consider the following mutually exclusive project alternatives, together with their cash
flows.
Alternative Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
A (60,000) 15,000 23,000 22,000 31,000 19,000
B (80,000) 24,000 22,000 25,000 32,000 35,000
Calculate the NPV & IRR
SOLUTION
Assume the required rate of return on both projects is 10 percent. Then, evaluate these
projects using the net present value method. The evaluation of these two projects requires the
computation of the net preset values for both projects.
➡Net Present Value (NPV)
▪ It is an investment project proposals evaluating and ranking
method using the net present value, which is the difference
between the present values of future cash inflows and thdifferenc
value of cash outflows, discounted at the given cost of capidifferecopportunity cost of capital.
In order to use this method properly, the following procedures are
followed.
1. Find the present value of each cash flow (both inflows and out
flows) using the cost of capital of the project for discounting.
2. Sum the discounted cash inflows and the discounted cash
outflows separately.
3. Obtain the difference between the sum of the cash inflows and
the sum of the cash outflows.
Decision Rule; The decision rule here is; accept a project if the NPV is
positive and reject if it is negative
➡NPV > Zero Accept
➡ NPV = Zero Indifference
➡ NPV < Zero Reject
➡ If the projects are independent, the projects with positive net present
values are the ones whose implementation maximizes the wealth of
shareholders.
Hence, such projects should be accepted for implementation.
➡ If the projects, on the other hand, are mutually exclusive, the one
with the higher positive NPV should be accepted leading to the
rejection of the projects with lower positive NPV.
➡NPV of zero imply that the cash flows of the project are just
sufficient to repay the invested capital and to provide the required
rate of return, no more, no less.
Firm A
Year Cash flow Discount factor Present value
(PVOA)
0 ETB(60,000) 10%
1 15,000 0.9090 13,635
2 23,000 0.8264 19,007.2
3 22,000 0.7513 16,528.6
4 31,000 0.6830 21,173
5 19,000 0.6209 11,797
PV of cash in flow 82,140.8
PV of cash outflow (60,000)
Net present value 22,140.08
IRR
Firm B
Year Cash flow Discount factor Present value
(PVOA)
0 ETB(80,000) 10%
1 24,000 0.9090 21,816
2 22,000 0.8264 18,180.08
3 25,000 0.7513 18,782.5
4 32,000 0.6830 21,856
5 35,000 0.6209 21,731.5
PV of cash in flow 102,366.08
PV of cash outflow (80,000)
Net present value 22,366.08
IRR
Q2.Evermaster Corporation issued €100,000 of 8 percent term bonds on January 1, 2015,
due on January 1, 2020, with interest payable each July 1 and January 1. If the investors
required an effective-interest rate of 10 percent. What is the value of the bonds?.
Solution
To calculate the value of the bonds issued by Evermaster Corporation, we need to find the
present value of the bond's future cash flows. Given that the bonds have an effective-interest
rate of 10% and a face value of €100,000, we can calculate the value using a present
value formula:
Value = (Interest Payments Present Value Interest Factor) + (Face Value Present Value
Factor)
Interest Payments = €100,000 * 8% = €8,000 (annually)
Present Value Interest Factor (n = 5, i = 10%) = 3.791
Present Value Factor (n = 5, i = 10%) = 0.6209
Value = (€8,000 * 3.791) + (€100,000 *0.6209)
Value=30,328+62,090=92,418
Q3.Assume the following statement financial position
Asseets Liabilities
Short Term Assets Short Term liability
Cash 2,000.00Accounts payable 1,500.00
Marketable Seurities 1,500.00Taxes Payable 1,200.00
Inventories 1,500.00Current Portions of Long 1,000.00
term debt
Accounts Receivables 4,000.00Short Term Debt 1,500.00
Fixed Asses Long Term Debt 1,500.00
Land 1,150.00Pension Liabilties 1,800.00
PPE at cost 2,500.00
Minus Accumulated -700.00Prefered Stock 200.00
Depreciations
Net Fixed Assets Minority Interest 100.00
Equity
Goodwill 1,000.00Stock at Par 1,000.00
Accumulated Retained 3,500.00
Earning
Stock Repurchases -350.00
Total Assets 9,950.00Total Liabilioties and 9,950.00
Equity
Determine the enterprise value usig the Accounting Book Values
Assum for ABC company .
ABC COMPANY BALANCE SHEET
December 31,2015
Assets Liabilities and
equity
Liquid assets (cash + 3500 Financial debt
marketable securities)
current asset Current portion of 1000
long- term debt
inventory 1500 short term debt 1500
accounts receivable 4000 long term debt 1500
less current liability Total financial debt 4000
account payable 1500 pension liability 1800
tax payable 1200 preferred stock 200
Net working capital 2800 minority interest 100
fixed asset 2950
Goodwill 1000 Equity 4150
ABC ENTERPRISE VALUE BALANCE SHEET
Assets LIABILITY AND
EQUITY
Net working 2800 Total financial debt 4000
Fixed asset 2950 Less Liquid asset 3500
Goodwill 1000 Net debt 500
Pension liability 1800
preferred stock 200
Minority interest 100
Equiy 4150
Enterprise value 6,750 Enterprise value 6750
Q4.let us assume that project A and project B have the same initial investments, 10,000 birr.
The RRR is for the firm 10 percent.
Year Project A Project B
0 (10,000) (10,000)
1 - 6,000
2 13,924 7,200
Which project should be selected? (use IRR or NPV)
Year A B Discount PV of A PV of B
factor(10%)
0 ETB(10,000) ETB(10,000)
1 - 6,000 0.9090 - 5,454
2 13,924 7,200 0.8264 11,506.79 5,950.04
PV of cash in =11,506.8 =11,404.04
flow
PV of cash ( 10,000) (10,000)
outflow =1,506.79 =1,404.04
Net present
value
If mutually exclusive project then firm A selected
If independent peodect both of them selected Blc NPV >0
