FIN622 Corporate Finance Assignment No.1 Fall Semester 2012 Due Date 19-11-2012

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FIN622 Corporate Finance Assignment No.1 Fall Semester 2012 Due Date 19-11-2012


Semester Fall 2012
Corporate Finance (FIN622)
Assignment No. 01
Due Date: 19-11-2012
Marks: 20
Capital Budgeting Techniques for Projects Evaluation
Learning objectives:
Understanding project evaluation techniques used to determine the financial viability of a project.
Learning outcomes:
After attempting this assignment, students will be able to understand how capital budgeting techniques can help in deciding whether to accept or reject a project.
Case
Tyres Manufacturing Incorporation (TMI) - a fast growing tyre manufacturing company in Pakistan has been serving nationally and internationally for the last 40 years. The company is a standard manufacturer of rubber tyres and tubes for all types of light vehicles running on the country’s roads. TMI is reliable name known for its quality products. Major customers of the company include people owing and driving vehicles manufactured by famous vehicle manufacturers in Pakistan.
To meet the rising demand for its products, TMI is thinking to expand manufacturing capacity for which two mutually exclusive investment opportunities named as project Alpha and Project Betaare under consideration.
The management has gathered necessary data which will be helpful in evaluation of the projects. Evaluation will be done through capital budgeting techniques. The company has to choose between these two equally risky and mutually exclusive projects. The expected cash flows of two projects are as follows:
Year
End
Project Alpha
Rs.(000)
Project Beta
Rs. (000)
0
(200,000)
(200,000)
1
60,000
55,000
2
80,000
65,000
3
75,000
70,000
4
60,000
80,000
TMI has estimated its required rate of return for each project at 12.3%. It has also estimated internal rate of return (IRR) for project Alpha at 14% and for project Beta at 12%.
Required
You as financial analyst need to recommend one of the two projects that TMI may add to its assets. Your decision is subject to the following:
1. Calculate Net Present Value (NPV) and profitability Index (PI) for each project. (16 marks)
2. If you apply NPV criterion, which project should be selected and why? (1 mark)
3. If you apply Profitability Index criterion, which project should be selected and why? (1mark)
4. If you apply IRR criterion, which project should be selected and why? (2 marks)
Show formulas and complete calculations as they carry marks.
Note:
Only in the case of Assignment, 24 hours extra / grace period after the due date is usually
available to overcome uploading difficulties which may be faced by the students on last date.
This extra time should only be used to meet the emergencies and above mentioned due dates
should always be treated as final to avoid any inconvenience.
Important Instructions:
Please read the following instructions carefully before attempting the assignment solution.
Deadline:
 Make sure that you upload the solution file before the due date. No assignment will
be accepted through e-mail once the solution has been uploaded by the instructor.
Formatting guidelines:
 Use the font style “Times New Roman”/ “Arial” and font size “12”.
 It is advised to compose your document in MS-Word 2003.
 Use black and blue font colors only.
Solution guidelines:
 Every student will work individually and has to write in the form of an analytical
assignment.
 Give the answer according to question.
 For acquiring the relevant knowledge don’t rely only on handouts but watch the
video lectures and use other reference books also.
Rules for Marking
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 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 etc…
Best Of Luck!!