Mgt201 Assignment No. 1 Solution

Financial Management MGT201

Assignment 1

ABC Corporation, a maker of electronics equipments, is considering selling the rights to market its products to a well_known advertising firm.

The proposed deal calls for annual year end payments of Rs.15,000 in years 1 through 7 and

payments of Rs.30,000 and Rs.25,000 at the end of 8th and 9th year respectively . A final payment of Rs. 10,000 would be due at the end of year 10.

1. If ABC Corporation applies a required rate of return of 12% to them, what is the present value of this series of payments?

Solution:

Year Cash Flows Present Value of Cash Flows

PV = FV / (1+i)^n

1          15,000              13,392.86

2          15,000              11,957.91

3          15,000              10,676.70

4          15,000              9,532.77

5          15,000              8,511.40

6          15,000              7,599.47

7          15,000              6,785.24

8          30,000              12,116.50

9          25,000              9,015.25

10         10,000              3,219.73

Present Value of series of payments 92,807.83

2. A second company has offered ABC Corporation a payment of Rs.30,000 now and

another final payment of Rs.80,000 at the end of year 3 for the rights to market the

products. Which offer should ABC Corporation accept?

Year Cash Flows Present Value of Cash Flows

PV = FV / (1+i)^n

1          30,000                          30,000.00 (As this payment was

made immediately, therefore

carries no interest)

3          80,000                          56,942.42

Present Value of series of payments 86,942.42

ABC corporation must accept the proposal whose Present Value of Series of Payment is higher

i.e. 92,807.83

........

ABC Corporation, a maker of electronics equipments, is considering selling the rights to market
its products to a well-known advertising firm.
The proposed deal calls for annual year end payments of Rs.15,000 in years 1 through 7 and
payments of Rs.30,000 and Rs.25,000 at the end of 8th and 9th year respectively . A final payment of Rs. 10,000 would be due at the end of year 10.


Answer

Year Cash Flows Present Value of Cash Flows
PV = FV / (1+i)^n
1 15,000 15000/(1+0.12)^1 = 13,392.86
2 15,000 11,957.91
3 15,000 10,676.70
4 15,000 9,532.77
5 15,000 8,511.40
6 15,000 7,599.47
7 15,000 6,785.24
8 30,000 12,116.50
9 25,000 9,015.25
10 10,000 3,219.73
Present Value of series of payments 92,807.83

2. A second company has offered ABC Corporation a payment of Rs.30,000 now and
another final payment of Rs.80,000 at the end of year 3 for the rights to market the
products. Which offer should ABC Corporation accept
Year Cash Flows Present Value of Cash Flows
PV = FV / (1+i)^n
30,000
30,000.00 this payment gave urgent so there is no include no of year
PV = FV / (1+i)^n
3 80,000 =56,942.42
=30000
present value of series of payment =86,942.42

ABC corporation must accept the proposal whose Present Value of Series of Payment is high
92,807.83