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BA62070H320 Group Problem Set 2 Laxmi Kirti Bachu Satish Gadepally, Nagendar Jajula , Amarnath Kommalapati , Sandeep Ramini

Part 1: Capital Budgeting Analysis Shipping Costs Associated $10,000.00 Installation costs for the machine $30,000.00 Purchase for Machine $200,000 Four years of machine operation WACC 10% Total salvage value at end of machine operation $25,000.00 The $40,000 used in the maintenance of the empty lot should not be included in the analysis. The cost of maintaining the empty lot is part of the running costs of the firm and including it will be double accounting. Year 0 First Year Second Year Third Year Fourth Year Product Units 1250 1250 1250 1250 Cost per Unit $100 $103 $106.09 $109.27 SP/Unit $200 $206 $212.18 $218.55 Revenue $250,000 $257,500 $265,225 $273,182 NWC $30,000 $30,900 31,827$ $32,781.81 Year Sales Unit Sale price Variable cost Contri bution per unit Depreciatio n PBT Tax @40% PAT Depreciati on Operatin g Cash Flows Net working capital 0 30,000 1 1250 $200 $100 $100 79,992 45,008 18,003 27,005 79,992 106,997 900 2 1250 $206 $103 $103 106,680 22,070 8,828 13,242 106,680 119,922 927 3 1250 $212.1 8 $106.09 $106.0 9 35,544 97,069 38,827 58,241 35,544 93,785 955 4 1250 $218.5 5 $109.27 $109.2 7 17,784 118,807 47,523 71,784 17,784 89,068 32,782 Year 0 First Year Second Year Third Year Fourth Year

Investment $240,000 Revenue $250,000 $257,500 $265,225 $273,181.75 Cost $125,000 $128,750 $132,612.50 $136,590.88 EBITDA $125,000 $128,750 $132,612.50 $136,590.88 Depreciation $43,750 $43,750 $43,750 $43,750 EBIT $81,250 $85,000 $88,862.50 $92,840.88 Tax Payable $32,500 $34,000 $35,545 $37,136.35 Net Income $48,750 $51,000 $53,317.50 $55,704.53 Investment Total Cash Flows PVIF @10% Present Value Simple Cumulative Cash Flows Cumulative PV Cash Flows 240,000 270,000 1.000 $270,000.00 $270,000.00 $270,000.00 106,997 0.909 $97,269.82 $163,003.20 $172,730.18 119,922 0.826 $99,109.09 $43,081.20 $73,621.09 93,785 0.751 $70,462.13 $50,703.90 $3,158.96 15,000 89,068 0.683 $60,834.73 $139,772.03 $57,675.77 IRR = 19.93% Net Present Value = $57,675.77 MIRR = 15.46% PI = 1.21 (1 + 57675/270000) Payback Period = 2.81 (2 + 77100/95038) Discounted Payback = 3.48 (3 + 311141.85/64929.38) Year 0 Year 1 Year 2 Year 3 Year 4 FCF $62,500 $63,850 $65,240.50 $66,672.72 Discounting Factor 0.909090909 0.826446281 0.751314801 0.683013455 DCF $240,00 0 $56,818.18 $52,768.60 $49,016.15 $45,538.36 NPV $ (35,858.71) Payback method CF $ 258,263.22

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The payback method does not consider the value of money over a period of time (inflation) given this, the firm ought to consider implementing the investment. NPV is the Net Present Value which considers the firmss discounting factor while evaluating the feasibility of its implementation. IRR is the internal rate of return; this is the rate at which NPV is zero Profitability Index is measured using the payoff received by the investment made. If NPV is negative, it means that the project is not feasible and should therefore not be implemented. Part 2: Working Capital Management Question One a). Days inventory outstanding = 365 days / Inventory turnover = 365 / 7.5 = 48.67 days Cash conversion cycle = Days sales outstanding+ Days inventory outstanding - Payables deferral period = (36.5 days + 48.67 days) - 40 days = 45.17 days. b). Net sales = 150000 Total assets = Accounts receivable + Inventory + Fixed assets = (Net sales * DSO days) / 365 + (COGS / Inventory turnover) + 35,000 = (150000*36.5) /365 + (121667 / 7.5) +35000

= (5475000/365) + 16222.27 + 35000 =15000+16222.27+35000 =$66222.27 Asset turnover = Net sales / Total sales = $150000 / $66222.27 = 2.27 Net profit = 150000 * 6% =150000*0.06 =$9000 Return on assets = Net profit / Total assets = 9000 / 66222.27 = 0.1359=13.59% c). Days inventory outstanding = 365 days / Inventory turnover = 365 / 9 = 40.56 days Cash conversion cycle = Days sales outstanding+ Days inventory outstanding - Payables deferral period = 36.5 days + 40.56 days - 40 days = 37.06 days

Total assets = Accounts receivable + Inventory + Fixed assets = (Net sales * DSO days) / 365 + (COGS / Inventory turnover) + 35000 = (150000*36.5) /365 + (121667 / 9) +35000 = $63518.56 Asset turnover = Net sales / Total sales = $150000 / $63518.56 = 2.36 Return on assets = Net profit / Total assets = 9000 / 63518.56 = 14.17% Question Two Inventory= sales/inventory turnover ratio Inventory=$10000000/2 =$5000000 In case the inventory ratio was raised by 5 then the inventory will be =$10000000/5 =$2000000 After the turnover ratio is increased the amount that is freed will be;

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= $5000000 - $2000000 =$3000000 Part 3: Dividend Policy a). Irrelevance theory postulates that dividends do not affect a firm’s stock price. Dividends are monies paid to the firms’ shareholders as part of their returns for investing in the company. The companies that opt to pay regular dividends do not experience a better performing stock price as compared to firms that do not ( Bogna, 2015). Developed in answer to the irrelevance theory, the bird-in-hand theory states that investors prefer a certain payment of dividends rather than a promissory possibility of higher future capital gain. As the name suggests, investors prefer the certainty of regular dividend payouts as compared to the future price of the stock. In contrast, the tax preference theory holds that several investors prefer a capital gain in the long-run as compared to regular dividend payouts. The investors would therefore rather than return profits are returned to the firm for re-investment. b). The three theories indicate that management should not prefer a dividend payout over plowing back of company profits to create a capital gain (Bogna, 2015). While dividend payment may be appreciated in the short-run, the firm should not risk the long-term stability and capital gain of the firm and use up profits to pay out shareholders. Since the sentiment is also prevalent among shareholders, management should prioritize the growth of the company to increase value for the shareholders. c). Stock re-purchases are a decision by a firm to buy back some of its stock from the market. A key advantage of re-purchases is the ability of the firm to improve its consolidation and increasing its financial ratios. By improving its ownership consolidation, it becomes easier

for management to implement unpopular long-term decisions and plans that would otherwise attract widespread opposition. However, stock re-purchases take money away from the company and may decrease its liquidity ratios and ability to meet short-term obligations. d). Stock dividends are payouts made by the firm in form of shares as opposed to cash. The advantage of a stock dividend is that it does not reduce the firms’ cash balance (Bogna, 2015). However, a stock dividend can reduce earnings per share for the shareholders. On the other hand, a stock split happens when a firm divides its current shares into smaller ones. A stock split reduces the price of a share and therefore appeals to new investors that can pump money into the company. Other investors can also be strategic industry partners. However, a stock split can reduce the share price and reduce the valuation of the company. Part 4: International Financial Management a). A multinational corporation is a firm that is operational in several countries across the world. Companies expand into other countries to improve efficiency. Different countries and regions have certain prevailing optimal conditions to produce specific goods and services. For example, countries with low labor costs are the best to base labor-intensive parts of the production process ( Faulkender & Smith, 2016). Similarly, certain countries have the personnel and educated groups to develop high-value products such as computer chips. Another advantage of operating in other countries is tax avoidance and increasing the consumer base. b). Cultural differences between countries affect the financial and policy decisions of multinationals in a way that local companies are not ( Intan & Bellamy, 2016). For example, while consumers in the United States like huge trucks, Europeans often favor smaller cars. A

similar trend can be seen in Japan in comparison to the United States. United States car manufacturers, therefore, have to take into consideration the cultural differences between Europe and America. Another consideration that multinationals have to take into account includes currency denominations that are constantly fluctuating ( Rottig, 2016). Changes in the exchange rates can either spell boom or doom for a multinational and affect the price of its products. Since some products are imported, changes in the rate of exchange can mean either an increase or decrease in the cost of a product or service. Another risk associated with being a multinational company is the existence of different legal frameworks in each jurisdiction. Each country may have a separate regulatory framework that necessitates different approaches to its market. For example, the Chinese government requires that foreign companies operating in the country in certain industries cooperate with local players and give part of their ownership to local investors. Additionally, political risks mean that multinationals have to constantly prepare for riots and other upheavals that may negatively affect their business. Election cycles in some country’s predicate violence and political upheaval. A multinational may therefore need to budget for such contingencies within the foreign market. In addition to the legal framework, the size and role of the government within a market affect the financial management of a multinational (Rottig, 2016). In some jurisdictions, the outsize nature of the government within the market means that a company has to restrict its entry into those segments of the market.

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Different languages also affect the financial management of a multinational. Language barrier means that a multinational has to re-package its advertising and product descriptions to go along with the main language being spoken within the new market. It also affects the recruitment process and ability to directly import products from the home market. c). The exchange rate risk for multinationals is both an advantage and a disadvantage for the multinational. Increases in the exchange rate increase the cost of importing products to the home market while decreases cause the reverse effect. Countries with a weak currency often tend to favor exports over imports. If their currencies continue to weaken, the cost of importation increases substantially. d). The current global monetary system departs from the gold-standard that was in use before 1971 ( Haron, 2018). In the previous model, the currency of a nation was pegged onto gold and ensured the stability of the same. After 1971, the major economies abandoned the gold standard in favor of the fiat system where each government props up its currency and determines its value ( Kirkby, 2018). In the current model, central banks have the tools to affect the value of a currency that is not pegged onto any item of value. e). The spot rate is the immediate settlement of an interest rate normally within two days while forward rates are typically employed for payment schedules that will happen in the future. A forward rate is at a premium when its exchange rate is quoted higher than the spot exchange rate ( Lotz, 2018). A discount occurs when the forward exchange rate is less than the spot rate. f). The Citrus management has to prepare accordingly before venturing into the new market by analyzing the cultural and political/legal differences between the two regions of the world. It

also has to take into account the fluctuating exchange rate of the different jurisdictions and find ways to manage any changes. References Bogna, K, J. (2015). Determinants of Dividend Policy: Evidence from Polish Listed Companies. Procedia Economics and Finance , Vol. 23, pp. 473-477. https://doi.org/10.1016/S2212-5671(15)00490-6 Faulkender, M., & Smith, J. (2016). Taxes and leverage at multinational corporations . Journal of Financial Economics, Vol. 122, Issue. 1, pp. 1-20. https://doi.org/10.1016/j.jfineco.2016.05.011

Haron, R. (2018). Cryptocurrencies, Fiat money or gold standard: empirical evidence from volatility structure analysis using news impact curve. https://doi.org/10.1504/IJMEF.2019.100262 Intan, S., & Bellamy, J. (2016). Multinational Corporations and the Globalization of Monopoly Capital: From the 1960s to the Present. Vol.68, Issue. 3, pp. 114-131. https://10.14452/MR-068-03-2016-07_9 Kirkby, R. (2018). Cryptocurrencies and Digital Fiat Currencies. The Australian Economic Review , Vol. 51, Issue. 4, pp. 527-539. https://doi.org/10.1111/1467-8462.12307 Lotz, S. (2018). A New Monetarist Model of Fiat and E-Money. Economic Inquiry , Vol. 57, Issue. 1, pp. 498-514. https://doi.org/10.1111/ecin.12714 Rottig, D. (2016). Institutions and emerging markets: effects and implications for multinational corporations. International Journal of Emerging Markets , Vol. 11, Issue. 1, pp. 2-17. https://doi.org/10.1108/IJoEM-12-2015-0248

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Required information Problem 14.056 The two machines shown are being considered for a chip manufacturing operation. Assume the MARR is a real return of 14% per year and that the inflation rate is 6.7% per year. A B Machine First Cost, $ -146,000 -820,000 -5,000 -70,000 M&O, $ per year Salvage Value, $ 40,000 200,000 Life, years 5 00 Problem 14.056.a: Compare two alternatives based on their AW values without inflation consideration Which machine should be selected on the basis of an annual worth analysis if the estimates are in constant-value dollars? What is the annual worth of the selected alternative? Select machine (Click to select]: wwwwwwwwwwww wwwwww... The annual worth of the alternative is $

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Cost $150,000 Training $17,000 Installation $15,000 Cisco Systems is purchasing a new bar code - scanning device for its service center in San Francisco. The table on the right lists the relevant initial costs for this purchase. The service life of the system is 4 years and its salvage value for depreciation purposes is expected to be about 28% of the hardware cost. Cost Item Hardware a. What is the cost basis of the device? b. What are the annual depreciations of the device if (i) the SL method is used? (ii) the 150% DB method is used? (iii) the 200% DB method is used? c. Calculate the book values of the device at the end of 4 years using all the methods above. Answers: (a) The cost basis of the device is $☐ (Round to the nearest dollar) (b) Annual depreciaitions and book values: (Round to the nearest dollar) SL Year 1 2 $ 3 4 Book values at $ end of year 4 150% DB ☐ 200% DB $ $

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Exercise 1 The Sunshine company is considering two projects, project A and project B. Project A requires the purchase of an equipment but no working capital investment whereas project B requires a working | capital investment but no equipment. The relevant information for net present value analysis is given below: Cost of equipment Working capital needed Annual cash inflows Salvage value of equipment Project life Project A Project B $600,000 $160,000 $ 40,000 $600,000 $120,000 8 years 8 years The working capital required for project B will be released at the end of project life. Sunshine company uses an 18% discount rate. Select the best investment using net present value (NPV) method. (Ignore income tax).

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