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