Fin622 Current Assignment 1 Fall 201 Solution soon

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:

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)