FINANCIAL MANAGEMENT

1.
INTRODUCTION
Capital budgeting is critical to the future success of a corporation. Capital
budgeting refers to the process of deciding to invest a sum of money when the
projected results would come after longer than a year.
It also covers the decision-making process for disinvestment, i.e., the choice to sell
off an endeavour or a portion of it. Nonetheless, in most cases, particularly these
days, the former sort of judgement predominates. It is a critical decision to make
since, after money has been irrevocably invested, it may be difficult to improve
performance.
A capital investment choice comprises a long-term financial commitment that is
frequently loaded with danger. Such decisions have long-term consequences for an
organization's viability and flexibility. Adopting non-viable plans depletes an
organization's money and may lead to insolvency.
BODY
Capital budgeting is the mechanism through which businesses determine the
purchase of important fixed assets such as machinery, equipment, and buildings, as
well as the acquisition of other firms to undertake ongoing operations, either
through the purchase of equity shares or a collection of assets.
Capital budgeting is an organised preparatory mechanism for capital acquisition
and investment that culminates in a capital budget, or it can be thought of as a
firm's formal strategic outlay for fixed asset acquisition.
The discounted cash flow approach calculates the cash inflow and outflow
throughout the life of an asset. They are then subjected to a discounting factor.
Following that, discounted cash inflows and outflows are compared. This
technique takes into account both the interest rate and the return after the payback
period.
a. NET PRESENT VALUE
The cash net present value of a project is the total of the current values of all
the cash flows associated with it. The present value of cash outflows is subtracted
from the present value of cash inflows to calculate NPV. It is a key notion drawn
from the time value of money.
To compute the NPV for each project, we must first determine the present value
(PV) of each cash flow and remove the initial investment (capital outlay).
About Project A (Vadapav):
Cash flow PV = Rs. 8,00,000 * (1/1.125) / 0.12
= Rs. 27,49,531.06
NPV = cash flow PV - initial investment
= 27,49,531.06 - 24,00,000
= 3,49,531.06
Misalpav (Project B):
Cash flow PV = Rs. 11,60,000 * (1/1.125) / 0.12
= Rs. 40,01,529.46
NPV = cash flow PV - initial investment
= 40,01,529.46 - 36,00,000
= 4,01,529.46
According to the NPV technique, Project B (Misalpav) is superior since it has a
greater NPV of Rs. 4,01,529.46 than Project A (Vadapav), which has an NPV of
Rs. 3,49,531.06.
b. PROFITABILITY INDEX
A profitability index is a financial measure used to determine whether an
investment should be approved or rejected. It calculates the ratio of the present
value of future cash flows to the initial investment. The index can be used to rate
investment projects and display the value created per unit of investment.
By dividing the PV of future cash flows by the initial investment, the PI is
determined.
About Project A (Vadapav):
Cash flow PV = Rs. 27,49,531.06 PI = cash flow PV / original investment
 = 27,49,531.06 / 24,00,000
= 1.1454
Misalpav (Project B):
Cash flow PV = Rs. 40,01,529.46
PI = cash flow PV / initial investment
= 40,01,529.46 / 36,00,000
= 1.1117
According to the PI technique, Project A (Vadapav) is superior since it has a higher
PI of 1.1454 than Project B (Misalpav), which has a PI of 1.1117.
CONCLUSION
The NPV approach is generally regarded as more reliable than the PI method
because it considers the time value of money and provides a clearer picture of the
project's profitability. As a result of the NPV technique, Project B (Misalpav) is the
preferred alternative.
2.
INTRODUCTION
Capital budgeting is critical to the future success of a corporation. Capital
budgeting refers to the process of deciding to invest a sum of money when the
projected results would come after longer than a year.
It also covers the decision-making process for disinvestment, i.e., the choice to sell
off an endeavour or a portion of it. Nonetheless, in most cases, particularly these
days, the former sort of judgement predominates. It is a critical decision to make
since, after money has been irrevocably invested, it may be difficult to improve
performance.
A capital investment choice comprises a long-term financial commitment that is
frequently loaded with danger. Such decisions have long-term consequences for an
organization's viability and flexibility. Adopting non-viable plans depletes an
organization's money and may lead to insolvency.
BODY
The weighted average cost of capital refers to an organization's overall cost of
capital, with each capital category weighted differently. WACC takes into account
all sources of capital, including common stock, preferred stock, bonds, and other
long-term debt. To calculate the Weighted Average Cost of Capital (WACC),
multiply the cost of each source of capital by its proportion in the total capital.
The Weighted Average Cost of Capital (WACC) is the weighted average of the
costs of all sources of capital, namely debt and equity, taking their respective
weights in the capital structure into consideration. WACC can be calculated using
the following formula:
WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)
Where,
E = Market value of equity
D = Market value of debt
V = Total market value of the firm (E + D)
Re = Required return on equity
Rd = Cost of debt
Tc = Corporate tax rate
Given:
Cost of debt (Rd) = 12%
Tax rate (Tc) = 30%
Amount of debt outstanding (D) = Rs. 2500 lakh
Risk-free rate of return = 6%
Required return of the market = 14%
Stock price = Rs. 50 Shares outstanding = 100 lakh
Beta (β) = 1.5
First, let's calculate the market value of equity (E) using the stock price and shares
outstanding:
E = Stock price * Shares outstanding
 = Rs. 50 * 100 lakh
= Rs. 5000 lakh
Next, let's calculate the total market value of the firm (V):
V=E+D
= Rs. 5000 lakh + Rs. 2500 lakh
= Rs. 7500 lakh
Now, let's calculate the cost of equity (Re) using the Capital Asset Pricing Model
(CAPM):
Re = Rf + β * (Rm - Rf)
Where,
Rf = Risk-free rate of return
β = Beta
Rm = Required return of the market
Re = 6% + 1.5 * (14% - 6%)
= 6% + 1.5 * 8%
= 18%
Finally, let's plug in the values to calculate WACC:
WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)
WACC = (5000/7500) * 18% + (2500/7500) * 12% * (1 - 30%)
WACC = 0.60 * 18% + 0.20 * 8.4%
WACC = 10.92%
Therefore, the Weighted Average Cost of Capital (WACC) for the firm is 10.92%.

3. (a)
To calculate the present value of the future cash flow, we need to use the
formula for present value:
PV = FV / (1 + r)^n
Where,
PV = Present value
FV = Future value
r = Interest rate
n = Number of periods
Given:
FV = Rs. 15,000
r = 8%
n = 3 years
Substituting the values in the formula, we get:
PV = 15,000 / (1 + 0.08)^3
PV = 15,000 / 1.2597
PV = Rs. 11,909.87 (rounded off to two decimal places)
Therefore, the present value of the future cash flow of receiving Rs. 15,000 after 3
years at an interest rate of 8% is Rs. 11,909.87.
3 (b)
To calculate the present value of the future cash flow, we need to use the formula
for present value:
PV = FV / (1 + r)^n
Where,
PV = Present value
FV = Future value
r = Interest rate
n = Number of periods
Given:
FV = Rs. 25,000
r = 15%
n = 5 years
Substituting the values in the formula, we get:
PV = 25,000 / (1 + 0.15)^5
PV = 25,000 / 2.0114
PV = Rs. 12,418.29 (rounded off to two decimal places)
Therefore, the present value of the future cash flow of receiving Rs. 25,000 after 5
years at an interest rate of 15% is Rs. 12,418.29.