Mgt201 Assignment No. 1 solution FM

Semester Spring 2011 
Financial Management MGT201)

Assignment # 1 Marks:: 20 
 

Capital Budgeting Techniques

Mr. Amir is planning to purchase a new car bearing the brand name of Honda civic (Model 2011). He visits a nearby car showroom ] Hijaz Motors, and comes to know that price of the car is Rs. 1,200,000. Amir thinks to take an optimistic decision, so he visits a local branch of Habib Bank Limited for seeking some information. 

The branch manager tells him that he can purchase the car under a lease contract to be signed with HBL. Terms and conditions of the lease contract include: Down payment of Rs. 400,000 and monthly installment of Rs. 25,000 to be paid at the end of each month for next four years. The rate of interest to be charged by HBL on this lease will be equal to the discount rate as determined by State Bank of Pakistan, which is 15% at present. 

Moreover, a friend of Mr. Amir tells him that he is interested to sell his car bearing the same model for reasonable terms including Rs. 400,000 at the time of delivery of car, Rs. 10,000 p.m. for the next two years, a fixed amount of Rs.300,000 after 6 months of 3rd year (2.5 years) and Rs.200,000 at the end of 3rd year. 

You are required to guide Mr. Amir, as which option is better among the three options discussed above, i.e. to purchase from the car showroom, lease from HBL or buy form the friend. 

(Show complete calculations and provide all formulas as they carry marks) 

Important Tips 
This Assignment can be best attempted from the knowledge acquired after watching video lecture# 1 to lecture # 12 and reading handouts as well as recommended text book. 
Video lectures can be downloaded for free from Online VU Lectures 
 

Schedule 
Opening Date and Time 
April 18, 2011 At 12:01 A.M. (Mid-Night) 

Closing Date and Time 
April 21, 2011 At 11:59 P.M. (Mid-Night) 

Topic/Area for Discussion 
Note: Only in the case of Assignment, 24 Hrs extra / grace period after the above mentioned due date is usually available to overcome uploading difficulties which may be faced by the students on last date. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience. 

Important Instructions: 
Please read the following instructions carefully before attempting the assignment solution. 

Deadline: 
. Make sure that you upload the solution file before the due date. No assignment will be accepted through e]mail once the solution has been uploaded by the instructor. 

Formatting guidelines: 
. Use the font style gTimes New Roman and font size 12h. 
. It is advised to compose your document in MS Word 2003. 
. Use black and blue font colors only. 

Solution guidelines: 
. Every student will work individually and has to write in the form of an analytical assignment. 
. Give the answer according to question, there will be negative marking for irrelevant material. 
. For acquiring the relevant knowledge, dont rely only on handouts but watch the video lectures and use other reference and recommended books also. 
. Marks will be deducted if complete calculations and formulas are not provided. 
. The assignment is in PDF format which will be opened using a PDF file reader software like Adobe Acrobat Reader which are freely available on CDs and internet. You can also download the latest Adobe Acrobat Reader using this link http://get.adobe.com/reader/ 
 

Rules for Marking 
Please note that your assignment will not be graded or graded as Zero (0) if: 
. It has been submitted after due date 
. The file you have uploaded, does not open or is corrupt 
. It is in any format other than .doc (MS. Word) 
. It is cheated or copied from other students, internet, books, journals et

::::::::::::::::::::::::::::::::

Solution:

1st Option
Purchase Value already given as = 1200000

2nd option
NPV = -Io + CFt / (1+i)t = -Io + CF1/(1+i) + CF2/(1+i) 2 + CF` /(1+i) 3 +..
NPV = 400000 + 300000/(1.15)*1 + 300000/(1.15)*2 + 300000/(1.15)*3 + 300000/(1.15)*4
NPV = 400000 + 260869.56 + 226843.10 + 197254.86 + 171525.97
NPV = 1256493.49

3rd Option
NPV = -Io + CFt / (1+i)t = -Io + CF1/(1+i) + CF2/(1+i) 2 + CF` /(1+i) 3 +..
NPV = 400000 + 120000/(1.15)*1 + 120000/(1.15)*2 + 300000/(1.15)*2.5 + 200000/(1.15)*3
NPV = 400000 + 104348 + 90738.24 + 211532.28 + 131503.24
NPV = 938121.76

3rd option is most suitable as Lowest NPV
:::::::::::::::::::::::::::::::::::


Option No. 1

Purchase value 1,200,000

Option No. 2


NPV = ICF + CFt/(1+r)^n

NPV =400,000 + 300000/1.15+300000/(1.15^2)+300000/(1.15^3)+300000/(1.15^4)
NPV = 400,000 + 260,869.56 + 226,843.10 + 197,254.86 + 171,526.59
NPV = 400,000 + 856494.11
NPV = 1,256,494.11

Option 3

NPV =120000/1.15+120000 / (1.15^2) + 300000/(1.15^2.5)+200000/(1.15^3) + 400,000
NPV =400,000 + 104,348 + 90,738.24 + 211,532.28 + 131,503.24
NPV = 400,000 + 538121.72
NPV = 938,121.72

Option 3 is the best Option as it has lowest NPV.

Note: students may not agree with this solution. Pls correct me if find any mistake.