Financial Mangagement

2. Letter of Transmittal
26 December, 2017
Ms. Nasima Khatun
Lecturer
School of Business Studies
Southeast University
Subject: Submission of assignment.
Dear Madam,
Here is the assignment that we assigned on the topic as per your request. The assignment
has been completed by the knowledge that we have gathered from the course “Financial
Management, Course Code- FIN2122”. It is a great pleasure for us to present the
assignment on case study.
We are thankful to all those persons who provided us important information and gave
us valuable advices. We would be happy if you read the assignment carefully and will
be trying to answer all the analysis & solution the assignment.
We have tried our label best to complete this assignment meaningfully and correctly, as
much as possible. We believe that our tiresome effort will help you to get ahead with
this sort of venture. In this case it will be meaningful to us. However, if you need any
assistance in interpreting this assignment please contact with us.
Lastly we would be thankful once again if you please give your judicious advice on
effort.
Sincerely yours,
Shakir Mahmud Shourav
“On behalf of our group”

3. Acknowledgement
In performing our assignment, we had to take the help and guideline of some respected
persons, who deserve our greatest gratitude. The completion of this assignment gives
us much pleasure. We would like to show my gratitude Ms. Nasima Khatun, Lecturer,
Southeast University for giving us a good guideline for assignment throughout
numerous consultations. Her valuable suggestions was of immense help throughout our
project work. Her perceptive criticism kept us working to make this project in a much
better way. Working under her was an extremely knowledgeable experience for ours.
We would also like to expand our deepest gratitude to all those who have directly and
indirectly guided us in writing this assignment.
Many people, especially our classmates and team members itself, have made valuable
comment suggestions on this proposal which gave us an inspiration to improve our
assignment. We thank all the people for their help directly and indirectly to complete
our assignment.

4. Executive Summary
Capital Budgeting Technique is the process of making with respect to specific
investment- that is, should a proposed project be accepted or rejected. The techniques
is used for the acceptance or rejection of a project. It is important for a business to
calculate capital budgeting technique for better and profitable investment. The popular
equations for calculating capital budgeting techniques are NPV, DCF, IRR, MIRR,
NPV Profile etc.
We have prepared two maths of capital budgeting technique and calculate NPV, DCF,
IRR, MIRR, NPV profile. And then justify the answers. The short summary of the maths
are given below-
Math- 1
In this math, a company invested two products. We have accepted Air Conditioner for
mutually exclusive investment based on the results of NPV, IRR, MIRR. For
independent project, we have choose both Air Conditioner and Refrigerator.
Math-2
A furniture company has invested 2 products for 3 years. Based on the results of NPV,
IRR, MIRR, we have accepted Sofa for mutually exclusive projects. But we have
chosen both products when the both investment are mutually exclusive.

5. Introduction
Hopefully we have presented you our assignment on a case study. Actually our
assignment also refers the topic “Capital Budgeting Techniques”. We have made the
assignment as you had given us to analyse by help of your suggestions.
We assign the assignment to analyze capital budgeting technique on financial
investment and decision making.. This assignment helps ours to get new experience for
preparing it.
For this, we have prepared two capital budgeting maths and tries to interpret the results
of the maths. For this we have analyzed DCF (Discounted Cash Flow), NPV (Net
Present Value), IRR (Internal Rate of Return), MIRR (Modified Internal Rate of
Return). Then we have to interpret the results. We have also made a decision according
to the higher probability of acceptance. We have identified which project/products is
the best for investment. Finally we have constructed NPV profile.
We believe that the knowledge and experience we gathered during the assignment will
extremely helpful in our future professional and academic life. We will be grateful to
you if you accept the assignment.

6. Math-1
Walton Company is considering two products with new model, refrigerator & air
conditioner. The company has invested initial investment at Tk5000000 for both
projects. The company’s cost of capital is 18%. In this case, the estimated cash flows
of 5 years are given below-
Refrigerator Air Conditioner
2013 2000000 1800000
2014 1000000 2000000
2015 1900000 1300000
2016 1500000 2500000
2017 2000000 1000000
The financial manager of the company has wanted to know the investment decision of
the two products. Calculate and interpret the following-
(1) DCF
(2) NPV
(3) IRR
(4) MIRR
(5) Justify the answers
(6) NPV Profile
Solution-
(1) DCF (Discounted Cash Flow)
For Product Refrigerator, DCFR =∑PVCIF
=∑
𝐶𝐼𝐹
(1+𝑟) 𝑛
=
2000000
(1+0.18)1
+
1000000
(1+0.18)2
+
1900000
(1+0.18)3
+
1500000
(1+0.18)4
+
2000000
(1+0.18)5

7. =
2000000
1.181
+
1000000
1.182
+
1900000
1.183
+
1500000
1.184
+
2000000
1.185
=1694915.254+718184.429+1156398.658+773683.
312+874218.432
=5217400.085
For Product Air Conditioner, DCFAC =∑PVCIF
=∑
𝐶𝐼𝐹
(1+𝑟) 𝑛
=
1800000
(1+0.18)1
+
2000000
(1+0.18)2
+
1300000
(1+0.18)3
+
2500000
(1+0.18)4
+
1000000
(1+0.18)5
=
1800000
1.181
+
2000000
1.182
+
1300000
1.183
+
2500000
1.184
+
1000000
1.185
=1525423.729+1436368.86+791220.134+12
89472.188+437109.216
=5479594.127
Interpretation- DCF entails estimating cash flow. The DCF of the product “Air
Conditioner” is higher than the product “Refrigerator”.
(2) NPV(Net Present Value)
For Refrigerator, NPVR =∑PVCIF-ICO
=∑
𝐶𝐼𝐹
(1+𝑟) 𝑛
-5000000
=
2000000
(1+0.18)1
+
1000000
(1+0.18)2
+
1900000
(1+0.18)3
+
1500000
(1+0.18)4
+
2000000
(1+0.18)5
-5000000
=
2000000
1.181
+
1000000
1.182
+
1900000
1.183
+
1500000
1.184
+
2000000
1.185
-5000000
=(1694915.254+718184.429+1156398.658+773683.312+874218.432)-5000000
=5217400.085-5000000
=217400.085

8. For Air Conditioner, NPVAC =∑PVCIF-ICO
=∑
𝐶𝐼𝐹
(1+𝑟) 𝑛
-5000000
=
1800000
(1+0.18)1
+
2000000
(1+0.18)2
+
1300000
(1+0.18)3
+
2500000
(1+0.18)4
+
1000000
(1+0.18)5
-5000000
=
1800000
1.181
+
2000000
1.182
+
1300000
1.183
+
2500000
1.184
+
1000000
1.185
-5000000
=(1525423.729+1436368.86+791220.134+1289472.188+437109.216)-
5000000
=5479594.127-5000000
=479594.127
Interpretation- NPV is the difference between the present value of future cash flow
from an investment and the amount of investment. The net present value of Air
Conditioner of five years is much higher than refrigerator.
(3) IRR (Internal Rate of Return)=
For Refrigerator, Lower Rate (LR)=18%
Assume that, Higher Rate (HR)=30%
So, the value of NPV when r=30%=0.30 is-
=
2000000
(1+0.30)1
+
1000000
(1+0.30)2
+
1900000
(1+0.30)3
+
1500000
(1+0.30)4
+
2000000
(1+0.30)5
-5000000
=
2000000
1.301
+
1000000
1.302
+
1900000
1.303
+
1500000
1.304
+
2000000
1.305
-5000000
=(1538461.538+591715.976+864815.657+525191.695+538658.148)-5000000
=4058843.014-5000000
=-941156.986
IRRR = LR+
𝑁𝑃𝑉(𝐿𝑅)
𝑁𝑃𝑉(𝐿𝑅)−𝑁𝑃𝑉(𝐻𝑅)
𝑥(𝐻𝑅 − 𝐿𝑅)
= 0.18+
217400.085
217400.085−(−941156.986)
𝑥(0.30 − 0.18)
=0.2025176

9. =20.25176%
For Air Conditioner , Lower Rate (LR)=18%
Assume that, Higher Rate (HR)=30%
So, the value of NPV when r=30%=0.30 is-
=
1800000
(1+0.30)1
+
2000000
(1+0.30)2
+
1300000
(1+0.30)3
+
2500000
(1+0.30)4
+
1000000
(1+0.30)5
-5000000
=
1800000
1.301
+
2000000
1.302
+
1300000
1.303
+
2500000
1.304
+
1000000
1.305
-5000000
=(1384615.385+1183431.953+591715.976+875319.4916+269329.074)-
5000000
=4304411.88-5000000
=-695588.120
IRRAC = LR+
𝑁𝑃𝑉(𝐿𝑅)
𝑁𝑃𝑉(𝐿𝑅)−𝑁𝑃𝑉(𝐻𝑅)
𝑥(𝐻𝑅 − 𝐿𝑅)
= 0.18+
479594.127
479594.127−(−695588.120)
𝑥(0.30 − 0.18)
=0.2289722
=22.89722%
Interpretation- IRR is the return that makes NPV=0. We have seen that the rate of IRR
of Air Conditioner is higher than Refrigerator.
(4) MIRR(Modified Internal Rate of Return)=
For Refrigerator=MIRRR= √
𝑇𝑉
𝑃𝑉 𝑜𝑓 𝐶𝑜𝑠𝑡
𝑛
− 1
TVR =∑CIF(1+r)n
=2000000(1 + 0.18)4
+1000000(1 + 0.18)3
+ 1900000(1 + 0.18)2
+
1500000(1 + 0.18)1
+ 2000000(1 + 0.18)0
=11936147.52

10. So, MIRRR = √
𝑇𝑉
𝑃𝑉 𝑜𝑓 𝐶𝑜𝑠𝑡
𝑛
− 1
=√
11936147.52
5000000
5
− 1
=1.19008-1
=0.19008
=19.008%
For Air Coordinator=MIRRAC= √
𝑇𝑉
𝑃𝑉 𝑜𝑓 𝐶𝑜𝑠𝑡
𝑛
− 1
TVAC =∑CIF(1+r)n
=1800000(1 + 0.18)4
+2000000(1 + 0.18)3
+ 1300000(1 + 0.18)2
+
2500000(1 + 0.18)1
+ 1000000(1 + 0.18)0
=12535983.97
So, MIRRAC = √
𝑇𝑉
𝑃𝑉 𝑜𝑓 𝐶𝑜𝑠𝑡
𝑛
− 1
=√
12535983.97
5000000
5
− 1
=1.20181-1
=0.20181
=20.181%
Interpretation- MIRR compares the future value of cash flows with the cost of the
project. We have seen that the MIRR of Air Conditioner is higher than the MIRR rate
of Refrigerator.

11. (5) Justify the Answer-
The NPV, IRR, MIRR of both products are given below-
Refrigerator Air Conditioner
NPV 217400.085 479594.127
IRR 20.25176% 22.89722%
MIRR 19.008% 20.181%
Initially if NPV>0, we can accept for investment. We have seen that both products’
NPV are above 0. So we can accept both products’ investment. If IRR>r & MIRR>r,we
can also accept the project. Bust we also have seen that the IRR and MIRR rate of both
products are higher than r(18%). So we can accept both investment.
 If the investments are independent we can accept both products.
 If the investments are mutually exclusive we can accept only Air Conditioner.
Because when the rate is higher, the acceptance is higher. We have seen that the
rate of NPV, IRR, MIRR of Air Conditioner is higher than Refregerator. So
Walton Company will get higher return if they invest for refrigerator.
(6) Construct NPV Profile-
For Refrigerator-
NPV r
217400.085 18%
-941156.986 30%
0 20.25176%

12. For Air Conditioner-
NPV r
479594.127 18%
-695588.120 30%
0 22.89722%
-10000
-5000
0
5000
10000
15000
20000
25000
14% 35.55% 40%
NPV
Required Rate of Return
NPV Profile
-10000
-5000
0
5000
10000
15000
20000
25000
14% 35.55% 40%
NPV
Required Rate of Return
NPV Profile

13. Math-2
Assume that you are a financial analyst of Hatil Furniture Ltd. The manager of the
company has asked to analyze two new proposal investment decision. One investment
is for the product “Sofa” and the other investment is for product “Dining Table” The
cost of the both project is TK60000 and the cost of capital is 14%. The expected net
cash flows from 2015 to 2017 are given below-
Sofa Dining table
2015 50500 35000
2016 25000 35000
2017 35500 35000
Calculate the following and identify which product’s investment is mostly profitable -
(1) DCF
(2) NPV
(3) IRR
(4) MIRR
(5) Justify the answers
(6) NPV Profile
Solution-
(1) DCF Discounted Cash Flow)
For Product “Sofa”, DCFS =∑PVCIF
=∑
𝐶𝐼𝐹
(1+𝑟) 𝑛
=
50500
(1+0.14)1
+
25000
(1+0.14)2
+
35500
(1+0.14)3
=44298.245+19236.688+23961.488
=87496.421
For Product “Dining Table”, DCFDT =∑PVCIF
=∑
𝐶𝐼𝐹
(1+𝑟) 𝑛

14. =
35000
(1+0.14)1
+
35000
(1+0.14)2
+
35000
(1+0.14)3
=30701.754+26931.363+23624.003
=81257.12
Interpretation: DCF entails estimating cash flow. The DCF of the product “Sofa” is
higher than the product “Dining Table”.
(2) NPV(Net Present Value)
For Sofa, NPVS =∑PVCIF-ICO
=∑
𝐶𝐼𝐹
(1+𝑟) 𝑛
-60000
=
50500
(1+0.14)1
+
25000
(1+0.14)2
+
35500
(1+0.14)3
-60000
=87496.421-60000
=27496.521
For Dining Table, NPVDT =∑PVCIF-ICO
=∑
𝐶𝐼𝐹
(1+𝑟) 𝑛
-60000
=
35000
(1+0.14)1
+
35000
(1+0.14)2
+
35000
(1+0.14)3
-60000
=81257.12-60000
=21257.12
Interpretation- NPV is the difference between the present value of future cash flow
from an investment and the amount of investment. The net present value of Sofa of
three years is much higher than the other one.
(3) IRR (Internal Rate of Return)=
For Sofa, Lower Rate (LR)=14%
Assume That, Higher Rate (HR)=45%
So the NPV would be when r=45%=0.45-

15. =∑
𝐶𝐼𝐹
(1+𝑟) 𝑛
-60000
=
50500
(1+0.45)1
+
25000
(1+0.45)2
+
35500
(1+0.45)3
-60000
=58362.786-60000
=-1637.213
IRRS = LR+
𝑁𝑃𝑉( 𝐿𝑅)
𝑁𝑃𝑉(𝐿𝑅)−𝑁𝑃𝑉(𝐻𝑅)
𝑥(𝐻𝑅 − 𝐿𝑅)
= 0.14+
27496.521
27496.521−(−1637.213)
𝑥(0.45 − 0.14)
=0.43257
=43.257%
For Dining Table , Lower Rate (LR)=14%
Assume that, Higher Rate (HR)=40%
So the NPV would be when r=40%=0.40
=∑PVCIF-ICO
=∑
𝐶𝐼𝐹
(1+𝑟) 𝑛
-60000
=
35000
(1+0.40)1
+
35000
(1+0.40)2
+
35000
(1+0.40)3
-60000
=55612.244-60000
=-4387.755
IRRDT = LR+
𝑁𝑃𝑉(𝐿𝑅)
𝑁𝑃𝑉(𝐿𝑅)−𝑁𝑃𝑉(𝐻𝑅)
𝑥(𝐻𝑅 − 𝐿𝑅)
= 0.14+
21257.12
21257.12−(−4387.755)
𝑥(0.40 − 0.14)

16. =0.35551
=35.551%
Interpretation- IRR is the return that makes NPV=0. We have seen that the rate of IRR
of Sofa (43.258%) is much higher than Dining Table (35.551%).
(4) MIRR (Modified Internal Rate of Return)=
For Sofa=MIRRS= √
𝑇𝑉
𝑃𝑉 𝑜𝑓 𝐶𝑜𝑠𝑡
𝑛
− 1
TVS =∑CIF(1+r)n
=50500(1 + 0.14)2
+25000(1 + 0.14)1
+ 35500(1 + 0.14)0
=129629.8
MIRRS = √
𝑇𝑉
𝑃𝑉 𝑜𝑓 𝐶𝑜𝑠𝑡
𝑛
− 1
=√
129629.8
60000
3
− 1
=1.29275-1
=0.29275
=29.275%
For Dining Table =MIRRDT= √
𝑇𝑉
𝑃𝑉 𝑜𝑓 𝐶𝑜𝑠𝑡
𝑛
− 1
TVDT =∑CIF(1+r)n
=35000(1 + 0.14)2
+35000(1 + 0.14)1
+ 35000(1 + 0.14)0
=120386

17. MIRRDT = √
𝑇𝑉
𝑃𝑉 𝑜𝑓 𝐶𝑜𝑠𝑡
𝑛
− 1
=√
120386
60000
3
− 1
=1.26127-1
=0.26127
=26.127%
Interpretation- MIRR compares the future value of cash flows with the cost of the
project. We have seen that the MIRR of Sofa (29.275%) is higher than the MIRR rate
of Dining Table (26.127%).
(5) Justify the Answer-
The NPV, IRR, MIRR of both products are given below-
Sofa Dining Table
NPV 27496.521 21257.12
IRR 43.257% 35.551%
MIRR 29.275% 26.127%
Initially if NPV>0, we can accept for investment. We have seen that both products’
NPV are above 0. So we can accept both products’ investment. If IRR>r &
MIRR>r,we can also accept the project. Bust we also have seen that the IRR and
MIRR rate of both products are higher than r(14%). So we can accept both
investment.
 If the investments are independent we can accept both products.
 If the investments are mutually exclusive we can accept only Sofa. Because
when the rate is higher, the acceptance is higher. We have seen that the rate of
NPV, IRR, MIRR of Sofa is higher than Dining Table. So Company will get
higher return if they invest for Sofa.

18. -10000
-5000
0
5000
10000
15000
20000
25000
14% 35.55% 40%
NPV
Required Rate of Return
NPV Profile
(6) Construct NPV Profile-
For Sofa-
NPV r
27496.521 14%
-1637.213 45%
0 43.257%

19. For Dining Table-
NPV r
21257.12 14%
-4387.755 40%
0 35.551%
-10000
-5000
0
5000
10000
15000
20000
25000
14% 35.55% 40%
NPV
Required Rate of Return
NPV Profile