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PART IComplete the following program exercises. When you hav.docx
- 1. PART I: Complete the following program exercises. When you have completed the following exercises, compress the program folder and submit the .zip file. These are all separate exercise, so you will have a separate file for each exercise. Exercises from 5.1 Determine the output displayed when the button is clicked Problem One: Private Sub btnConvert_Click(…) Handles btnConvert.Click ‘Convert Celsius to Fahrenheit Dim temp As Double = 95 txtOutput,Text = CStr (CtoF (temp) ) End Sub Function CtoF (ByVal t As Double) As Double Return ( (9 / 5) * t) + 32 End Function Problem Two: Private Sub btnDisplay_Click(…) Handles btnDisplay.Click ‘Rule of 72 Dim p As Double p = CDbl (txtPopGr.Text) ‘Population growth as a percent txtOutput.Text = “The population will double in “ & DoubleTime(p) & “ years." End Sub Function DoublingTime(ByVal x As Double) As Double ‘Number of cars that can be parked
- 2. Return 100 * x End Function Problem Three: Private Sub btnDisplay_Click(…) Handles btnDisplay.Click Dim d As Date = #12/4/2011# txtOutput.Text = MonthAbbr(d) End Sub Funcion MonthAbbr(ByVal d As Date) As String Dim str As String = FormatDateTime(d, DateFormat.LongDate) Dim n As Integer = str.IndexOf(“ “) Return str.Substring(n + 1, 3) End Function Exercises from 5.2 Write a program that displays the output shown in a list box. The last two lines of the output should be displayed by one or more Sub procedures using data passed by variables from an event procedure. Problem One: Assume that the following is displayed. According to a 2008 survey of college freshman taken by the Higher Education Research Institute: 16.7 percent said they intend to major in business. 1 percent said they intend to major in computer science. Problem Two:
- 3. Assume that the label for txtBox reads “What is your favorite number?”, and the user types 7 into txtBox before btnDisplay is clicked. The sum of your favorite number with itself is 14. The product of your favorite number with itself is 49. Problem Three: Assume that the current date is 12/31/2010, the label for txtBox reads “What is your date of birth?”, and the user enters 2/3/1984 into txtBox before btnDisplay is clicked. You are now 26 years old. You have lived for 9824 days. CAPITAL BUDGETING Financial Management Capital Budgeting Techniques Introduction
- 4. The value of an entity today is the present value of all its future cash flows. The cash flows here includes the assets currently held by the company as well as any better investment opportunities that might be available in future .The value is calculated by discounting these future cash flows with investors required rate of return or what we can say is the degree of uncertainty attached to those future cash flows and expected time when these will occur. The managers of the business have a goal to maximize the entity’s value which in turn would help shareholders to maximize their wealth. In order to evaluate any long-term project that whether it is feasible for investment purpose or not there are different ways in which a project can be evaluated and these are as follows. · Payback Period · Discounted Payback Period · Net Present Value · Internal rate of return, and Payback Period The payback period for any project will be the time until when the investment can be recovered from a certain project for example if a project required initial investment of 20,000 dollars and the project will provide cash outflows of 10,000 in year 1 and then the same amount will be out flowed in year 2 then the payback period for the project will be 2 years. Discounted Payback Period The discounted payback period is basically the extension of payback period where the payback period is calculated that is the time in which the investment would be recovered through future cash outflows but the difference here is that it also requires the future cash flows to be discounted with the investors required rate of return that can be explained as the uncertainty of those future cash flows along with time value of money which in total becomes the required rate of return for the investor (owners of the capital invested) ,this is also known as the cost of capital.
- 5. Net Present Value Net present value is nothing but the difference between present value of future expected cash inflows and initial investment. The present value of future cash inflows is being determined by using a discount rate which is normally the cost of capital. If the present value of inflow is greater than initial investment, it is called positive net present value; otherwise it is called negative net present value. The project is accepted if the net present value is positive and if one of the two projects is to be selected, the positive net present value with higher amount is selected. The most widely used technique is net present value as it considers cash flows for the whole life of the project and time value of money. Only drawback for net present value method is that it can be used where the projects are mutually exclusive, it means that where company can opt for only one option for any reason. However, the drawback can be removed by finding the Profitability index or NPV index. The index can be used where the company can opt for various options. The company ranks each project according to its index in descending order and then select from the top till the investment is exhausted. Internal Rate of Return The Internal Rate of Return is the discount rate at which the net present value is zero. If the rate is more than the cost of capital, the project should be accepted, otherwise not. It is simple to express, but it is difficult to calculate manually. Like accounting rate of return method, it is also shown in percentage terms therefore it also ignores size of investment. It has another drawback that it is based on the assumption that future cash flow is reinvested at internal rate of return. Weighted Average cost of Capital Capital is the source of fiancé through which resources are provided. It may be debt financing or equity financing. The cost of debt financing is interest which is the before tax cost of capital, while after tax cost of capital is r (1-t). If suppose the
- 6. interest rate is 10% and the rate of tax is 20%, it means that before tax cost of capital is 10% and after tax cost of capital is 8%. In equity finance the cost of capital is dividend, if the rate of dividend is 10%. Then after tax cost of capital and before tax cost of capital are same, which is 10% as there is no tax shield available, as the dividend is not the expense, rather it is distribution of profit. If a project is financed only from debt financing the cost of capital will be 8% and if it is only financed from equity the cost will be 10%. But if financing is done 50% from each, then the cost of capital will be 9%. The increase in debt financing will reduce the overall cost of capital. For example if we raise the portion of debt financing to 60%, now the cost of capital will be 8.8%. You can see that the percentage of financing provided from a source determines the weight age of financings. Another example can help, suppose a project requires $200 million and $120 from debt and $80 million from equity financing is provided therefore the weight age of debt is 60% and of equity it is 40%. Now to calculate WACC we will take 60% of the cost of debt and the after tax cost of debt is 8%, while the 60% of 8% is 4.8% and we will take 40% of cost of equity and the after tax cost of equity is 10%, we will take 40% of 10% which is 4%. Now add 4.4% and 4%, the WACC is 8.8% of the project financing. Wheel Industries Investment Appraisal Equity Financing The wheel industries has used equity financing the cost of which to company is 11.90 % this has been calculated by using the dividend growth model by using the following formula. {(Dividend x 1+ growth rate/Selling price-floatation cost) +Growth rate}. The advantage of equity financing to company is the saving in
- 7. interest expenses which in turn would reduces the profit before taxes and ultimately the total profits. However it can be argued that the cost of equity financing is higher than cost of debt financing but debt financing requires a constant interest expense regardless of the fact that whether company is making profits or not but on the other hand the equity financing thought more expensive but will only requires dividends to be paid if company is making enough profits else in losses company is not bound to pay unlike the debt financing. Debt Financing The after tax cost of debt financing can be calculated by deducting the tax shield from the 5% tax rate which is (0.05*0.65) =3.3%. The debt financing is far cheaper than equity financing and one of the important factors making debt financing cheaper is the tax shield as interest expense is a tax allowable expense it means that though total cost of debt also has an advantage of reducing the tax expense. One of the disadvantages of debt financing is that it increases the gearing ratio and in times of losses it becomes a burden for the company in the form of compulsory interest payments to the lenders. Weighted Average cost of Capital Debt 30% 3.3% 0.98% Equity 70% 11.9% 8.32% WACC 9.30% The weighted average cost of capital is being calculated by taking 30% of after tax cost of debt and 70% of cost of equity. The weighted average cost of capital is used in capital
- 8. budgeting techniques as the discount rate or we can say the investors required rate of return. After Tax Cash Flows After tax cash flow Revenues 1200000 less expenses 600000 Less Depreciation 500000 Earnings before taxes 100000 less taxes 35000 Earnings after taxes 65000 add depreciation 500000 Cash flow after taxes $ 565,000 million The after tax cash flows have been calculated using the income
- 9. statement approach (indirect method).The depreciation has been added to net income to arrive at cash flows after tax. Net Present Value and IRR Year Cash flow PVIF at 6% 0 -1500000 1 -1500000 1 $ 565,000 0.943396226 533018.9 2 $ 565,000 0.88999644 502848 3 $ 565,000 0.839619283 474384.9 NPV 10251.75 IRR 6.37% The project as per net present value technique can be accepted as it has a positive NPV of 10251 dollars .However the IRR is 6.37 percent which is below the WACC and a conflict between these two techniques is being raised and the project should be
- 10. declined. The conflict has risen because the NPV has been calculated at 6% if it would be calculated at 9.32 percent the WACC it would be a negative NPV and hence the decision as per NPV would also be the one to decline the project. It is concluded that project should not be accepted. Expected after tax cash flow Investment B Investment C 5000 6600 16000 20000 10000 10000 Expected after tax cash flow 31000 36600 The expected cash flows have been calculated by taking into account the probability and cash flow for each investment project. Net Present Value and Internal Rate of Return Year B C PVIF at 8%
- 12. 6 31000 36600 0.63017 19535.25843 23064.208 NPV 143309 169197 IRR 14% 21% As the NPV and IRR of investment project C is higher than Investment Project B so project C should be accepted as it appears to be a feasible one. but when the projects are mutually exclusive the decision needs to be based on net present value .the project with higher NPV should be selected, because the IRR can be different for two projects due to difference in amount of investments, as the IRR is mentioned in percentage ,therefore it ignores the size of investment.