Question

Financial Management Question 1

SECTION II:

1.) The following information relates to machines A and B.

Year	Machine A	Machine B
0	(100,000)	(120,000)
1	60,000	50,000
2	40,000	50,000
3	20,000	50,000

Find the Internal Rate of Return (IRR) of the project at rates 10% and 15%

2) Using the Capital Asset Pricing Model (CAPM). Determine the required rate of return on equity for the following situations

Situation	Expected return on market portfolio (Rm )	Risk free rate (Rf )	Beta (β)
1	15%	10%	1.0
2	18%	14%	0.7
3	15%	8%	1.2

4	17%	11%	0.8
5	16%	10%	1.9

What generalization can you make?

Answer 1

1) Machine B Machine A year wNPO Cash flows pv@10% (1,00,000.00) 60,000.00 40,000.00 20,000.00 Present value 1.0000 $ (1,00,000.00) 0.9091 $ 54,545.45 0.8264 $ 33,057.85 0.7513 $ 15,026.30 Cash flows $(1,20,000.00 $ 50,000.00 $ 50,000.00 $ 50,000.00 pv@15% Present value 1.0000 $(1,20,000.00) 0.8696 $ 43,478.26 0.7561 $ 37,807.18 0.6575 $ 32,875.81 s 3 IRR 11.79% NPV $ 2,629.60 IRR 12.04% NPV $ (5,838.74) 2) Situation return on market (Rm) Risk free rate (rf) beta return on equity (Rf+B(Rm-Rf)) 15% 10% 0.15 18% 14% 0.7 0.17 15% 8% 1.2 0.16 17% 11% 0.8 0.16 16% 10% 1.9 0.21 Return on equity is high( i.e 21%) in situation 5 when compared to the remaining situation