FIN722 GDB 1 Solution and Discussion

[zaasmi]

Total Marks 5
Starting Date Friday, May 29, 2020
Closing Date Wednesday, June 03, 2020
Status Open
Question Title Capital Budgeting Analysis
Question Description

Topic: Capital Budgeting Analysis

Objective: After attempting this activity, students will have better understanding of capital budgeting rules and thus will be able to calculate incremental cash flows with more accuracy for capital budgeting analysis.

Background:

During capital budgeting analysis, analysts have to keep certain rules in mind to calculate incremental cash flows while determining the financial viability of a project. If any of these rules is ignored, it may lead to wrong evaluation. For example, a capital budgeting rule says that after tax cash flows should be considered for evaluation because company’s value is based on the cash flows which it is going to keep, not on those which are sent to the government.

A company, in order to assess the understanding of its internees regarding these rules, presented the following scenario in front of them:

Company is evaluating a project of worth Rs. 5 million by hiring services of an expert analyst. Company promised to pay him Rs. 300,000 for his consultancy, however, will pay only Rs. 100,000 if evaluation depicts that project is not financially viable. Networking capital of Rs. 150,000 will be required in first year of the project. Salvage value of the project is Rs. 250,000 while project life is 5 years.

Requirements:

In the light of above given information, company then asked to answer the following:

What will be the irrelevant cost for the project (mention value of the cost as well)?
What will be treatment of networking capital and salvage value while calculating incremental cash flows over the life of project?
Financing cost that the company has to bear for this project is 15%. Whether it will be considered relevant while calculating incremental cash flows? Explain by providing logical reasoning.

Important Note:

It is advised to consult all the related material including recommended book, updated PPTs of related lectures to get complete understanding of the topic.

Important Instructions:

Post your GDB comments (answer) against GDB # 01 rather than against lessons’ MDB.
Your discussion must be based on logical reasoning and to the point. Avoid irrelevant discussion and unnecessary information.
Do not copy or exchange your answer with other students.  Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
Books, websites and other reading material may be consulted before posting your comments; but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0) even if you provide references.
Obnoxious or ignoble answer should be strictly avoided.
Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB.

For Detailed Instructions, please read the GDB # 01 announcement