INTERNATIONAL FINANCE ASSESSMENT

International Finance Assessment

International Finance Assessment

Question # 1(a)

Thunderbolt Plc

Cash Flows (Amount in 000's)

Year

Revenue

Costs

Gross Profit

Interest

Net Cash Flow

Jan 2011

 

 

 

 

(2,000,000)

2011

1,200,000

650,000

550,000

33,000 517,000

2012

1,400,000

730,000

670,000

40,200 629,800

2013

2,400,000

1,130,000

1,270,000

76,200 1,193,800

2014

900,000

530,000

370,000

22,200 347,800

2015

1,400,000

730,000

670,000

40,200 629,800

2016

2,120,000

1,018,000

1,102,000

66,120 1,035,880

2017-2020

1,440,000

746,000

694,000

41,640 652,360

Totals

10,860,000

5,534,000

5,326,000

319,560

3,006,440

 

Discount rate

6%

NPV

1,849,828

IRR

28%

Pay Back Period= 3 Years

Thunderbolt Plc

WACC Calculation

 

Amount

Weights

Share

1,000,000

0.5

Debenture

500,000

0.25

Loan Stock

500,000

0.25

Total

2,000,000.00

 

Cost of Equity

Ke=D1/(P+g)

Ke

7.00%

Cost of Debentures

Kn

3.00%

Cost of Loan Stock

Kl

7.00%

Formula:

WACC

6.00%

A kind of measures has developed over time to investigate capital budgeting requests. The newer methods use time worth of money concepts. Older methods, like the payback time span, have the deficiency of not using time worth techniques and will finally drop by the wayside and be restored in companies by the newer, superior methods of evaluation.

A capital budgeting analysis conducts a test to see if the benefits (i.e., cash inflows) are large sufficient to repay the business for three things: (1) the cost of the asset, (2) the cost of financing the asset (e.g., interest, etc.), and (3) a rate of come back (called a risk premium) that compensates the business for promise errors made when estimating cash flows that will happen in the distant future.

Net Present Value (NPV)

Using the hurdle rate as the needed rate of come back, the net present value of an investment is the present worth of the cash inflows minus the present worth of the cash outflows. A more widespread way of expressing this is to say that the snare present worth (NPV) is the present worth of the benefits (PVB) minus the present worth of the costs (PVC)

NPV = PVB - PVC

By using the obstacle rate as the discount rate, we are carrying out a test to see if the task is anticipated to profit from our smallest desired rate of return. Here are our decision rules:

If the NPV is:

Benefits vs. Costs

Should we anticipate to profit from at leastour smallest rate of return?

Accept theinvestment?

Positive

Benefits > Costs

Yes, more than

Accept

Zero

Benefits = Costs

Exactly identical to

Indifferent

Negative

Benefits < Costs

No, less than

Reject

Remember that we said overhead that the purpose of the capital budgeting analysis is to see if the project's benefits are large sufficient to repay the business for (1) the asset's cost, (2) the cost of financing the task, and (3) a rate of come back that amply compensates the business for the risk discovered in the cash flow estimates.

Therefore, if the NPV is:

· Positive, the benefits are more than large enough to repay the business for (1) the asset's cost, (2) the cost of financing the task, and (3) a rate of come back that amply compensates the business for the risk discovered in the cash flow estimates.

· Zero, the benefits are scarcely sufficient to cover all three but you are at breakeven - no earnings and no loss, and thus you would be indifferent about acknowledging the project.

· Negative, the benefits are not large enough to cover all three, and thus the task should be rejected.

 

Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) is the rate of come back ...