mgt201 assignment no 1 solution

Assignment # 1 Financial Management

ABC Corporation, a maker of electronics equipments, is considering selling the rights to market its products to a well‐known advertising firm.
The proposed deal calls for annual year end payments of Rs.15,000 in years 1 through 7 and payments of Rs.30,000 and Rs.25,000 at the end of 8th and 9th year respectively . A final payment of Rs. 10,000 would be due at the end of year 10.

(Show complete calculations and provide all formulas as they carry marks)


Q1. If ABC Corporation applies a required rate of return of 12% to them, what is the present value of this series of payments?

Solution: -
1. When Payment Rs.15000/- in Years 1 through 7th Year

PV=FV/ (1+i) n
= 15000/ (1+0.12)7
= 15000/2.21068
= 6785.24 -------------------------(1)
2. When Payment Rs.30000/- in Years 1 through 8th Year

PV=FV/ (1+i) n
= 30000/ (1+0.12)8
= 30000/2.4759
= 12116.80 ------------------------(2)
3. When Payment Rs.25000/- in Years 1 through 9th Year

PV=FV/ (1+i) n
= 25000/ (1+0.12)9
= 25000/2.7730
= 9015.50 ------------------------- (3)
4. When Payment Rs.10000/- in Years 1 through 10th Year

PV=FV/ (1+i) n
= 10000/ (1+0.12)10
= 10000/3.1058
= 3219.78 ------------------------- (4)

Total 1= 6785.24+12116.80+9015.5+3219.78 => 31137.32

Verification: Above values can be verified via using formula FV=PV*(1+i) n

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Q2: A second company has offered ABC Corporation a payment of Rs.30,000 now and another final payment of Rs.80,000 at the end of year 3 for the rights to market the products. Which offer should ABC Corporation accept?
Solution: -

1. If Payment to be made Rs. 30K now

PV=FV/ (1+i) n
= 30000/ (1+0.12)1
= 30000/ (1.12)
= 26785.71 --------------------------- (1)

2. If Payment to be made Rs. 80K at the end of 3rd Year

PV=FV/ (1+i) n
= 80000/ (1+0.12)3
= 80000/1.4049
= 56943.55 --------------------------- (2)
Total 2: 26785.71+56943.55 => 81729.26

Which offer ABC Corporation should accept.
Ans: As per above calculations in case-1 result, company will get G.Tatal Amount Rs: 31137.32 in total tenor. Meanwhile in Case-II Result Company will receive G.Total: 81729.26 with Present value. Its mean 2nd offer is much better and having less duration. And proposed deal B is better than Deal A (80,000/- Vs 110,000/- respectively)