Student Name: Karimov Timur Jura ugli

Student Name:		Karimov Timur Jura ugli
Student Number:		B1901011
Course:		Year 2
Module Code and Title:		Corporate Finance
Module Leader:		Yusra Anas
Module Tutor:		Shohjahon Elmurodov
Assessment:		Main Examination
Due Date:	8 February		Date Submitted:	8 February 2022
Weighting within Module:		35%
ALL MARKS ARE PROVISIONAL AND ARE SUBJECT TO CHANGE UNTIL CONFIRMED BY THE EXTERNAL EXAM BOARD
Comments from Internal Examiner (Name):
Strengths:
Weaknesses:
Areas of Improvement:
Provisional Mark out of 100:

ANSWER
ANSWERS
Section A
1 B 9 C
2 D 10 E
3 C 11 D
4 B 12 B
5 D 13 A
6 D 14 C
7 E 15 B
8 C
Section B
A)
Computation of Annual Cash Inflows

Straight line depreciation = (cost-salvage value)/number of years
1500000
Fixed cost=	1800000
Less depreciation=	1500000
Relevant fixed cost=	300000
	Inflation rate	Year 0	Year 1	Year 2	Year 3		Year 4
Unit price	0.03		110.0	113.3	116.7		120.2
Less: Variable material cost	0.02		23.0	23.5	23.9		24.4
Less: Var labor cost	0.04		36.0	37.4	38.9		40.5
Less: Var overhead	0.05		10.0	10.5	11.0		11.6
Net contribution per unit			41.0	41.9	42.8		43.7
Expacted demand			58000.0	58000	58000		58000
Expacted contribution			2378000	2430200	2482818		2535808
Less: Relevant fixed cost	0.03		300000	309000	318270		327818.1
Net Operating Cash Flow			2078000	2121200	2164548		2207990
Investment		-6000000
Salvage Value							0
Net Cash Flows		-6000000	2078000	2121200	2164548		2207990
Discount Factor	14%	1	0.8772	0.7695	0.675		0.5921
Present Value		-6000000	1822822	1632263	1461070		1307351
NPV		223506

Computation of Cash Outflow
Cost of new Machinery-£ 6,000,000
Development Cost of Relounge- £4,000,000
£64,000,000
Computation of NPV

Year	Cash Inflow	PVF	Present Value
1	2,078,000	0.88	1828640
2	2,121,200	0.77	1633324
3	2,164,547	0.67	1450246
4	2,027,989	0.59	1146514

Present value of cash Inflow 61,08724
Less: Initial cash outflow 64,00000
New Present value -291,276 (negative)
Since the NPV of the project is Negative it is advised to restore Ltd to the production of Relounge.
B)

Advantages and Disadvantages

Method 1: Payback Period

Advantages:

This strategy is simple to comprehend, implement, and choose.
It aids in the preparation of the debt repayment schedule.
It is especially effective in times of lack of money and tight capital market circumstances since it is based on the liquidity concept.
Especially effective in projects with a high risk of technical obsolescence.
Disadvantages:

It disregards the monetary worth.

This strategy does not take into account the whole project life cycle, including cash flows after the payback period.
The cost of capital is not taken into account, and the emphasis is on wealth growth rather than surplus generation.

2. The method of net present value

Advantages:

Money's temporal worth is taken into account.

It takes into account the whole project life cycle.
There is a strong emphasis on maximizing money.
Disadvantages:

It's difficult to comprehend and implement.

Cost of capital and discounting raste are difficult to quantify.
When money are few, this method is ineffective.
Method 3: Internal Rate of Return

Advantages:

It is a more advanced and dependable method.
Consider the concept of time worth of money.
Decisions are made quickly.
Ensures that your money is maximized.
The existence of an external discounting rate is not required for IRR calculations.

Disadvantages:

It's a difficult concept to grasp.
The difference between lending and borrowing rates has no bearing on the IRR calculation.
Small project bias exists, which means that initiatives with a shorter length have a higher likelihood of being chosen.
Reinvesting future inflows at the same IRR may not be feasible, especially in the long run.

C)

When calculating the NPV of a project, there are two techniques to account for inflation. These are the following:

1. Nominal Technique - In this method, nominal cash flows are discounted at a nominal rate that takes inflation into account.

2. Real Technique - Real cash flows are discounted using a real rate of interest in this method. The real cash flow and real discount rate remove the influence of inflation, allowing for parity comparisons.

Real cash flows should be discounted using the real rate, and nominal cash flows should be discounted using the nominal rate, in order to preserve consistency.