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1)The management of Daytona Industries, an interior design company, is considering a R250 000 investment in a high-quality booking system with the following cash flows: Year Cash Inflow 1 R 30 000 2 R 60 000 3 R120 000 4 R130 000 5 R160 000 If the company wants to recover its initial investment in year 3, is the investment worthwhile? 2) An emergency can anyone assist me to solve this : Donny is an exchange rate trader based in Kuala Lumpur
1)The management of Daytona Industries, an interior design company, is considering a R250 000 investment in a high-quality booking system with the following cash flows:
Year Cash Inflow
1 R 30 000
2 R 60 000
3 R120 000
4 R130 000
5 R160 000
If the company wants to recover its initial investment in year 3, is the investment worthwhile?
2)
An emergency can anyone assist me to solve this :
Donny is an exchange rate trader based in Kuala Lumpur. He has received this
information on the exchange rates quoted by 3 different banks as follows:
| Bid | ||
| Bank A (MYR/SGD) | 3.0680 | 3.0701 |
| Bank B (USD/SGD) | 0.7220 | 0.7451 |
| Bank C (MYR/USD) | 4.2754 | 4.3456 |
Assume that he has MYR200,000 to be used as a starting amount to benefit from this
pricing discrepancy. Calculate the triangular arbitrage profit.
3)
If the net present value of a project is positive, which of the following statements is (are) true? Explain why?
i) Its payback period is less than or equal to the cut-off point
ii) Its payback period is more than the cut-off point
iii) Its internal rate of return is less than the cost of capital
iv) Its internal rate of return is more than the required rate of return
Expert Solution
1)
| Year | Cash Flow | Cumulative Cashflow |
| 1 | 30000 | 30000 |
| 2 | 60000 | 90000 |
| 3 | 120000 | 210000 |
| 4 | 130000 | 340000 |
| 5 | 160000 | 500000 |
| Initial investment is R250,000 | ||
| payback period is between year 3 & year4 | ||
| payback back period =3years+(250000-210000)/130000*365 | ||
| payback back period =3years and 112 days | ||
| the company wants to recover the investment in year3 | ||
| but actual recovery period of initial investment is 3 years 112 days, which is in year4 | ||
2)
| MYR/SGD = 3.0680/3.0701 | ||||
| USD/SGD = 0.7220/0.7451 | ||||
| MYR/USD = 4.2754/4.3456 | ||||
| Sell MYR200000 for SGD, | ||||
| SGD Inflow = 200000/3.0701 | ||||
| = SGD 65144.46 | ||||
| Sell SGD 65144.46 for USD | ||||
| USD Inflow = 65144.46*0.7220 | ||||
| = USD 47034.3 | ||||
| Sell USD 47034.3 for MYR | ||||
| MYR Inflow = 47034.3*4.2754 | ||||
| = MYR 201090.4 | ||||
| Profit due to arbitrage = MYR 201090.4 - MYR 200000 | ||||
| = MYR 1090.44 |
3)
(i) and (iv) are true
Justification:
(i)The payback period refers to the amount of time it takes to recover the cost of an investment. Simply put, the payback period is the length of time an investment reaches a break-even point. An investment can either have a short or long payback period. A shorter payback period means the investment will be ‘repaid’ fairly shortly, in other words, the cost of that investment will quickly be recovered by the cash flow that investment will generate.
In order to determine whether the payback period is favourable or not, management will determine the maximum desired payback period or cut-off point to recover the initial investment costs.
A short payback period indicates that the investment generates high cash flows in the early part of its economic life, thus resulting to a high present value of cash flows. As a result, there is a greater possibility that NPV will be positive. A short payback period also indicates a high IRR, thus resulting to a greater possibility that the investment's IRR will exceed the cost of capital. And if IRR is greater than the cost of capital, NPV is positive.
(iv) The IRR is defined as the discount rate that makes the present value of the cash inflows equal to the present value of the cash outflows in a capital budgeting analysis, where all future cash flows are discounted to determine their present values.
If the present value of the expected cash outflows is less than the present value of the expected cash inflows then NPV > 0.
If NPV is positive , it implies that IRR is greater than the required rate of return.
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