Financial Management Assignment: MID Test Questions & Answers

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Question 1

You plan to start a business with your friends after working for several years. You plan to invest $300,000 ($100,000 from your own savings, the rest from your parents and bank loan) to start the business. You will operate the businesses for 8 years.

After comprehensive market research, and assessment of the local and global economy, political situation and business risk, you have 3 different possible businesses in mind. You will select the best business after analysis of the 3 businesses.

You will select the best business using Net Present Value criterion and payback period (without interest).

Requirements:

You are required to provide the following before carrying out analysis:

• Describe the nature of 3 businesses which you have in mind.
• You will evaluate and assess the 3 businesses basing on the yearly returns.
• You will invest $300,000 for each business.
• Estimate the salvage value for each business, if any.
• Determine your IRR and justify IRR. Use same IRR for 3 businesses
• For each business, show detail monthly cash flows (revenues and expenses) in first year.
• For each business, provide detail monthly estimations of cash flows in first year – list the cash inflows and cash outflows for each month (Jan – Dec).

 

Examples of cash inflows are: sales revenue, salvage value, loan from bank, investment from your own savings.

Examples of cash outflows are: rental expenses, salaries expenses, interest expenses, transportation expenses, payments for bank loan, insurance premium and etc. Determine the net monthly cash flow (receipts minus expenses). Do not include depreciations in expenses.

For the subsequent year after year1, detail estimations of the monthly cash flows for each business are not required. You need to estimate net yearly cash inflows and net yearly cash outflows. Determine net yearly cash flows (net yearly cash inflows – net yearly cash outflows).