Here is a compilation of various financial management problems along with its relevant solutions.

Problem 1:

From the following project details calculate the sensitivity of the:

(a) Project Cost,

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(b) Annual Cash Flow, and

(c) Cost of Capital.

Which variable is most sensitive?

Project Cost Rs. 12,000

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Life of the project 4 years

Annual cash flow Rs. 4,500

Cost of Capital 14%

The annuity factor at 14% for 4 year is 2.9137 and at 18% for 4 years is 2.6667.

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Solution:

Problem 2:

ABC Ltd. asks you to do sensitivity analysis of two mutually exclusive projects P and Q. Its Management has made the following annual cash flow estimates related to the projects:

Solution:

To make a sensitivity analysis, it is necessary to computes net present values of the two projects. These are worked out below:

Problem 3:

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DKR Enterprises is analysing an investment proposal. It has requested you to make a sensitivity analysis and so furnished you the range and most likely value of each of the basic variable as under:

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Solution:

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Before we we make a sensitivity analysis we have to establish a mathematical model in respect of net present value (NPV) relationship. This is:

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Problem 4:

Shri Ramanathan, an accounts assistant of Larsen & Toubro Ltd., is considering taking ICWAI course at a cost of Rs. 2,000. He believes that he has a 60 per cent chance of passing the ICWAI examination and that the company would recognise this qualification with Rs. 24,000 per annum salary increase over and above his usual annual increase. On the other hand, if he dose not take or pass ICWAI examination, he is 100 per cent sure his increase next year will be Rs. 3,600.

Plot the above data in the form of a decision tree. 

Solution:

Problem 5:

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Consider the data given in the problem no. 14 and plot the same in the form of a decision tree. Advise whether the project should be accepted or rejected.

Solution:

 

Problem 6:

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A publishing house has brought out a new monthly magazine which sells at Rs. 25 per copy. The cost of producing it is Rs. 20 per copy.

A newsstand estimates the sales pattern of the magazine as under:

Solution: