# Financial management revision question and answer

The following six have been submitted for inclusion in 1998 capital expenditure budget for Limuru Ltd.

 Year A Sh. B Sh. C Sh. D Sh. E Sh. F Sh. Investment 0(1998) 250,000 250,000 500,000 500,000 500,000 125,000 1 0 50,000 175,000 0 12,500 57,500 2 25,000 50,000 175,000 0 37,500 50,000 3 50,000 50,000 175,000 0 75,000 25,000 4 5 50,000 50,000 50,000 50,000 175,000 175,000 0 0 125,000 125,000 25,000 Per year 6 – 9 50,000 50,000 500,000 125,000 Per year 10 11 – 15 50,000 50,000 50,000 50,000 125,000 Internal rate    of return 14% ? ? ? 12.6% 12.0%

Required:
(a) Rates of return (to the nearest half percent) for projects B, C and D and a ranking of all projects in descending order.
(b) Compute the payback reciprocal for projects B and C.
(c) Compute the N.P.V of each project using 16% as discount rate and rank all projects.
(a) I.R.R. for projects B, C and D
Project B
This has 15 years economic life and an annuity of Shs.

From PVAF table at 15 period, a PVAF of 5.000 falls between 18% and 20%

At 5 periods, a PVAF of 2.875 falls between 20% and 24%.
Project D

Computation of I.R.R of a project whose cash flows do not depict any annuity pattern.

We use the weighted average method e.g Project D does not depict any annuity pattern.

Weighted cash inflows:

2.Compute the payback using the weighted average cash flows

3. Determine the approximate rate from the PVIFA tables NPV/16%.

4. Computation of NPV at 16%

(b) Payback reciprocals
Project                                B                                    C

Note: The longer the project life (n>is) the better the payback reciprocals as an estimation of the IRR of a project whose cash flows depict the perfect annuity pattern.

(c) To compute NPV if rate of return is 16% for all project:

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