3rd sem International finance.docx - INSTRUCTIONS: TIME: 3...

INSTRUCTIONS: TIME: 3 HOURS
International Financing (3Rd Semester) (Finance & Banking Specialization Subject)
INSTRUCTIONS: TIME: 3 HOURS
SECTION A (30 MARKS)
There is only ONE (1) Question in this section. Answer all the Question in the answer
Booklet.
QUESTION 1 (30 MARKS)
A company is considering whether to purchase a new machine. Machines A and B
are available for $80,000 each. Earnings after taxation are as follows:
Yea
r
Machine
A
Machine
B
$ $
1 24,000 8,000
2 32,000 24,000
3 40,000 32,000
4 24,000 48,000
5 16,000 32,000
Required: Evaluate the two alternatives using the following: (a) payback method,
(b) rate of return on investment method, and (c) net present value method. You should use
a discount rate of 10%. (10+10+10)

Solution

5 .621 16,000 9,936 32,000 19,872
1,36,000 1,04,616 1,44,000 1,03,784
Net Present Value = Present Value – Investment
Net Present Value of Machine A: $1,04,616 – $80,000 = $24,616
Net Present Value of Machine B: $1,03,784 – 80,000 = $23,784
According to the net present value (NPV) method, Machine A is preferred because its NPV is
greater than that of Machine B.
SECTION B
There are only THREE (3) Questions in this section. Answer all the Questions in the answer
Booklet. (15*3=45)