SUPPLEMENTEXECUTIVE PROGRAMME

(NEW SYLLABUS)

for

December, 2020 Examination

FINANCIAL AND STRATEGIC MANAGEMENT

MODULE 2

PAPER 8Disclaimer: This document has been prepared purely for academic

purposes only and it does not necessarily reflect the views of ICSI. Any person wishing to act on the basis of this document should do so only

after cross checking with the original source.

Disclaimer: This document has been prepared purely for academic purposes only and it does not necessarily reflect the views of ICSI. Any person wishing to act on the basis of this document should do so only

after cross checking with the original source.

Disclaimer: This document has been prepared purely for academic purposes only and it does not necessarily reflect the views of ICSI. Any person wishing to act on the basis of this document should do so only

after cross checking with the original source.

Disclaimer: This document has been prepared purely for academic purposes only and it does not necessarily reflect the views of ICSI. Any person wishing to act on the basis of this document should do so only

after cross checking with the original source.

Lesson No. and Name

Particulars of Change Page No.

Remarks

Lesson 2- Capital Budgeting

Example 2: Excellent Limited is planning to undertake a project requiring initial investment of $100 million. The project is expected to generate $25 million per year in net cash flows for 7 years. Calculate the payback period of the project.

SolutionPayback Period= Initial Investment ÷ Annual Cash Flow= $100M ÷ $25M= 4 years

Example 3: Best Limited is planning to undertake another project requiring initial investment of $50 million and is expected to generate $10 million net cash flow in Year 1, $13 million in Year 2, $16 million in year 3, $19 million in Year 4 and $22 million in Year 5. Calculate the payback value of the project.

SolutionYear (cash flows in millions)

AnnualCash Flow CumulativeCash Flow0 (50) (50)1 10 (40)2 13 (27)3 16 (11)4 19 85 22 30Payback Period = 3 + 11/19 = 3 + 0.58 ≈ 3.6 years

41 Case studies in the form of practical problems have been discussed in order to strengthen the comprehension of the concept of Payback Period. As this concept assist tremendously in ascertaining the time consumed to recover the project cost.

Example: Compute the NPV for Project A and accept or reject the project cash flows shown below if the appropriate cost of capital is 10%

Time

Cash Flow

0 -75

1 -75

2 0

3 100

4 75

5 50

46 In view of the significance of the concept of Net Present Value in selecting or declining an investment decision, case studies in the form of practical scenarios have been discussed.

Disclaimer: This document has been prepared purely for academic purposes only and it does not necessarily reflect the views of ICSI. Any person wishing to act on the basis of this document should do so only

after cross checking with the original source.