Financial Management

IMBA-622 Financial Management

Assignment 1 –

Financial Management – Theory and Application


As per the VLE

Learning Objectives for Course

1. Obtain a comprehensive understanding of the financial environment and adequately

define financial terms

2. Have an ability and readiness to formulate, examine and defend business case

judgments, as well as recognize ethical dilemmas and corporate social responsibility

issues in Finance,

3. Conceptually understand the main theories of Corporate Finance and have a

commitment to their practical mathematical application

4. Compare and appraise theories that underlie current thinking in Corporate Finance

and Investment, demonstrate and evaluate how these theories can be applied in

practical situations,

5. Demonstrate effective oral communication of complex ideas and arguments, possess

developed listening skills.

Guidelines for assignment

ü This is an individual assignment

ü Ground your answer in relevant theory

ü Plagiarism and reproduction of someone else’s work as your own will be penalized

ü Make use of references, where appropriate – Use Harvard or APA referencing


ü Late submission implies a deduction of 10 marks per day

ü Structural elements should include an introduction, main body, and a conclusion

ü Weight – 40%

ü Word count guidance: 2500 words

ü Type of assignment: Excel Assessed Work Folder

ü Start / Finish : as per the VLE

ü Learning Outcome Assessed: 1,2,3,4


Part 1

Assume that for a car manufacturer, Chrysler Ford. Your boss, the chief financial officer, has just handed

you the estimated cash flows for two proposed projects. Project L involves adding a new item to the

firm’s ignition line; it would take some time to build up the market for this product, so the cash inflows

would increase over time. Project S involves an add-on to an existing line, and its cash flows would

decrease over time. Both projects have 3-year lives, because Chrysler is planning to introduce entirely

new models after 3 years.

Here are the projects net cash flows (in thousands of dollars):

Expected after-tax

Net cash flows (CFt)

Year Project S Project L

0 ($100) ($100)

1 70 10

2 50 60

3 20 80

Project S

0 1 2 3

Project L

0 1 2 3

-100 70 50 20 -100 10 60 80

Depreciation, salvage values, net working capital requirements, and tax effects are all included in these

cash flows.

The CFO also made subjective risk assessments of each project, and he concluded that both projects have characteristics which are similar to the firm’s average project. Chrysler’s weighted

average cost of capital is 10%. You must no determine whether one or both of the projects should be



Evaluate the projects using the 5 key techniques:

(1) payback period,

(2) discounted payback period,

(3) net present value,

(4) internal rate of return,

(5) modified internal rate of return.

Identify those projects that will lead to the maximization of the firm’s stock price.

Part 2

Critically appraise the 5 appraisal techniques above. Discuss their limitations, the social and

ethical factors that should also be considered when making such decisions.