Bangalore University 2008 M.Com Commerce SECOND SEMESTER , - Question Paper

(3X15=45)

7. Briefly discuss and illustrate the concept of 'time value of money'. State its relevance in various areas of financial decision-making.
8. Contrast the IRR and the NPV methods. Under what circumstances may they lead to
i) comparable recommendations, and
ii) provide conflicting recommendations ?
In circumstances in which they provide contradictory results, which criteria should be used to choose the projects and why ? Justify your ans.
9. A company is considering 2 mutually exclusive projects X and Y. Project X costs Rs. 30,000 and project Y Rs. 36,000. You have been provided beneath the net current value estimates and probability distribution for every project :

Project -- X Project -- Y

NPV estimate Probability NPV estimate Probability

Rs. 3,000 0.1 Rs. 3,000 0.2
Rs. 6,000 0.4 Rs. 6,000 0.3
Rs. 12,000 0.4 Rs. 12,000 0.3
Rs. 15,000 0.1 Rs. 15,000 0.2

a) calculate the expected net current value of projects X and Y .
b) calculate the risk attached to every project that is, standard deviation of every probability distribution.
c) Which project do you consider more risky and why ?
d) calculate the profitability index of every project.

10. A company is considering which of 2 mutually exclusive projects it should undertake. The Finances Director thinks that the project with the higher NPV should be choosen whereas the M.D thinks that the 1 with the higher IRR should be undertaken especially as both projects have the identical initial outlay and length of life. The company anticipates a cost a capital of 10% and the net aftertax cash flows of the projects are as follows :

Year
Cash flows :
(in'00) one two three four five

Project -- X (200) 35 80 90 75 20
Project -- Y (200) 218 10 10 four 3

needed :

a) compute the NPV and IRR of every project.
b) State, with reasons, which project you would recommend.
c) Expalin the inconsistency in the ranking of the 2 projects.

The discount factors are as follows :

Year 0 one two three four five
Discount factor : (10%) one 0.91 0.83 0.75 0.68 0.62
(20%) one 0.83 0.69 0.58 0.48 0.41


11. explain the different characteristic features of futures contracts. What is the role of clearing houses in trading of such contracts ?


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Earning:   Approval pending.