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Timothy Joseph Uy MD-MBA090058 Financial Management Assignment Option A Cash Flow: Buy the 1980 Lancer SH Year 0 1 2 3 Total

Average Cash Flow (120,000) 18,960 18,960 138960 176,880 58,960 PVIF (15%) 0.87 0.756 0.658 PV 16,495.2 14,333.8 91435.7 12,264.7 40,754.9 Option B Cash Flow: Family Operated Beauty Parlor Year 0 1 2 3 4 5 Total Average Cash Flow (120,000) 30,000 35,000 40,000 55,000 60,000 220,000 44,000 PVIF (15%) 0.87 0.756 0.658 0.572 0.497 PV 26,100 26,460 26,320 31,460 29,820 140,160 28,032

Analysis of Cash Flow Statements for Options A and B Parameter Payback Period Accounting Rate of Return Internal Rate of Return Net Present Value Profitability Index 1. Option A 2.0 49.1% 16% 2,264.7 1.0 Option B 2.7 36.7% 21% 20,160 1.2

Using the payback measure as the parameter with which the decision for Option A and B would be derived, it would appear that Option A would be better. A 2.0 payback period for Option A as compared to the 2.7 payback period for Option B would insinuate a shorter amount of time needed to recover the initial investment. Though the family has not decided on the minimum payback period criteria, it would seem that we could assume a 3-year minimum acceptable payback period given that the life of the Option A investment would run for three years. If this criteria was accepted, then both option A and B would be deemed acceptable. Using the accounting rate of return using the initial value of investment for Option A and B, it would appear that Option A is the better alternative. With 49.1% ARR for Option A, there would be a higher rate of return on the initial value of the investment as compared to Option B which only has a 36.7% ARR. Using the internal rate of return in the decision for Option A and B, Option B would have the higher IRR. Option Bs 21% as compared to Option As 16% is much higher. This would mean that Option B would require a 21% discount rate to equalize net present value with future discounted rates while Option A would require a lower 16% discount rate. As such, if a 21% discount rate is realized in any of the two options, Option B would not yield any losses while Option A would yield significant losses to the family. Using the net present value and profitability indices, it would seem that Option B would be the better option. Option Bs 20,160 NPV and 1.2 profitability index are higher compared to Option As 2,264 NPV and 1.0 profitability index. In my opinion, it would be better to push through with Option B (set-up a family operated beauty parlor) in that the IRR, NPV and Profitability Index are much higher for this alternative. As I have said, there is only a small gap between the payback period for both alternatives and if a 3-year period is set as the minimum acceptable payback period, they would both be acceptable. As to the ARR, it only accounts for the initial value of the investment and does not consider future discounted rates. Option Bs IRR, NPV and PI which takes into consideration the discounted cash flow rates are all higher as compared to Option A. This, to me, would point to a better outlook for Option B.

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