Answer for the question 1
Given values to get the Net present Value
Outflows
,000,000
With the up front fee = ,000,000
Equipments = ,000,000
Crap value of 5 million for the equipment after 5 years
20% writing down allowance
Inflows
,000,000 = 1st year
,000,000 = 2nd year
,000,000 = 3rd year
,000,000 = 4th year
,000,000 = 5th year
a.1 The calculation for the writing down allowance is given below:
Year
Asset Cost $
20% Tax Saved
Year 1
Year2
Year 3
Year 4
Year 5
Year 6
$
$
$
$
$
$
$
$
Year 1 (WDA 25%)
25,000,000
1,250,000
625,000
625,000
(-6,250,000)
468,750
Year 2 (WDA 25%)
18,750,000
937,500
1,093,750
468,750
(-4,687,500)
351,563
Year 3 (WDA 25%)
14,062,500
703,125
820,313
351,563
(-3,515,625)
263,671.88
Year 4 (WDA 25%)
10,546,875
527,343.75
615,234.88
263,671.88
(-2,636,718.75)
436,523.44
436,523.44
Year 5 (WDA 25%)
7,910,156.25
873,046.88
700,195.31
Scrap value
(-5,000,000)
2,910,156.25
a.2 The calculation for the company expected return
Year
Profit ($)
Tax
Amount ($)
Payable
year 1
8,000,000
20%
1,600,000
800,000
year 2
9,000,000
20%
1,800,000
1,700,000
year 3
10,000,000
20%
2,000,000
3,400,000
year 4
10,000,000
20%
2,000,000
3,400,000
year 5
10,000,000
20%
2,000,000
3,400,000
The calculation for the Net Present Value (NPV) is given below:
Year
Asset ($)
WDA tax saved
Expected Return ($)
Tax on
Expected
Rate (20%)
Total
($)
Inflation
Rate (4%)
Total
Expected Rate
of Return $ (14%)
0
35,000,000
35,000,000
1.00
35,000,000
-35,000,000
1
625,000
8,000,000
-800,000
7,825,000
1.04
8,138,000.00
8,463,520.00
2
1,093,750
9,000,000
-1,700,000
8,393,750
1.08
9,078,680.00
8,406,185.19
3
820,313
10,000,000
-3,400,000
7,420,313
1.12
8,340,431.81
7,380,913.11
4
615,234.88
10,000,000
-3,400,000
7,215,234.88
1.17
8,441,824.81
7,340,717.23
5
5,000,000
700,195.31
10,000,000
-3,400,000
12,300,195.31
1.22
15,006,238.28
12,401,849.59
6
436,523.44
-1,700,000
-1,263,476.56
1.26
-1,591,980.47
-1,263,476.57
NPV
7,729,709
Since the net present value for the project is the value of the difference for the discounted cash flows that are investment expected which is also the initially invested amount. This can also be used for the valuation process in the discounted cash flow. The net present value and its analysis can also help to make the sound decisions regarding the acceptance or the rejection of the potential project of investment and primarily base on its objective criterion of financial. This is therefore the useful way for the discounted cash flow methods. This is also commonly yields and having the result of being expressed in the after-tax dollar which can also take into consideration of difference in the future cash flow value as well as the cost in raising the required capital cost in the given investment (12Manage, 2008). This value means that for the 5th year, it is in the discounted cash inflow. This also means that Golden Rat Manufacturing Company must consider or accept the project and this can also considered to be the suitable venture. It also signifies that the company can pay $ 7,729,709 more than the ,000,000 cost and break even and will earn the capital cost of 0.14. Thus, the $ 7,729,709 is only implies that surplus incentive for the investment and it can also be measured for exist of the safety margin. The project also needs to have the return more that the desired of 14% that is suitable for the project investment. To simplify, the net present value is the firm’s amount that can be pay for the excess of the cost while can also break even and that is also the present value of the income right after the costs of capital.
b.
Before taking into the account of investment, the managers can also have the ability to choose other than the use of the Net Present Value. This means that the manager of the Golden Rat Manufacturing Company cannot only depend on the impact of the Net Present Value because it cannot account for the uncertainty/flexibility for the decision of the project. It cannot also deal to the intangible benefits which can alleviate its usefulness for strategic projects and issues. This has also the sensitivity when it comes to the inflation and discount rate whereas the manager must need to be aware on these rates. To support this argument, the computation for the Net Present Value is only the summation for the many and multiple discounted cash flow. This means that the conversion for the terms of present value for the same point in the time whether they neither are positive nor negative has the beginning of cash flow. Accordingly, the rate that are using for the denominators of every computation of the present value is critical though significant for the determination of the final value of the Net Present Value. This also implies that even the neither small increase nor decrease for the rate can definitely have the significant effect for the final value of the NPV. This has also the exclusion for the value of the real options which can exist in the investment (Greenwood and Taylor, 2002). Consequently, the manager must also have to consider the other method for the valuation of any investment as the method using the internal rate of return which implies that the higher or substantial value of Internal Rate of Return compared to the other options which are available will have the better chance for having the strong growth. This also implies that if the IRR is not available then, it can invest in the retained earnings to the market. The other method to use that the manager must use is the analysis for the cost benefit which is use in attempting to evaluate and measure the benefits and non-marketed costs taken from the investment that deal with the less tangible costs and with the association from the risks and uncertainly. The value added investment can also be use in order to get the intangible and tangible property accrual. The payback period can be use for the time in the initial investment that can be recovered. This can also means that the shortest pay back period needs to use using the method of discounted cash flow. The wealth maximization rate can be use to eliminate the defect of IRR. This can also considers the benefits of the cash flow right after the initial investment while considering the investors rate to receive in the coming of the line (Spencer, et. al., 2002, p. 24).
In general, for the pursuance of the project, it is important to use the guide of the Net Present Value. However, it is most important to use and look at the business, need to have the real awareness for the any special sector concerning the debt and WFC, and to understand the realism for the potential growth (Finance Wonk, 2008).
Answer to Question Number 2
a. The total shareholder return (TSR) is the one that represents the changes in the capital value for the quoted or listed company over the period of which is commonly the 1 year or longer than a year plus the dividends that is expressed as positive or negative percentage for the opening value. The TSR can also be compared from the company and to the company. This is also being benchmark within or against the market or the company and its return without the bias on its sizes (Value Base Management, 2008). To follow the formula of Total Shareholder Return this is given below:
TSRt = Divt + (Pt – Pt – 1)
Pt – 1
Where: TSR = Nominal Shareholder Return for the t period
Div = Dividends Paid
P = Price
By substitution of the given values
TSR = .25 + (.20 – .70)
.70
TSR = .25 + (.50)
.70
TSR = .25 + (.50)
.70
TSR = .75
.70
TSR = .59
This composition of the total shareholder return which accounted for .59 and considered to be low is considered to be not critical for its sustainability and to its growth. For the having the finite return, it implies that the company grown, made an assets, and has the positive cash flow. This also indicates the cash compensation that increase of 5.9% for every 10% of the increase in the total shareholder return. This can also be achieved through the change of the growth value and to the economic profit. Accordingly, the company only generates the creation of increasing and positive wealth every year but it only equals to the cost of the capital. This can also signifies the change in the expectations of the investors. Primarily, the TSR is considered to be the best expression for the interest of the shareholders. This implies that the shareholders must give the major consideration for the designing the long term incentives (Chingos, 2002, p.234)
b. There are many discussions that had been tackled regarding the relevance of the dividend in the business and in stocks. Most of the experts say that the dividends are considered to be the separate policy that does not enter into the account of decisions due to the fact that they are derivatives of the factors. On the other hand, the dividends are still important and have the significant effect in the business ventures. Looking at the real world, the dividends are still important for the stockholders and plays huge roles in the valuation process. Most of the investors still prefer to use the dividends and to determine the value of the firm which needs to affect the dividend payment. One of the importances of dividends is the fact that they are the worth more than the cash in the future that had been derived from reinvesting the retained earnings. This implies that when the firms pay dividends, it has the ability to reduce the uncertainty to the investors. This can lower risks as well which also lower the discount rate. In short, the discount rate that will assign in the future will retain as earnings. The second advantage of the dividends is its content on information. Through paying the dividends, it only emphasizes to the investors that the firm is expecting to generate the earnings for the payment of the dividends in the future. On the other hand, if the firm stops to pay, then it signals to the investors that something is going wrong which can influence the attitude of the investors. The last importance of the dividends in the firm is the needs of the investors in the current income for the purpose of future income. This signifies that most of the stockholders, they become more aware when the company lessen its dividends whereas it dispose the stock and affects the value (Groppelli, A and Nikbakht, E, 2006, p. 277-278).
The taxation has important role in the stocks, valuation and business. The marginal tax rates as well as the interest for the income of the investors are all factors in the valuation of the stock market. This implies to the volatility for the marginal tax rate on investors with high income. In structuring the long-term incentive for the plan of compensation, the taxation for the executive, the accounting charges, and the corporation deductibility in the packages of compensation are the important things. The importance and use of the taxation simply lies in the efficient raising of for the tax revenues that can be use in reinforcing the system for the credit of the public. According to the Inland Revenue of the United Kingdom, the dividends are chargeable to taxes every year where they are being paid and resulted to delayed of the receipt when badly needs (Wormell, 2000, p. 324). Accordingly, the taxes have impact on the securities’ values whereas it affects to the equity and to the corporation burden of taxes and to the debt holders but the empirical tests for the credit risk structure and its models must first be done before considering the tax regime (Genser, 2005, p. 81)
For the Japan, it has given the consideration for the convenience of the investors by self assessment waiving and through the tax reporting. There must also be consideration on the medium and long term that is taken from the narrow perspective. The taxable income also affect that by having been reviewed the life and non-life insurance premiums, the system of the asset building, and the request of the fair tax burdens. This can be done the balance of taxation amid the earnings and the financial asset system from the avoidance of curtails and works (Japan Ministry of Finance, n.d.).
Bibliography
Chingos, P 2002, Paying for Performance: A Guide to Compensation Management, John Wiley and Sons, New Jersey.
Decentralization and Tax System n.d., Japan Ministry of Finance, viewed 05 June, 2008, http://www.mof.go.jp/english/tax/commission/e030617c.htm.
Genser, M 2005, A Structural Framework for the Pricing of Corporate Securities, Birkhäuser, United States.
Greenwood, R and Taylor, P 2002, Handbook of Financial Planning and Control, Gower Publishing, United Kingdom.
Groppelli, A and Nikbakht, E 2006, Finance, Barron’s Educational Series, United States.
Net Present Value 2008, 12 Manage, viewed 05 June, 2008, http://www.12manage.com/methods_npv.html.
Present Value Fundamentals 2008, Finance Wonk, viewed 05 June, 2008, http://financewonk.blogspot.com/2006/05/present-value-analysis-fundamentals.htm.
Spencer, N, et. al 2002, How Building Add Value for Clients, Scotland.
Total Shareholders Return 2008, Value Base Management, viewed 05 June, 2008,
http://www.valuebasedmanagement.net/methods_tsr.html.
Wormell, J 2000, The Management of the National Debt of United Kingdom, 1900-1932, Routledge, United Kingdom.
Credit:ivythesis.typepad.com
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