INSTITUTE OF ACCOUNTANCY ARUSHA (IAA)

GROUP ASSIGNMENT.

PROGRAMME : BA III

MODULE NAME : INTERNATIONAL FINANCE

MODULE CODE : AFU 08112

FACILITATOR : NGOWI (Mr. H).

SEMESTER : ONE

ACADEMIC YEAR : 2017/ 2018

GROUP MEMBERS.

1) SIIMA EZEKIEL J. BA/0807/T.2015

2) THOMAS LYIMO BA/0696/T.2015
3) MCHARO RABIETH BA/0791/T.2015
4) NNKO JUDICA J. BA/0815/T.2015
5) MASALE DEOGRATIUS G. BA/0784/T.2015
6) MAKUNDI HILARY R. BA/0828/T.2015
7) NANYARO PROSPER K. BA/0754/T.2015
8) MSACKY LUCY R. BA/0694/T.2015
9) SAITA IRENE EDEN BA/0820/T.2015
10) MSAMBA HENRY BA/0789/T.2015
QUESTION ONE
Information given
Initial Investment 450,000
Operating cash flow 220,000
Debt Finance 450,000 * 40% = 180,000
Equity Finance (450,000 – 180,000) = 270,000
Cost of equity 5%
Cost of Debt 2%
Industry equity Beta 1.368
Industry Debt Equity 1.5
Black equity Beta 1.8
Risk Free per annum 10%
Return 15%
Tax 30%
Depreciation 70%

NOTE 1
Find Asset Beta
𝐸
𝛽 ×
𝐸 + 𝐷(1 − 𝑡)
5
1.368 ×
5 + 1(1 − 0.3)

Asset Beta = 1.2

NOTE 2
Required Return

𝑅 + 𝛽 ( 𝑅𝑚 − 𝑅𝑓)
10% + 1.2 ( 15% − 10%)
Required Return = 16%

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NOTE 3
Tax Allowed on Depreciation
Details Amount Tax (30%)
Cost of Machine 450,000
Less: Initial Allowance 70% 315,000 94,500
135,000
Tax Allowable for depreciation 3 Yrs. (135000/3) 45,000 13,500

NOTE 4

Tax saving = (Tax Rate x Amount)/ Discount factor

= (30% × 17883)/ (1.1)

Therefore; Tax saving = 4877.18

1st step

Details Yo Y1 Y2 Y3 Y4

Initial Outlay (450,000)

Saving on Tax Allowable
Depreciation 94,500 13,500 13,500 13,500

Operating Cash flow 220,000 220,000 220,000

Tax on Operating Cash flow (66,000) (66,000) (66,000)

Total Cash Flow (450,000) 314,500 167,500 167,500 (52,500)

PV Factor 1 0.8620 0.7432 0.6407 0.5523

PV (450,000) 271,099 124,486 107,317 (28,996)

Summation of PV 473,906.50

Initial Outlay (450,000)

NPV 23,906.50

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2nd Step
Financing side effect

Capital Requirement
Equity 60% 270,000.00
Debt 40% 180,000.00
Total Capital Require 450,000.00

Issue Cost
Equity 5/95 x 270,000 14,210.00
Debt 2/95 x 180,0000 3,673.00
Total 17,883.00
Less: Tax Saving 4,877.00
Post tax Issue cost 13,006.00

Tax Relief on Loan Interest

Gross value of Loan = 180,000 + 3673 = 183,673
Gross loan Value
Annual Repayment =
3 Yrs (at factors of 10%)
183,673
Annual Repayment =
2.487
Annual Repayment = 73,853

Opening Balance Interest Repayment Closing Balance

Year 1 183,673 18,367 73,853 128,187
Year 2 128,187 12,819 73,853 67,153
Year 3 67,153 6,715 73,853 15

Tax Relief on 30% on Interest ( One year Delay)

Cash 10% Factor PV
Year 2 5510 0.826 4,551.26
Year 3 3846 0.751 2,888.35
Year 4 2015 0.683 1,376.25
8,815.85

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 Adjusted Present Value

Base NPV 23,907

Issue Cost (13,006)

Tax relief 8,816

PROJECT APV 19,717

Note: Since APV is greater than zero, the project is worthwhile

b) Adjusted present value (APV) technique is sometimes advocated as being a more appropriate
way of evaluating a project than net present value (NPV) due to the following reasons.

i. Its transparency, because you explicitly state how large each of the three components of
the APV is (NPV of equity financed company, tax advantage of debt and cost of risk of
debt).
ii. There is a significant change in the firm capital structure due to the project financing
package

iii. Subsidized loan, grants or issue cost exist. It helps to find the right level of debt. If the
advantage of debt (tax deductibility) far outweighs the cost of debt (bankruptcy), you might
think about increasing the debt level. That is a crude way to put it, but goes in the direction
you should think. Financing side effect exists. (Example the subsidized loan) That require
discounting at a rate different from that applied to the project operating cash flow.

QUESTION TWO

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 Working 1

Price per Variable

Year Demand Revenue Total Cost
Racket (Sf) Cost/ Racket
2019 88 600 52800 25 15000
2020 100 600 60000 25 15000
2021 90 1000 90000 38 38000
2022 95 1000 95000 45 45000

Working 2

Spot rate TZS 2,245/Sf 2018 December

TZS 2,132.75/Sf 2019

TZS 2,026.1125/Sf 2020

TZS 1,924.80/Sf 2021

Working 3

Year 2018 2019 2020 2021

Discount
Factor 15% 1 0.8696 0.7561 0.5718

CAPITAL BUDGET ANALYSIS : AMSHAPOPO COMPANY LTD

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Details 2018 2019 2020 2021 2022

Revenue (98,000) 52,800 60,000 90,000 95,000

Less: Variable Cost (15,000) (15,000) (38,000) (45,000)

Less: Depreciation (15,000) (15,000) (15,000) (15,000)

Profit Before Tax 22,800 30,000 37,000 35,000

Less: Corporate Tax (20%) 4,560 6,000 7,400 7,000

Net Profit 18,240 24,000 29,600 28,000

Add Back: Depreciation 15,000 15,000 15,000 15,000

Net Cash flow (98,000) 33,240 39,000 44,600 43,000

Liquidated Value - - - - 25,000

Net Cash PV Value 33,240 39,000 44,600 68,000

Less: WHT 10% 3,324 3,900 4,460 6,800

Net Cash to be remitted 29,916 35,100 40,140 61,200

Exchange rate (Tzs/ Sf) 2,245 2,133 2,026 1,925 1,829

Net Cash Remitted (220,010,000) 63,803,349 71,116,549 77,261,748 111,908,272

Discount Factor 1 0.8696 0.7561 0.6575 0.5718

Present Value In Tzs (220,010,000) 55,483,392 53,768,237 50,799,599 63,989,150

n

NPV = ∑ PV − Initial Invetment

t=1

𝑁𝑃𝑉 = 224,040,378 – 220,010,000

𝑵𝑷𝑽 = 𝟒, 𝟎𝟑𝟎, 𝟑𝟕𝟖. 𝟐𝟖𝟓

Since NPV is positive, the poroject is viable and should be taken

References
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Buckley, Adrian (1996) Multinational Finance, 3rd ed, Prentice-Hall, India

Gibson, Heather D. (1996), International Finance: Exchange Rates and Financial Flaws in the
International System, Longman

Jeff Madura (2006) International corporate Finance, 8th ed, Thomson South- Western, USA

Prakash Apte (2011) International Finance, 2nd ed, Tata McGraw Hill Education Private Ltd. New
Delhi