NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Corporate Finance
Internal Assignment Applicable for June 2024 Examination

1) Sanjana decides to invest in a Recurring Deposit at the rate of Rs. 2,000 per year for 5 years
and at Rs. 3000 per year for next 10 years. What shall be the value of her investment at the
end of 15 years, if the rate of interest is 10%?
If she wants to receive a lumpsum payment of Rs. 1,00,000 at the end of 15 years, what should
be the sum invested each year for 15 years at the same interest rate?
Calculate showing formula and detailed working. Amounts may be rounded off to nearest
rupee. (10 marks)
Answer:

Calculate the value of Sanjana’s investment at the end of 15 years, we need to use the formula for
the future value of an annuity, which is given by:

FV = P × [(1+r)n−1 /r]

where:

• ( FV ) is the future value of the annuity.

• ( P ) is the annual payment.
• ( r ) is the annual interest rate (in decimal).
• ( n ) is the number of years.

For the first 5 years, the annual payment ( P ) is Rs. 2,000, the annual interest rate ( r ) is 10% (or
0.10 in decimal), and the number of years ( n ) is 5.

For the next 10 years, the annual payment ( P ) is Rs. 3,000, the annual interest rate ( r ) remains
10% (or 0.10 in decimal), and the number of years ( n ) is 10.

Let’s calculate the future value for each period separately and then sum them up:

For the first 5 years:

FV5yrs = 2000 × [(1+0.10)5−1 /0.10]

FV5yrs = 2000 × [(1.10)5−1 /0.10]

FV5yrs = 2000 × [(1.61051−1 /0.10]

FV5yrs = 2000 × (6.1051)

FV5yrs = 12,210
 NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Corporate Finance
Internal Assignment Applicable for June 2024 Examination
For the next 10 years: Since the investment for the next 10 years will also earn interest for the 5
years that follow the initial period, we need to compound the future value of the 10-year
investment for an additional 5 years.

FV 10yrs = 3000 × [(1+0.10)10−1 / 0.10]

FV 10yrs = 3000 × [(1.10)10−1 / 0.10]

FV 10yrs = 3000 × (2.59374−1 / 0.10)

FV 10yrs = 3000 × (15.9374)

FV 10yrs = 47812

The total future value at the end of 15 years will be the sum of ( FV_{5yrs} ) and ( FV_{10yrs} ).

FVtotal= FV5yrs +FV10yrs

FVtotal= 12210+47812

FVtotal= 60022

Now, to find the sum that needs to be invested each year for 15 years to receive a lump sum
payment of Rs. 1,00,000, we use the formula for the present value of an annuity, which is given
by:

PV=FV×[1-(1+r)−n /r]

Here, ( FV ) is Rs. 1,00,000, ( r ) is 10% (or 0.10 in decimal), and ( n ) is 15 years.

We solve for ( PV ) to find the annual payment ( P ):

P=1,00,000×[1−(1+0.10)−15/0.10]

P= 10000/1- (1.10)−15

P=10000/1-0.239

P= 10000/0.761

P= 13,137.

So, Sanjana would need to invest approximately Rs. 13,137 each year for 15 years at the same
interest rate to receive a lump sum of Rs. 1,00,000 at the end of 15 years.
 NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Corporate Finance
Internal Assignment Applicable for June 2024 Examination

2) Atharva Textiles is suffering from declining profits, one of the key reasons for which has been
pointed out as Inventory Management. The following details are collated by the Finance
Manager:
Purchase price per unit is Rs. 1000.
Cost incurred at the time of each order is Rs. 600.
The no. of orders placed in a year are 30.
The firm incurs a cost of 5% to carry Inventory cost.
Average inventory held 2,500 units.
Determine the current Total Inventory Cost.
Also advise what should be the Optimum Order quantity to minimize the cost, if the annual
demand for the enterprise is 1,65,000 units. What shall be the Total Inventory Cost at that
level? (10 marks)

Answer:
To determine the current Total Inventory Cost for Atharva Textiles, we need to calculate the costs
associated with ordering and holding inventory. The total cost is the sum of the ordering cost and
the carrying cost.

Parameter Calculation Result

( OC = \text{Cost per order} \times ( OC = Rs. 600 \times 30 ) =
Ordering Cost (OC)
\text{Number of orders} ) Rs. 18,000
( CC = \text{Average inventory} \times ( CC = 2,500 \times Rs.
Carrying Cost (CC) \text{Purchase price per unit} \times 1000 \times 5% ) = Rs.
\text{Carrying cost percentage} ) 125,000
Total Inventory Cost ( TIC = Rs. 18,000 + Rs.
( TIC = OC + CC )
(TIC) 125,000 ) = Rs. 143,000
Optimum Order (EOQ \approx 629 \text{
( EOQ = \sqrt{\frac{2DS}{H}} )
Quantity (EOQ) units} )
(N \approx 262.32 )
Number of Orders (N) ( N = \frac{D}{EOQ} ) (Rounded up to 263 orders
per year)
Average Inventory at ( AIE \approx 314.5 )
( AIE = \frac{EOQ}{2} )
EOQ (AIE) (Rounded to 315 units)
( TICE = (S \times N) + (AIE \times ( TICE = (600 \times 263) +
Total Inventory Cost
\text{Purchase price per unit} \times (315 \times 1000 \times 5%)
at EOQ (TICE)
\text{Carrying cost percentage}) ) ) = Rs. 173,550
 NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Corporate Finance
Internal Assignment Applicable for June 2024 Examination
The Total Inventory Cost at the EOQ level is Rs. 173,550. It’s important to note that while EOQ
minimizes the sum of ordering and carrying costs, other factors such as storage limitations and
cash flow constraints might also need to be considered for practical inventory management.

3)
a) Priya Industries sells their products at Rs. 80 per unit. They incur a Variable cost of Rs.
45 to make the product. Annual credit sales of Priya Limited is 50,000 units. They give a
month’s credit and have a closing debtor balance of Rs. 3,00,000. The Finance manager
decides to increase the credit period from existing 30 days to 45 days. They have an
increase in sales quantity by 10% with the closing debtors balance going up to Rs.
4,24,000. Cost of funds for the firm is 20%.
Calculate the investment in additional receivables.
What should be the considerations to assess the effectiveness of the additional credit
period? Should Priya Industries continue with the relaxed credit or reinstate it to 30 days?
(5 marks)

Answer:

To calculate the investment in additional receivables, we need to determine the increase in sales
and the corresponding increase in the closing debtor’s balance.

S. No Description Calculation Result

1 Initial Sales (units) - 50,000 units
( 50,000 \text{ units} \times
2 Initial Sales (value) Rs. 40,00,000
Rs. 80/\text{unit} )
Initial Closing Debtors
3 - Rs. 3,00,000
Balance
( 50,000 \text{ units} + 10%
4 New Sales (units) \text{ of } 50,000 \text{ units} 55,000 units
)
( 55,000 \text{ units} \times
5 New Sales (value) Rs. 44,00,000
Rs. 80/\text{unit} )
6 New Closing Debtors Balance - Rs. 4,24,000
( \text{New Closing Debtors
Investment in Additional
7 Balance} - \text{Initial Closing Rs. 1,24,000
Receivables
Debtors Balance} )
To assess the effectiveness of the additional credit period, consider:

• Incremental Profit: Calculate the additional profit from the increased sales, considering
the variable cost and the cost of funds.
 NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Corporate Finance
Internal Assignment Applicable for June 2024 Examination
• Cash Flow Impact: Analyze the impact on cash flow due to the longer credit period and
the increased debtor balance.
• Customer Relations: Evaluate if the extended credit period leads to better customer
relationships and potential for future sales.
• Credit Risk: Assess the risk of default with the longer credit period and its impact on the
company’s financial health.

Priya Industries should continue with the relaxed credit period if the incremental profit and
strategic benefits outweigh the costs and risks associated with the extended credit terms.
Otherwise, reinstating the original 30-day credit period may be more prudent.

b) A firm sells 2000 baskets at Rs. 100 each. The Basket has a making charge of Rs. 50 each
and a fixed operating cost of manufacture of Rs. 50,000/year. Calculate the Contribution
and DOL. Also show the impact if SP increases by 50% on the contribution and DOL.
What does the change in DOL signify? (5marks)
Answer:

To calculate the Contribution and Degree of Operating Leverage (DOL), we’ll first define the
terms:

• Contribution Margin (CM) is the difference between the selling price (SP) per unit and the
variable cost (VC) per unit. It represents the portion of sales that helps to cover the fixed costs.
• Degree of Operating Leverage (DOL) at a certain level of sales is the percentage change in
operating income (or EBIT) that results from a percentage change in sales.

Given:

• Selling Price (SP) per basket = Rs. 100

• Variable Cost (VC) per basket (making charge) = Rs. 50
• Fixed Operating Cost (FOC) = Rs. 50,000
• Quantity sold (Q) = 2000 baskets

New Value (SP increased by

S. No Financial Metric Formula Initial Value
50%)
Selling Price (SP) per
1 - Rs. 100 Rs. 150
basket
Variable Cost (VC)
2 - Rs. 50 Rs. 50
per basket
Fixed Operating Cost
3 - Rs. 50,000 Rs. 50,000
(FOC)
4 Quantity sold (Q) - 2000 baskets 2000 baskets
Contribution Margin
5 ( CM = SP - VC ) Rs. 50 Rs. 100
(CM)
 NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Corporate Finance
Internal Assignment Applicable for June 2024 Examination
New Value (SP increased by
S. No Financial Metric Formula Initial Value
50%)
Total Contribution ( TC = CM \times
6 Rs. 1,00,000 Rs. 2,00,000
(TC) Q)
Operating Income
7 ( OI = TC - FOC ) Rs. 50,000 Rs. 1,50,000
(OI)
Degree of Operating ( DOL =
8 2 1.33
Leverage (DOL) \frac{TC}{OI} )

The change in DOL from 2 to 1.33 signifies that the firm’s operating income becomes less
sensitive to changes in sales volume. A lower DOL means that the firm is less leveraged in terms
of fixed costs, and a 1% change in sales will now result in a 1.33% change in operating income,
down from a 2% change previously. This can be seen as a reduction in business risk.

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