TUTORIALS

FIN 310

Question One
Consider the banking system to be made up of 2 banks BICEC and NFC. The outcomes
of return from their lending activities are given as follows;
Outcomes BICEC Probability NFC Probability
A -8 0.2 7 0.1
B 10 0.4 8 0.3
C 8 0.2 -3 0.5
D 6 0.2 18 0.1
Required:
i) Calculate the Covariance.
ii) Calculate the expected return of BICEC and NFC each.
iii) Determine the Standard deviation of BICEC and NFC each.
iv) Compute for the coefficient of correlation.

Question Two
UBA bank is thinking of building an additional branch in the South-west region. They are
confused between building that branch in Buea or in Kumba. As an intern, you were
given the task to make a financial feasibility study to advise them on the project to take
on. In your analysis, the expected cash-flows (in thousands, Fcfa) to the bank if the
branch is in Kumba are; 4,000 Fcfa; 5000 Fcfa; 6000 Fcfa; 7000 Fcfa and 800 Fcfa. On
the other hand, the expected cash-flows (in thousands, fcfa) in case they build in Buea
are; 2,000 Fcfa; 10,000 Fcfa; 8000 Fcfa; 8000 Fcfa and 4000 Fcfa. The discount rate for
both projects is 10% and the probabilities associated with each project are; 0.1; 0.2; 0.4;
0.2; 0.1 respectively, if the branch is built in Kumba while in Buea the probabilities
associated with the project are 0.1; 0.15; 0.5; 0.15; 0.1 respectively.
Required
Given that the initial cost of the project was 5,000,000 Fcfa. Compute the following;
i) Expected value
ii) Expected Present Value
iii) Expected Net Present Value
iv) The riskiness of the project
v) The co-movement of the two projects
vi) The relationship between the two projects

Question Three
a) From the following data compute for the covariance
Standard deviation J = 12% Standard deviation m = 9% and correlation jm = 0.72 b)
Compute the Variance j and Variance m
b) What does a correlation jm implies?
 c) Calculate the standard deviation of the portfolio jm if we consider an equitable
distribution of j and m in the portfolio.
Question Four
You are a financial Manager of X Manufacturing Industry in Cameroon and you were
called to do a sensitivity analysis for a particular Project with an initial capital of 450k.
Through-out 6 years, the expected volume of sales is 1000 with a unit selling price of 15
Frs. The variable costs and fixed costs a are 6frs/unit and 3000 Frs respectively, with a
tax rate of 35%, Discount rate of 12% and depreciation 25%.
Required:
i) Calculate the NCF in two ways and determine the NPV and Profitability Index of the
project.
ii) Calculate the NPV if the selling price increases by 15% and the Variable Cost by 5%.
iii) Calculate the NPV if the Selling price decreases by 15% and the Variable Costs
increases by 5%.
iv) From ii and iii above, which best explains the pessimistic situation and the optimistic
situation. Draw a synthesis table showing the changes and interpret the results.
Question Five
A company is considering two projects with an initial cash outlay of 10,000 Frs each. The
company has a required rate of return of 10%, tax rate of 50% and the projects have a life
span of 5years. Considering a straight-line depreciation, the before tax cash flows
expected to be generated are as follows:
Projects 1 2 3 4 5 6
A 5000 5000 5000 5000 5000 5000
B 3000 6000 4000 9000 1500 5000
Required:
i) Compute the IRR and the ARR for each project and using each method, advice which
project is to be taken.
ii) Calculate the Pay-back period and the Discounted Pay-back period and advice which
project is better.
iii) What is the difference between the Pay-back period and the Discounted Pay-back
period?
Question Six
ABC Company intends to invest in two projects A and B using the capital budgeting
instruments: NPV, PI and IRR. The cash flows be depreciation are as follows:
YEARS Project A (Fcfa) Project B (Fcfa)
1 4000 7000
2 4000 2000
3 4000 5000
4 4000 6000
5 4000 1000
6 4000 3000
Considering that the investment on these projects is 10,000 Frs, the risk-free rate is 10%,
the tax rate is 35% for the first five years and 50% for the last year. Depreciation is on
straight-line basis.
Required:
i) Calculate the NPV of the two projects and advise on the better Project.
ii) If the company wants to get himself an additional compensation for the risk taken at
5%, what is the NPV using the Risk-adjusted discount rate.
iii) Compute for the IRR taking the risk adjusted rate as the first discount rate.
iv) Interpret iii above.
Question Seven
Your father is assessing whether the purchase of a machine for his business will be
profitable after 3 years. The cost of the machine is 200,000 Frs; Year 1 outcomes are;
Outcome 1 is 10,000 frs with probability of 0.5; Outcome 2 is 60,000 Frs with probability
of 0.5. For Year 2, Outcome 1 is 80,000 Frs with probability of 0.5; Outcome 2 is 12,000
Frs with probability of 0.5; Outcome 3 is 16,000 Frs with probability of 0.4; Outcome 4
is 180,000 Frs with probability of 0.6. For Year 3, outcome 1 is 10,000 frs with
probability 0.5; Outcome 2 is 60,000 Frs with probability of 0.5; Outcome 3 is 150,000
Frs with probability of 0.4; Outcome 4 is 120,000 Frs with probability 0.6; Outcome 6 is
90,000 Frs with probability of 0.7; Oucome 7 is 200,000 Frs with Probability 0.4 &
outcome 8 is 100,000 Frs with probability of 0.6.
Required:
i) Calculate the NPV and the expected NPV of each path and of the whole project.
ii) State the riskiest path and the least risky one. Give reasons for your answers.