REVIEW OF THE PROBLEMS OF 3rd PART TOPIC 9 (a)


2.012.022.032.042.052.062.072.082.09 -


REVIEW_2.01(a).- A firm has five alternative projects of investment. Calculate the Payback and put in order the projects according to this criteria REVIEW 2.02 SOLUTION 2.01

Projects

Initial outlay

1st year

2nd year

3rd year

Collections

Payments

Collections

Payments

Collections

Payments

A

135,000

160,000

30,000

150,000

35,000

65,000

25,000

B

135,000

200,000

50,000

90,000

80,000

50,000

30,000

C

135,000

70,000

40,000

90,000

50,000

110,000

60,000

D

135,000

30,000

80,000

30,000

40,000

270,000

70,000

E

135,000

120,000

20,000

85,000

43,300

50,000

20,000

F

135,000

110,000

20,000

100,000

100,000

80,000

15,000

PBA = See solution; PBB = x y, 10 m and 24 d; PBC = See solution; PBD = x y, 11 m and 21 d; PBE = See solution; PBF = x y, 8 m y 9 d



























REVIEW_2.02(a).- The Manufactures of the Bay's manager wants to improve the productivity of his firm, therefore, he wants to know the firm's cash conversion cycle before of the beginning of the program of improving. Calculate the information that the manager needs related to the cash conversion cycle if the data are the following (averages of the period and in million of pesetas): OUTCOME: CCC = 208.31 days REVIEW 2.03 SOLUTION 2.02

ITEMS

AMOUNTS

Sales cost

3,530

Total cost of production

5,409

Average raw material stock

357

Average finished goods stock

589

Material purchases

2,345

Total sales

5,792

Average goods in process stock

987

Average receivables stock

400

























REVIEW_2.03(a).- The firm QQQ has a Share Capital of 1,459.548€ divided in 121,600 shares. The shares quote in the Stock Market at 95% and the expected annual dividends are 4.58€. The annual interest rate of the market is 10%. Calculate the nominal value, the market value and the theoretical value of the shares of the corporation REVIEW 2.04 SOLUTION 2.03


Nominal value = 12.00€/share

Market value = 11.40€/share

Theoretical value = 45.80€/share



























REVIEW_2.04(a).- A project of investment had an initial outlay of 150,000€ and the cash flows of the first and second years were 60,000€ and 80,000€, respectively. Calculate the cash flow of the third year, knowing that the Payback was 2 years and 11 months REVIEW 2.05 SOLUTION 2.04


X = 10,909.09€



























REVIEW_2.05(a).- A building firm with 3,120,000€ of Share Capital made up of 115,000 shares, has obtained a distributing profit of 1,230,000€ at the end of the year and it has created reserves of 73,000€. Determine: REVIEW 2.06 SOLUTION 2.05

    1. The nominal value of the shares

    2. The theoretical value of the shares

    3. The distributed dividend per share

    4. The Net worth


Nominal value = 27.3€/share

Theoretical value = 27.77€/share

Distributed dividend per share = 10.70€/share

Net worth = 3,193,000€



























REVIEW_2.06(a).- The firm “Babe Apples” markets apple trees to nurseries. Its Share Capital is divided in 37,500 shares of 25.70 m.u. each one. The firm quotes in the Stock Market at 24.30 m.u./share and it has reserves of 70,000 m.u. REVIEW 2.07 SOLUTION 2.06

    1. Calculate the amount of the Share Capital

    2. Determine if the shares quote under par, over par or at par

    3. Calculate the theoretical value of each share


Share capital = 963,750 m.u.

The shares quote . . . par

Theoretical value = 27.57 m.u.



























REVIEW_2.07(a).- A firm plans to make a project of investment to acquire a machine valued in 100,000€. The project lasts four years. The planned revenue for each year with the acquisition of this new machine are: 22,000€; 31,000€; 40,500€ and 57,000€ respectively. The planned operating expenses appear in the following table. The interes rate is 0.9%; the salvage value is 13,000€ and the tax on profits is 25%. You must decide if the investment is a good idea for the firm or not, according to the Net Present Value (NPV). OUTCOME: NPV = -22,497.01€ SOLUTION 2.07

EXPENSES

1st year

2nd year

3rd year

4th year

Labour

8,400

9,100

11,000

17,500

Raw material

1,200

1,500

1,200

1,800

General expenses

800

1,000

1,500

2,300























REVIEW_2.08(a).- We have a project of investment with the following data:

R0 = 50 m.u. F1 = 60 m.u. F3 = 10 m.u.

The interest rate is 40%; we want to know:

  1. The net present value

  2. Is it acceptable the investment?

OUTCOME: NPV = -3,5 SOLUTION 2.08


























REVIEW 2.09.- A firm wants to expand its market to Extremadura. In order to do that, it must buy new machinery for an amount of 100,000 €.

The expected annual cash flow which are paid at the end of each year for Extremadura for the first year is 40,000 €, increasing at a rate of 5% each year till the third year.

If the interest rate is 20%:

We want to know: OUTCOME: Cash flows: 1st year = 40,000; 2nd year = 42,000 and 3rd year = 44,100; NPV = -11,979.17 SOLUTION 2.09

  1. The expected cash flows

  2. The NPV of the project

  3. Is it accpetable to expand the activity to Extremadura?




























SOLUTION 2.01(a).- REVIEW 2.01


PROYECT

INITIAL OUTLAY

CASH FLOW 1st YEAR

CASH FLOW 2nd YEAR

CASH FLOW 3rd YEAR

A

135,000

130,000

115,000

40,000

B

135,000

150,000

10,000

20,000

C

135,000

30,000

40,000

50,000

D

135,000

-50,000

-10,000

200,000

E

135,000

100,000

41,700

30,000

F

135,000

90,000

0

65,000


Proyect A.-


12 m ------- 115,000

x m -------- 5,000


x = 5,000 x 12 : 115,999 = 0.52 m


1.00 m ---------- 30 d

0.52 m ---------- x d


x = 0.52 x 30 : 1 = 15.6 d = 16 d


PBA = 1 y and 16 d


Proyect B.-


12 m ------- 150,000

x m ------- 135,000


x = 135,000 x 12 : 150,000 = 10.80 m


1 m ------- 30 d

0.80 m ------- x d


x = 0.80 x 30 : 1 = 24 d


PBB = 10 m and 24 d


Proyect C.- This project is not recovered


Proyect D.-


12 m ------- 200,000

x m ------- 195,000


x = 195,000 x 12 : 200,000 = 11.70 m


1 m ------- 30 d

0.70 m ------- x d


x = 0.70 x 30 : 1 = 21 d


PBD = 2 y, 11 m and 21 d


Proyect E.-


12 m ------- 41,700

x m ------- 35,000


x = 35,000 x 12 : 41,700 = 10.07 m


1 m ------- 30 d

0.07 m ------- x d


x = 0.07 x 30 = 2.1 d


PBE = 1 y, 10 m and 2 d


Project F.-


12 m ---------------------- 65,000

x m ---------------------- 45,000 x = 8.31 m


1.00 m -------------------------- 30 d

0.31m --------------------------- x d x = 9.3 d = 9 d


PBF = 2 y, 8 m and 9 d




According to this criteria the order would be (from the best one to worst one): B – A - E – F – D and C



























SOLUTION 2.02(a).- REVIEW 2.02


Raw material rotation = 2,345 : 357 = 6.57

Raw material conversion period = 365 : 6.57 = 55.56 d

Goods in process rotation = 5,409 : 987 = 5.48

Goods in process conversion period = 365 : 5.48 = 66.61 d

Finished goods rotation = 3,530 : 589 = 5.99

Finished goods conversion period = 365 : 5.99 = 60.93 d

Payment from customers rotation = 5,792 : 400 = 14.48

Receivables conversion period = 365 : 14.48 = 25.21 d


CCC = 55.56 + 66.61 + 60.93 + 25.21 = 208.31 d



























SOLUTION 2.03(a).- REVIEW 2.03


NV = 1,459,548 : 121,600 = 12€

MV = 12 x 0.95 = 11.40€

TV = 4.58 : 0.1 = 45.8€



























SOLUTION 2.04(a).- REVIEW 2.04


11 m ------- 10,000

12 m ------- x


X = 12 x 10.000 : 11 = 10,909.09€



























SOLUTION 2.05(a).- REVIEW 2.05


NV = 3,120,000 : 115,000 = 27.12€

TV = (3,120,000 + 73,000) : 115,000 = 27.77€

Div = 1,230,000 : 115,000 = 10.70€

Net worth = 3,120,000 + 73,000 = 3,193,000€



























SOLUTION 2.06(a).- REVIEW 2.06


Share Capital = 37,500 x 25.70 = 963,750€

The shares quote under par

Theoretical value = (963,750 + 70,000) : 37,500 = 27.57€



























SOLUTION 2.07(a).- REVIEW 2.07


Initial outlay

Cash flows 1st year

Cash flows 2nd year

Cash flow 3rd year

Cash flows 4th year

100,000




+13,000


+22,000

+31,000

+40,500

+57,000


-10,400

-11,600

-13,700

-21,600


-2,900

-4,850

-6,700

-12,100

TOTALS

8,700

14,550

20,100

36,300


Profit 1st year = 22,000 – 10,400 = 11,600

Profit 2nd year = 31,000 – 11,600 = 19,400

Profit 3rd year = 40,500 – 13,100 = 26,800

Profit 4th year = 13,000 + 57,000 – 21,600 = 48,400


Taxes 1st year = 11,600 x 0.25 = 2,900

Taxes 2nd year = 19,400 x 0.25 = 4,850

Taxes 3rd year = 26,800 x 0.25 = 6,700

Taxes 4th year = 48,400 x 0.25 = 12,100


NPV = -100,000 + 8,700 : 1.009 + 14,550 : 1.0092 + 20,100 : 1.0093 + 36,300 : 1.0094 = - 22,497.01€


The project isn't interesting because we are lossing money


























SOLUTION 2.08(a).- REVIEW 2.08

NPV = - 50 + (60 : 1.4) + (10 : 1.43) = - 50 + 42.86 + 3.64 = -3.5

It isn't acceptable because the NPV is negative


























SOLUTION 2.09.-

a-)

Cash flow 1st year = 40,000 €


Cash flow 2nd year = 40.000 x 1.05 = 42,000 €


Cash flow 3rd year = 40,000 x 1.052 = 44,100 €


b-)

NPV = -100,000 + (40,000 : 1.2) + (42,000 : 1.22) + (44,100 : 1.23) = -11,979,17 €


c-)

It isn't acceptable to expand the activity to Extremadura