REVIEW OF THE PROBLEMS OF 3^{rd} PART TOPIC 9 (a)
2.01 – 2.02 – 2.03 – 2.04 – 2.05 – 2.06 – 2.07 – 2.08 – 2.09 
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 
1^{st} year 
2^{nd} year 
3^{rd} 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 
PB_{A} = See solution; PB_{B} = x y, 10 m and 24 d; PB_{C} = See solution; PB_{D} = x y, 11 m and 21 d; PB_{E} = See solution; PB_{F} = 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
The nominal value of the shares
The theoretical value of the shares
The distributed dividend per share
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
Calculate the amount of the Share Capital
Determine if the shares quote under par, over par or at par
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:
R_{0} = 50 m.u. F_{1} = 60 m.u. F_{3} = 10 m.u.
The interest rate is 40%; we want to know:
The net present value
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: 1^{st} year = 40,000; 2^{nd} year = 42,000 and 3^{rd} year = 44,100; NPV = 11,979.17 SOLUTION 2.09
The expected cash flows
The NPV of the project
Is it accpetable to expand the activity to Extremadura?
SOLUTION 2.01(a). REVIEW 2.01
PROYECT 
INITIAL OUTLAY 
CASH FLOW 1^{st} YEAR 
CASH FLOW 2^{nd} YEAR 
CASH FLOW 3^{rd} 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
PB_{A} = 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
PB_{B} = 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
PB_{D} = 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
PB_{E} = 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 1^{st} year 
Cash flows 2^{nd} year 
Cash flow 3^{rd} year 
Cash flows 4^{th} 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 1^{st} year = 22,000 – 10,400 = 11,600
Profit 2^{nd} year = 31,000 – 11,600 = 19,400
Profit 3^{rd} year = 40,500 – 13,100 = 26,800
Profit 4^{th} year = 13,000 + 57,000 – 21,600 = 48,400
Taxes 1^{st} year = 11,600 x 0.25 = 2,900
Taxes 2^{nd} year = 19,400 x 0.25 = 4,850
Taxes 3^{rd} year = 26,800 x 0.25 = 6,700
Taxes 4^{th} year = 48,400 x 0.25 = 12,100
NPV = 100,000 + 8,700 : 1.009 + 14,550 : 1.009^{2} + 20,100 : 1.009^{3} + 36,300 : 1.009^{4} =  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 : 1.4^{3}) =  50 + 42.86 + 3.64 = 3.5
It isn't acceptable because the NPV is negative
a)
Cash flow 1^{st} year = 40,000 €
Cash flow 2^{nd} year = 40.000 x 1.05 = 42,000 €
Cash flow 3^{rd} year = 40,000 x 1.05^{2} = 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