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