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

2.012.022.032.042.052.062.072.082.09 -

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

 Proyect Initial outlay 1st year 2nd year 3rd year Collections Payments Collections Payments Collections Payments A 12,250 9,500 4,970 8,100 3,050 7,300 1,000 B 12,250 10,300 3,250 5,500 2,480 2,000 420 C 12,250 30,600 5,300 20,100 4,400 27,750 4,250 D 12,250 13,750 2,000 12,500 3,000 10,800 3,750 E 12,250 10,000 10,000 5,000 5,000 20,000 5,000

PBA = See solution; PBB = See solution; PBC = x y, 5 m and 24 d; PBD = See solution; PBE = x y, 8 m and 28 d; PBF = See solution

REVIEW_2.02(b).- 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): REVIEW 2.03 SOLUTION 2.02

 ITEMS AMOUNTS Sales cost 20,500 Total cost of production 15,300 Average raw material stock 1,100 Average finished goods stock 800 Material purchases 18,000 Total sales 30,700 Average goods in process stock 700 Average receivables stock 3,000

CCC = 88.93 days

REVIEW_2.03(b).- The firm QQQ has a Share Capital of 3,000,000€ divided in 375,000 shares. The shares quote in the Stock Market at 150% and the expected annual dividends are 2€. The annual interest rate of the market is 5%. 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 = 8.00 €/share

Market value = 12 €/share

Theoretical value = 40 €/share

REVIEW_2.04(b).- A project of investment had an initial outlay of 500,000€ and the cash flows of the first and second years were 100,000€ and 200,000€, respectively. Calculate the cash flow of the third year, knowing that the Payback was 2 years and 5 months REVIEW 2.05 SOLUTION 2.04

X = 480.000€

REVIEW_2.05(b).- A building firm with 1,000,000€ of Share Capital made up of 400,000 shares, has obtained a distributing profit of 300,000€ at the end of the year and it has created reserves of 200,000€. 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 = 2.5 €/share

Theoretical value = 3 €/share

Distributed dividend per share = 0.75 €/share

Net worth = 1,200,000€

REVIEW_2.06(b).- The firm “Babe Apples” markets apple trees to nurseries. Its Share Capital is divided in 50,000 shares of 3.75 m.u. each one. The firm quotes in the Stock Market at 4.08 m.u./share and it has reserves of 40,000 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 = 187,500 m.u.

The shares quote . . . par

Theoretical value = 4.55 m.u.

REVIEW_2.07(b).- A firm plans to make a project of investment to acquire a machine valued in 60,000€. The project lasts four years. The planned revenue for each year with the acquisition of this new machine are: 20,000€; 30,000€; 15,000€ and 10,000€ respectively. The planned operating expenses appear in the following table. The interes rate is 75%; the salvage value is 6,000€ 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). SOLUTION 2.07

 Expenses 1st year 2nd year 3rd year 4th year Labour 1,000 1,800 1,000 500 Raw material 500 300 250 260 General expenses 500 900 250 240

NPV = - 42.584,76

REVIEW 2.08(b).- We have a project of investment with the following data: SOLUTION 2.08

R0 = 100 m.u. F1 = 80 m.u. F3 = 20 m.u.

The interest rate is 50%; we want to know:

1. The net present value

2. Is it acceptable the investment?

REVIEW 2.09.- A firm wants to expand its market to Extremadura. It needs to buy a new machinery for an amount of 200,000 €.

The expected annual cash flow which are paid at the end of the year for Extremadura for the first year are 100,000 €, increasing a rate of 8% each year till the third year.

If the interest rate is 30%:

We want to know: OUTCOME: Cash flows: 1st year = 100,000; 2nd year = 108,000; 3rd year = 116,640; NPV = -6,081 SOLUTION 2.09

1. The cash flows

2. The NPV

3. Is this investment interesting?

SOLUTION 2.01(b).- REVIEW 2.01

PROYECT

INITIAL OUTLAY

NET CASH FLOW 1st YEAR

NET CASH FLOW 2nd YEAR

NET CASH FLOW 3rd YEAR

A

12,250

4,530

5,050

6,300

B

12,250

7,050

3,020

1,580

C

12,250

25,300

15,700

23,500

D

12,250

11,750

9,500

7,050

E

12,250

-3,000

20,500

-1,000

F

12,250

0

0

15,000

Proyect A.-

12 m ------- 6,300

x m -------- 2,670

x = 2,670 x 12 : 6,300 = 5.09 m

1 m ---------- 30 d

0.09 m ---------- x d

x = 0.09 x 30 : 1 = 2.7 d = 3 d

PBA = 2 y, 5 m y 3 d

Proyect B.-

This project isn’t recovered

Proyect C.-

12 m ------- 25,300

x m ------- 12,250

x = 12,250 x 12 : 25,300 = 5.81 m

1 m ------- 30 d

0.81 m ------- x d

x = 0.81 x 30 : 1 = 24.3 d = 24 d

PBB = 5 m and 24 d

Proyect D.-

12 m ------- 9,500

x m ------- 500

x = 500 x 12 : 9,500 = 0.63 m

1.00 m ------- 30 d

0.63 m ------- x d

x = 0.63 x 30 : 1 = 18.9 d = 19 d

PBD = 1 y and 19 d

Proyect E.-

12 m ------- 20,500

x m ------- 15,250

x = 15,250 x 12 : 20,500 = 8.93 m

1 m ------- 30 d

0.93 m ------- x d

x = 0.93 x 30 = 27.9 d = 28 d

PBE = 1 y, 8 m and 28 d

Project F.-

15,000 --------------------- 12 m

12,250 -------------------- x m

x = (12,250 x 12) : 15,000 = 9.8 m

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

0.80 m ---------------------- x d

x = (0.8 x 30) : 1 = 24 d

PBF = 2 y, 9 m and 24 d

According to this criteria, the order form the best one to worst one would be: C – D – E – A – F - B

SOLUTION 2.02(b).- REVIEW 2.02

Raw material rotation = 18,000 : 1,100 = 16.36

Raw material conversion period = 365 : 16.36 = 22.31 d

Goods in process rotation = 15,300 : 700 = 21.86

Goods in process conversion period = 365 : 21.86 = 16.70 d

Finished goods rotation = 20,500 : 800 = 25.63

Finished goods conversion period = 365 : 25.63 = 14.24 d

Payment from customers rotation = 30,700 : 3,000 = 10.23

Receivables conversion period = 365 : 10.23 = 35.68 d

CCC = 22.31 + 16.70 + 14.24 + 35.68 = 88.93 d = 89 d

SOLUTION 2.03(b).- REVIEW 2.03

NV = 3,000,000 : 375,000 = 8€

MV = 8 x 1.5 = 12€

TV = 2 : 0.05 = 40€

SOLUTION 2.04(b).- REVIEW 2.04

5 m ------- 200,000

12 m ------- x

X = 12 x 200,000 : 5 = 480,000€

SOLUTION 2.05(b).- REVIEW 2.05

NV = 1,000,000 : 400,000 = 2.5€

TV = (1,000,000 + 200,000) : 400,000 = 3€

DIV = 300,000 : 400,000 = 0.75€

Net worth = 1,000,000 + 200,000 = 1,200,000€

SOLUTION 2.06(b).- REVIEW 2.06

Share capital = 50,000 x 3.75 = 187,500€

The shares quote over par

TV = (187,500 + 40,000) : 50,000 = 4.55€

SOLUTION 2.07(b).- REVIEW 2.07

Initial outlay

Cash flows 1st year

Cash flows 2nd year

Cash flows 3rd year

Cash flows 4th year

60.000

+6,000

+20,000

+30,000

+15,000

+10,000

-2,000

-3,000

-1,500

-1,000

-4,500

-6,750

-3,375

-3,750

TOTALS

13,500

20,250

10,125

11,250

Profit 1st year = 20,000 – 2,000 = 18,000

Profit 2nd year = 30,000 – 3,000 = 27,000

Profit 3rd year = 15,000 – 1,500 = 13,500

Profit 4th year = 6,000 + 10,000 – 1,000 = 15,000

Taxes 1st year = 18,000 x 0.25 = 4,500

Taxes 2nd year = 27,000 x 0.25 = 6,750

Taxes 3rd year = 13,500 x 0.25 = 3,375

Taxes 4th year = 15,000 x 0.25 = 3,750

NPV = -60,000 + 13,500 : 1.75 + 20,250 : 1.752 + 10,125 : 1.753 + 11,250 : 1.754 = - 42,584.76€

This project isn’t interesting because we are lossing money

SOLUTION 2.08(b).-

NPV = - 100 + (80 : 1.5) + (20 : 1.53) = - 100 + 53.33 + 5.93 = - 40.74 m.u.

This investment isn’t interesting because we are losing money

SOLUTION 2.09.-

A.-

Cash flow 1st year = 100,000 €

Cash flow 2nd year = 100,000 x 1.08 = 108,000 €

Cash flow 3rd year = 100,000 x 1.082 = 116,640 €

b.-

NPV = -200,000 + (100,000 : 1.3) + (108,000 : 1.32) + (116,640 : 1.33) = -6,081

c.-

This investment isn't interesting because we are losing money