REVIEW OF THE PROBLEMS OF 3rd PART TOPIC 9 (b)
2.01 – 2.02 – 2.03 – 2.04 – 2.05 – 2.06 – 2.07 – 2.08 – 2.09 
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 
PB_{A} = See solution; PB_{B} = See solution; PB_{C} = x y, 5 m and 24 d; PB_{D} = See solution; PB_{E} = x y, 8 m and 28 d; PB_{F} = 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
The nominal value of the shares
The theoretical value of the shares
The distributed dividend per share
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
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 = 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
R_{0} = 100 m.u. F_{1} = 80 m.u. F_{3} = 20 m.u.
The interest rate is 50%; we want to know:
The net present value
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: 1^{st} year = 100,000; 2^{nd} year = 108,000; 3^{rd} year = 116,640; NPV = 6,081 SOLUTION 2.09
The cash flows
The NPV
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
PB_{A} = 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
PB_{B} = 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
PB_{D} = 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
PB_{E} = 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 : 1.75^{2} + 10,125 : 1.75^{3} + 11,250 : 1.75^{4} =  42,584.76€
This project isn’t interesting because we are lossing money
NPV =  100 + (80 : 1.5) + (20 : 1.5^{3}) =  100 + 53.33 + 5.93 =  40.74 m.u.
This investment isn’t interesting because we are losing money
A.
Cash flow 1^{st} year = 100,000 €
Cash flow 2^{nd} year = 100,000 x 1.08 = 108,000 €
Cash flow 3^{rd} year = 100,000 x 1.08^{2} = 116,640 €
b.
NPV = 200,000 + (100,000 : 1.3) + (108,000 : 1.3^{2}) + (116,640 : 1.3^{3}) = 6,081
c.
This investment isn't interesting because we are losing money