Dr.

SAAM

CF_Fall 2012

Assignment Problems of Cash Flow Determination Course: Corporate Financial (FIN 440) Problem # 1 The Apex Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. Corporate tax is 30%. (Cash flows are in tk. Thousands) 0 1 2 3 4 Investment 15,000 Sales Revenue 7000 7500 8000 6000 Operating cost 2000 2500 2800 2900 Depreciation 2500 2500 2500 2500 Net working 200 250 300 200 0 capital Sunk Cost Opportunity cost 100 50 50 50 50

Requirement: (a) Compute NPV of the new investment of the company and give your suggestion to the top management if the discount rate is 12%. (b) What would be your suggestion if the discount rate is 24%. (c) Calculate the payback period and discounted payback period of the project. (d) Calculate the profitability index of the project for discount rate 12% Problem # 2 Alpha Corporation has the opportunity to invest in a machine that costs $550,000. The revenue will be $ 250,000 and Expenses excluding depreciation will be $ 50,000 per year. Tax rate will be 20%. The company follows straight line depreciation method. Assume salvage value is zero. If the economic life of the machine is 10 years and the relevant discount rate is 10 %, what would be the NPV of the Investment? Problem # 3 Apex Corporation has the opportunity to invest in a project that requires $600,000 for equipment and initial installation cost $40,000 to implement the project. The revenue will be $ 300,000 and Expenses excluding depreciation will be $ 25,000 per year. Tax rate will be 30%. The initial cost and the installation cost will be depreciated using a straight line method. Assume salvage value is $ 40,000. If the

Dr. SAAM

CF_Fall 2012

economic life of the machine is 12 years and the relevant discount rate is 12 %, what would be the NPV of the Investment?

Problem # 4 IIB Corporation wants to start a new project of water refining Project that requires $500,000. The total cost of the project consists the cost of equipment $ 300,000. The revenue will be $ 200,000 and Expenses excluding depreciation will be $ 20,000 per year. Tax rate will be 20%. The company follows straight line depreciation method. Assume salvage value is zero. If the economic life of the machine is 6 years and the relevant discount rate is 10 %, should the IIB Corporation starts the project? Problem # 5 Dhaka Corporation is considering investing a machine to produce computer keyboards. The price of the machine will be tk. 400,000 and its economic life five years. The machine will be fully depreciated by the straight-line methods. The machine will produce 10,000 units of key boards each year. The price of the keyboard will be tk. 40 in the first year which will be increasing by 10% per year. The production cost per unit of the keyboard in the beginning year will be tk. 20 that will be increased by 5% in each year. The opportunity cost of the investment is tk. 5,000 per year, and sunk cost of the company is tk. 13,000.The corporate tax rate for the company is 30%. If the appropriate discount rate is 15%, what is the NPV of the investment? Problem # 6 (Scenario Analysis) Consider the following Cash Flows of Argentina Ltd. and calculate the expected NPV: Scenario 0 1 2 3 4 5 Pessimist 50,000 50,000 50,000 100,00 100,00 ic 500,00 0 0 0 Expected 150,00 150,00 250,00 250,00 350,00 500,00 0 0 0 0 0 0 Optimisti 250,00 250,00 350,00 350,00 400,00 c 500,00 0 0 0 0 0 0

6 150,00 0 400,00 0 450,00 0

Dr. SAAM

CF_Fall 2012

Assume that probabilities of pessimistic, expected and optimistic scenario are 25%, 50% and 25% respectively, and cost of capital (discount rate) is 12%. Problem # 7 (Cash Flow determination and Scenario Analysis) Bengal Corporation has an opportunity to invest in a project that requires $625,000 for equipment. The revenue will be $ 300,000 in the first year which will be increased by 10%. Expenses excluding depreciation will be $ 25,000 at the end of first year of the project (Year 1) will be increasing by 11% per annum respectively during the project life. The economic life of the machine is 6 years. The initial cost will be depreciated using a straight line method. Assume salvage value is $ 25,000, and the equipment can be sold for tk. 40,000 at the end of the project. The company needs to invest tk. 10,000 in the working capital which will be recovered at the end of the project. If the company tax rate will be 30%, and the relevant discount rate is 15 %, determine the expected cash flow stream and NPV of the proposed project? Assume that cash inflows in each year will be decreased by 30% for pessimistic scenario, increased by 40% in optimistic situation. If the probabilities of pessimistic, expected and optimistic scenario are 15%, 60% and 25% respectively, calculate the expected NPV of the project considering the 15% cost of capital. Problem # 8 (Sensitivity Analysis) Consider the information of problem #7 (a) If the government increases the tax rate from 30% to 40%, what will new cash flow, NPV of expected, pessimistic and optimistic scenario, and expected NPV. (b) If the government decreases the tax rate from 30% to 20%, what will new cash flow, NPV of expected, pessimistic and optimistic scenario, and expected NPV.
Problem # 9

The Apex Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. Corporate tax is 30%. (Cash flows are in tk. Thousands) 0 1 2 3 4 Investment 10,000 Sales Revenue 7000 8000 9000 7000 Operating cost 2000 2200 2400 2600 Depreciation 2500 2500 2500 2500 Sunk Cost 100

Dr. SAAM

CF_Fall 2012

Opportunity cost

50

50

50

50

Requirement: (a) Determine the cash flows of project for different years. (b)The company has taken tk. 4000 loan from AB Ltd. at the rate of 9% interest, and issued 600 shares with tk. 10 per share in DSE for financing the project. The average rate of return of DSE is 15% while interest rate for BD governments saving certificate is 6%. If the beta of the firm is 1.3, what is the cost of capital (WACC) of the project? (c) Calculate the NPV and evaluate the project based on the NPV. Instruction: Please attempt to solve these problems based on project evaluation concepts discussed in the class. Feel free to consult with me or the GA for any further clarification.
Last Date of Submission: 18 October, 2012 (Not later than 5.50 pm)