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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

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

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

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: 20 February, 2013 (Not later than 5.50 pm)