Problem 12-1: Net Present Value (NPV) and Internal Rate of Return
A firm is considering a major expansion that will cost SAR 22,000,000.
Annual cash flows from the project are expected to be SAR 4,000,000 for 10 years.
The firm uses a discount rate of 12%.
Calculate the Net Present Value (NPV) and the Internal Rate of Return of the project and determine if the project is acceptable based on NPV and IRR decision criteria.
Data
Discount Rate 12%
Initial outlay 22000000
Cash Flow 1 4000000
Cash Flow 2 4000000
Cash Flow 3 4000000
Cash Flow 4 4000000
Cash Flow 5 4000000
Cash Flow 6 4000000
Cash Flow 7 4000000
Cash Flow 8 4000000
Cash Flow 9 4000000
Cash Flow 10 4000000
Data
Initial outlay -22000000
Cash Flow 1 4000000
Cash Flow 2 4000000
Cash Flow 3 4000000
Cash Flow 4 4000000
Cash Flow 5 4000000
Cash Flow 6 4000000
Cash Flow 7 4000000
Cash Flow 8 4000000
Cash Flow 9 4000000
Cash Flow 10 4000000
Problem 12-2: Profitability Index (PI) and Payback Period
A firm is considering a major expansion that will cost SAR 15,000,000.
Annual cash flows from the project are expected to be SAR 3,975,000 for 7 years.
The firm uses a discount rate of 8%. It accepts the project if the project’s payback is less than 6 years.
Calculate the Profitability Index (PI) and the Payback Period of the project and determine if the project is acceptable based on PI and the Payback Period decision criteria.
Data
Discount Rate 7%
Initial outlay 18500000
Cash Flow 1 3500000
Cash Flow 2 3500000
Cash Flow 3 3500000
Cash Flow 4 3500000
Cash Flow 5 3500000
Cash Flow 6 3500000
Cash Flow 7 3500000
Cash Flow 8 3500000
Cash Flow 9 3500000
Problem 12-3: Uneven cash flows
A firm is considering the two following projects with amounts in SAR.
(a) Calculate the NPV for each project assuming a discount rate of 8%.
(b) Explain which project is better and why.
|
Data |
||
|
Project A |
Project B |
|
|
Rate |
8% |
8% |
|
Cash outflow: |
-42,000,000 |
-42,000,000 |
|
Cash Inflows: |
7,000,000 |
23,000,000 |
|
9,000,000 |
18,000,000 |
|
|
18,000,000 |
9,000,000 |
|
|
22,000,000 |
6,000,000 |
|
Problem 12-4: Calculating the free cash flows
A firm is introducing a new product and expected change in net operating income of SAR 15000,000. Its corporate tax is 23%. The project will also produce SAR 4,000,000 depreciation per year. In addition, this cause the following changes:
|
Data |
||
|
Without Project |
With Project |
|
|
Accounts Receivable |
375,000 |
550,000 |
|
Inventory |
425,000 |
575,000 |
|
Accounts Payable |
650,000 |
825,000 |
|
Change in EBIT |
15,000,000 |
|
|
Tax rate |
23% |
|
|
Depreciation |
4,000,000 |
|
Problem 12-5 Calculating project cash flows and NPV
A firm is considering the product line currently consisting of scooters to include gas-powered scooters and it can sell 5,500 of these per year for 9 years; as the end of year 9, the project will be terminated. The gas-powered scooters would sell for SAR 2,500 each with variable cost of SAR 1,200 for each one produced, annual fixed cost associated with production would be SAR 2,350,000. In addition, that would be SAR 25,000,000 initial outlay for the purchase of new production equipment. It assumes the initial expenditure will be depreciated using the straight-line method over 9 years and no salvage value. This project requires a SAR1,500,000 in net working capital associated with inventory and the additional working capital investment will be recovered after the project is terminated. The firm’s corporate tax rate is 23%.
a) What is the initial outlay associated with this project?
b) What are the annual cash flows associated with this project for Years 1 through 8?
c) What is the terminal cash flow in Year 8?
|
DATA |
|
|
Cost of plant and equipment |
25,000,000 |
|
Change in Net Working Capital |
-1,500,000 |
|
Shipping and installation |
0 |
|
Tax rate |
23% |
|
Number of Years |
9 |
|
Required rate of return |
10.0% |
|
Sales Price per unit (yrs 1-9) |
2,500 |
|
Variable cost per unit |
1,200 |
|
Annual fixed cost |
2,350,000 |
|
Depreciation |
17,500,000 |
|
Unit Sold |
5,500 |
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