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hi sir,
can you help me with the below:
a project have required investment of 25 000 and is expected to get a inflow of 8000 a year for 5 years.
cost of capital is 10%
what is the sensitivity change of the cash inflow for each month?
The present value of the inflows is 30328.
The NPV is 30328 – 25000 = 5328
So the sensitivity of the flow is 5328/30328 = -17.58% (negative, because we are only worried if the inflows fall).
Hi John would you be able to help me with following:
1) A company has sales of $200m per year. Receivable days are currently 40 days. Company are considering offering a 1% discount for payment within 15 days. 60% of customers are expected to take advantage of the discount. What is the effective annual cost of the discount? Answer: 15.8%….I have seen your working for this but keep on getting a different answer even when I am using brackets.
2) A company are considering investing in a new project which will cost $160,000 and have an expected life of 4 years and expected scrap value of $20,000. Anticipated net operating cash flows each year will be:
Year 1: $40,000
Year 2: $60,000
Year 3: $80,000
Year 4: $20,000The cost of capital is 10%. What is the ARR? Answer: 16.67%
3) A company has 3 projects with the following initial costs and NPV’s
Project A: $20,000 NPV: $2,000
Project B: $30,000 NPV $2,400
Project C: $10,000 NPV $1,200Capital available for investment is $40,000. Projects are divisible. What is the max NPV? Answer: $4,000
4) A company has just paid a dividend of $0.23/share. Shareholders are expecting the dividend to remain at $0.23/share next year but to increase at an average rate of 3% per annum there after. Shareholders required return is 12% and the rate of corporation tax is 25%. What will be the current market value per share? Answer $2.56
Many Thanks,
David
Question 1:
I guess you are then happy with it being (1.0101) ^ (365/25) – 1
The problem is that different calculators need the kets pressing in a different order.
All I can suggest is that you calculate 365/25 = 14.6Then calculate (1.0101)^(365/25) – 1, and you should get 0.158 (or 15.8%)
Question 2:
Total cash received = 40000+60000+80000+20000 = 200000
Total depreciation = 160000 – 20000 = 140000
So total profit = 200000 – 140000 = 60000
So average annual profit = 60000/4 = 15000Average investment = (160000+20000) / 2 = 90000
So ARR = 15000/90000 = 16.67%
Question 3:
NPV per $ invested for A = 2000/20000 = 0.10; for B = 2400/30000 = 0.08; for C = 1200/10000 = 0.12.
So C is best, A is second best, and B is third best.So invest in all of C. This uses 10,000 and gives NPV of 1200.
There is 30,000 left, so invest in all of A. This uses 20,000 and gives NPV of 2000.
There is 10,000 left, so invest in 1/3 of B. This gives NPV of 800.So total NPV = 1200 + 2000 + 800 = 4000
Question 4:
Use the dividend growth formula and this gives (0.23(1.03)) / (0.12 – 0.03) = $2.63
This would be the MV if the dividend started growing immediately. However because it starts in 1 year it gives the value in 1 years time.
In addition there is a dividend of 0.23 in 1 year.
So total in 1 year is 2.86. To get the MV now, discount it for 1 year at 12%3. From a project under consideration a cash inflow of 100m, 300m, 300m and 500m are expected annually for the next 4 years. To undertake it, one would have to invest 400m today and then 50 million in each of the next three years. Depreciation of the initial investment is on straight line basis. Your tax rate is 35%. Will you undertake this project?
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