Question 1
You have been asked by the president of your company to evaluate the proposed acquisition of a new special purpose truck. The truck's basic price is Rs.50,000 and it will cost another Rs.10,000 to modify it for special use by your firm. The truck falls into MACRS three-year class and it will be sold after three years for Rs.20,000. Use of the truck will require an increase in net working capital (spare parts inventory) of Rs.2,000. The truck will have no effect on revenues. But it is expected to save the firm Rs.20,000 per year in before tax operating costs, mainly labor. The firm's marginal tax rate is 40%.
(a) What is the net investment in the truck? (That is, what is the Year 0 net cash flow?)
(b) What is operating cash flow in Year 1, 2 and 3?
(c) The truck's cost of capital is 10%. What is NPV?
(d) What is additional (non-operating) cash flow in Year 3?
Question 2
(a) Pak manufacturers are able to reduce average inventory levels to Rs.250 billion and average accounts receivable to Rs.300 billion.
At the same level of inventories, accounts receivable and accounts payable, Pak manufacturers can increase production and sales by 10%. What will be the effect on the cash conversion cycle?
(b) Suppose Pak manufacturers are able to reduce average inventory levels to Rs.250 billion and average accounts receivable to Rs.300 billion. By how many days will this reduce the cash conversion cycle?
Question 3
Given the following information, what is the required cash flows associated with the acquisition of a new machine that is in project analysis, what is the cash outflow at t = 0?
Purchase price of new machine Rs.8,000
Installation chare 2,000
Market value of old machine 2,000
Book value of old machine 1,000
Inventory decrease if new machine is installed 1,000
Accounts payable increase if new machine is installed 500
Tax rate 34%
Cost of capital 15%
Question 4
Calculate NPV of an investment project with the following characteristics:
Units sold per year 55,000
Price per unit Rs.800
Variable cost per unit Rs.720
Fixed cost 0
Initial cost Rs.20 million
List of project 10 years
Discount rate 10%
Depreciation straight line
Tax rate 34%
(a) Suppose an additional investment of Rs.5 million would reduce the variable cost per unit to Rs.700. figure NPV of this alternative.
(b) What is the break-even (NPV) number of units for the two alternatives?
Question 5
The Lucky star Mining Co. is considering reopening one of its old silver mines. New extraction techniques will allow the company to mine one year production of silver worth Rs.3 million in after-tax profit. However, in the second year of operation, the cost of returning the mine to the natural condition mandated by law will cost Rs.1 million. Opening and preparing the mine will cost rs.1 million in the present year. The cost of capital is 8%.
(a) What is the NPV of the reopened mine?
(b) What is the IRR?