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Course Data

Student data

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Final work

Below is attached the final work that you must complete correctly to obtain the
accreditation title for the course you are taking.
Remember that the team of tutors is at your complete disposal for any questions
you may have throughout its development, do not send the entire work until you
have finished it. Said submission will be made in this template and the
responses must be written after the statement.
The presentation of practical cases must meet the following requirements:

• Arial letter 12
• Margins of 2.5
• 1.5 line spacing
• Student data
• Shipping address specified on the cover
• Have correct pagination

The cases submitted must be original and individual. Any similarity between
exercises by different students, examples and/or extracts from the Internet or
other documents will lead to the immediate return of the exercises and the
failure to obtain the degree in the case of repetition. Remember that you will only
be able to submit the final work up to two times per subject. If these attempts are
not passed, the student must pay the price corresponding to the credits of the
subject in order to be evaluated again.

The works will only be accepted in word processor format (Word, docx, odt, etc.)
or in pdf. If another format is presented, it must be consulted with the advisor
and, if necessary, provide the necessary software for its reading.

The file that will be sent with the work must have the following format:

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Block name_Surname_First name_dateddmmay.pdf
Example:
Business Strategy_García_Elena_22042016

The length of the work may not exceed 18 pages, not counting the cover,
bibliography and annexes.

Evaluation criteria

The final Project Financing work will be evaluated based on the following
variables:

• Knowledge acquired (25%) : The knowledge acquired throughout

the subject will be evaluated through the analysis of the theoretical
data present throughout the work presented by the student.

• Development of the statement (25%) : The student's interpretation

of the statement and its development in a coherent and analytical
manner will be evaluated.

• Final result (25%) : The final result of the statement will be evaluated,
whether the entire text provides a correct solution to what was initially
proposed and whether the format and presentation falls within the
established parameters.

• Added value and complementary bibliography (25%) : The

complementary contributions by the student for the presentation and
conclusion of the final work that give added value to the presentation
of the statement will be evaluated: complementary bibliography,
graphics, independent studies carried out by the student. student,
external academic sources, opinion articles, etc. All sources, both
printed and online material, must be attached to the work following
APA regulations.

STATEMENT
Consider the following two investment projects:

Project A : has an initial cost of 20,000 euros and requires additional

investments of 5,000 euros at the end of the first year and 15,000 euros at the

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end of the second. This project is two years old and generates 20,000 euros of
annual income.

Project B : has an initial cost of 20,000 euros and requires an additional

investment of 10,000 euros at the end of the first year. This project has one year
of life and generates 32,000 euros of income at the end of the project.

If we consider an interest rate of 5%, the NPV of these projects has the following
values:

Project A: NPV = -1,179.15 euros

Project B: NPV = 952.38

In relation to the value of the IRR:

Project A: IRR = 0%

Project B: IRR = 10%

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REQUESTED

1. Starting from the value of the NPV, calculated with a market interest rate
of 5%, which of the two projects is the most recommended?

The NPV or Net Present Value is what in finance matters allows us to

know the status of collections and payments of an investment that has
been carried out. Therefore, it is a tool that acts as an indicator when
determining whether said investment or project is viable.

If there are several investment options, the NPV also serves to determine
which of the projects is most profitable. It is also very useful to define the
best option within the same project, considering different projections of
income and expense flows. Likewise, this indicator allows us, when
selling a project or business, to determine if the price offered is above or
below what would be earned if it were not sold.

The best-known NPV formula is Updated Net Profit (BNA) – Investment.

BNA is understood as the current value of the cash flow that is updated
using a discount rate, that is, what would be obtained from the sale in the
future by correcting said amount by a discount rate that updates it to the
present. When performing this formula, three possible results can be
given:

NPV < 0 . The project is not profitable since the investment that has been
made in it is greater than the income that would be obtained from the
sale.
NPV = 0 . The project is considered profitable since the BNA is equal to
the investment made.
NPV > 0 . The project is profitable and will also generate profits from its
sale.

One of the strong points of the NPV is the homogenization of the points
to be compared, since it updates all the amounts to the present, making

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their comparison simple over time. That is why it is one of the most used
methods financially speaking.

In this case we are presented with two (2) projects to select the most
recommended. When observing the results of the NPV indicators, we
have:

Project A: NPV = -1,179.15 euros

Project A has an NPV < 0 , this means that the project is not
recommended, since the investment to be made is greater than the
income that will be obtained, that is, it will generate losses, so it must be
rejected.

Project B: NPV = 952.38

Project B has an NPV > 0 , this means that the project is recommended,
since it will generate benefits.

So, due to the results of the NPV indicator in both projects, the most
recommended is Project B.

2. Justify the previous answer by naming and explaining the reasons and
causes that cause one project to be more profitable than another.

✓ Project B has a NPV indicator > 0 , with this result, we determine

that this option is profitable unlike Project A, which has a NPV < 0 .

✓ Project B has an initial cost of 20,000 euros like Project A, the

difference occurs in the additional investments required, since
Project A requires a greater additional investment (20,000)
compared to Project B (10,000).

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✓ Project B (1 year) has a shorter duration than Project A (2 years),
which means that the profits and return on investments will be
obtained in less time with Project B.

✓ Project B will generate profits, while Project A will generate

losses.

3. Considering the values in relation to the IRR of each of the projects, are
the two projects executable? Justify your answer.

We live in a changing world, which is experiencing political, social and

economic changes that markets can hardly anticipate. In this context,
people have a great challenge when deciding where to invest our money.
There are many investment formulas, such as fund series, but
businesses will always be a very attractive alternative, and the IRR is
very useful to evaluate this type of investment.

The Internal Rate of Return or IRR allows us to know if it is viable to

invest in a certain business, considering other lower risk investment
options. The IRR is a percentage that measures the viability of a project
or company, determining the profitability of the updated collections and
payments generated by an investment.

The IRR is a very important tool for making the decision to carry out a
new project, since it allows you to weigh other profitability options with
lower risk and determine whether the project is viable or not. It is
important to consider it as another tool within other existing means of
evaluating a project, since by itself it can lose sight of other aspects that
generate value to the project.

By generating a quantitative value that can be compared with other

profitability options, it is a very useful assessment in times like this, where
market changes force us to constantly review our investments.

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The proposed projects have the following indicators:

Project A: IRR = 0%

In Project A the IRR < k , that is, it is recommended to reject the project,
since the minimum profitability that we ask for on the investment is not
being achieved.

Project B: IRR = 10%

In Project B the IRR>k , that is, it is recommended to accept the

investment project. Because the internal rate of return that we will obtain
will be higher than the minimum rate of profitability required by the
investment.

Based on the previous approaches, we can say that only Project B is

executable, since the IRR is higher than the interest rate (10% > 5%). On
the other hand, project A is not executable, since it is lower than the
interest rate (0% < 5%).

4. Assuming that both projects are executable, which of the two is more
recommended? Justify your answer.

As indicated in the previous point, only Project B is executable, and

therefore the most recommended among both alternatives, because the
NPV is positive, the IRR is higher than the interest rate and the payback
is less than two years ( duration Project A).

5. Suppose that we are going to make an investment in machinery whose

cost is 90,000 euros and we plan to obtain a profitability of 20%, that is,
we will obtain a profit of 18,000 euros. For the financing of this project,
two scenarios are proposed (in both cases we understand that all the
benefit obtained is liquidity):

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a. Own financing 70% - External financing 30%. Total cost of external
financing: 1,755 euros. Profits Tax 25%.
b. Own financing 20% - External financing 80%. Total cost of external
financing: 3,960 euros. Profits Tax 25%.

5.1 Based on the information provided and considering said operation in

isolation, it analyzes which of these two project financing options is more
interesting from the point of view of the profitability of the partners and the
debt ratio.

We will calculate the variables in each scenario, to evaluate which of the

two options is the most recommended.

Net profit

It is the amount of money that a company can have after having met its
obligations in the form of taxes or expenses.

In the scenarios proposed in the statement, the net benefit is the

following:

Scenario 1.

Net Profit → €11,745

Scenario 2.

Net Profit → €9,540

Own funds

As indicated in the statement, there are two financing alternatives with

own and external resources, being the following:

Scenario 1.

% €

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Own Financing 70% 63.000 €
Foreign financing 30% 27.000 €

Scenario 2.

% €
Own Financing 20% 18.000 €
Foreign financing 80% 72.000 €

Debt Ratio

The Debt Ratio measures financial leverage, that is, the proportion of
debt that a company supports compared to its own resources. This
coefficient is calculated taking into account all the debts that the company
has contracted, both in the short and long term, dividing it by the total
liabilities (net equity plus current and non-current liabilities – which is also
usually called equity capital) and multiplying it by 100 to obtain the
percentage. Debt measures, so to speak, the company's dependence on
third parties, so the debt ratio specifies the degree to which the company
is financially dependent on banking entities, shareholders or even other
companies.

Scenario 1.

% Debt = 46%

Scenario 2.

% Debt = 422%

Analyzing the indicators in each scenario, the most recommended

scenario is Scenario 1 , because the debt ratio is ideal, since it offers
greater protection against a possible insolvency of the company.

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5.2 After choosing one of the options, explain what specific types of
financing you would use. Give examples.

When seeking to obtain the machinery that is needed, it is useful to take

into account financing as a source to obtain the resources.

There are different types of financing that are at our disposal and that
could be of great help when looking to make an investment in machinery
and equipment. Within these types of financing we have:

Loan

A loan is the financial operation in which one entity or person (the lender)
delivers another (the borrower) a fixed amount of money at the beginning
of the operation, with the condition that the borrower returns that amount
along with the interest agreed upon in a certain period. The amortization
(repayment) of the loan is normally made through regular installments
(monthly, quarterly, semi-annual...) over that period. Therefore, the
operation has a previously determined life. Interest is charged on the total
amount of money borrowed.

Loans are usually granted to finance the acquisition of a specific good or

service. In our case study, it is necessary to acquire machinery, so a loan
is a type of financing that has the following advantages:

1. It is a non-current asset for the company, which will generate benefits

during its useful life.
2. The loan funds will be available at once for the property to be
acquired.
3. Predicting the payments to be made is relatively simple, due to their
amortization through periodic installments.
4. It allows you to know at all times the outstanding debt that is
maintained with the bank.

In the proposed case study, the shareholders must present the necessary
documentation to the banking entity, so that it can carry out the respective
credit analysis, and draft the contract between both parties. After being

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approved, the borrower (company) and lender (financial entity) will sign
the documents establishing clauses, which must be complied with by the
borrower. At this point, the installment plan to be paid to the entity has
already been agreed upon.

Leasing

Leasing is a financing tool that allows technological renewal without going

into debt. It is a rental with option to purchase goods and equipment.

It is a means of medium and long-term financing (normally 5 years) that is

carried out between the “lending” company (bank or company) and the
“taking” company (interested in acquiring a machine). The provider buys
the machine and rents it to the borrower. The rental contract stipulates
the term and amount of leasing installments.

From the point of view of small and medium-sized companies, it is

confirmed that this operation has become the most appropriate tool to
expand production capacity, because it is more accessible to them than
conventional credit.

Once the lease term has expired, you can choose between:

✓ acquire the asset, paying a final “residual value” installment.

✓ renew the leasing contract for another machine, which avoids
equipment obsolescence.
✓ not exercising the purchase option, delivering the property to the
lessor.

This option has the following advantages:

✓ It incorporates assets without acquiring them, therefore it does not

affect the company's capital.
✓ Financing 100% of the value of the property.
✓ With the payment of the first installment (fee) the use of the machine
is available.
✓ The machine is not counted as a company asset until the purchase
option is made, which reduces the tax base for calculating the minimum

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presumed income tax.
✓ The payment of VAT is financed: it is paid with each installment and
not in full as in the case of the purchase.
✓ Since you are paying rent (it is counted as a loss), the amount for
calculating income tax is reduced.
✓ More than 90% of the value of the machine is amortized accelerated
and after exercising the purchase option, the residual value is amortized.
✓ Leasing fees are paid with funds generated by the operation of the
same machine that is being rented.
✓ The first fee is paid only when the delivery of the property is
completed.

✓ It does not affect the company's credit limits in the banking system
because there is no debt.

In our example, if the company decides to acquire the machinery but

considers the option of renting it for a while and depending on how things
go, decide if it is worth buying it.

In this case, the financial institution offers to buy the machinery and allow
the company to use it for a period of time. In exchange, the company
must pay a lease (which includes amortization and interest). When the
agreed period ends, the company will be able to decide if it wants to buy
the machinery (paying a cost), renew the leasing contract or return it
permanently.

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BIBILIOGRAPHY

Net present value (NPV).[Link]

[Link]

GO. [Link]

Basics financial: he worth current net (GO).

[Link]
el-valor-actual-neto-van/

VAN: what it is and what it is for. [Link]

es-y-para-que-sirve/

What is the IRR and what is it

for?[Link]

Internal Rate of Return (IRR): definition, calculation and examples.

[Link]
retorno-tir-definicion-calculo-ejemplos

Net profit. [Link]

School financial: he ratio of indebtedness.

[Link]

Advantages and drawbacks of a loan banking.

[Link]

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