SOLVED PROBLEMS

CHAPTER #5
THEME: CASH FLOW

Problem #1:
A machine has an initial cost of $1,100 and a useful life of 6 years, after which...
its salvage value is $100 The operating and maintenance costs are
from $30 a year and it is expected that the income from the use of the machine
they rise to $300 per year. What is the IRR of this investment project?

DATA:
Ci = 1100
n = 6 years
Vs = 100
Cop = 30 $us/year
Ingresos = 300 $us/año
TIR = ?

Problem #2:
Consider the two following investment plans:
Plan A has an initial cost of $25,000 and requires additional investments of $5,000 at the end.
from the third month and $8000 at the end of the seventh month. This plan has a duration of 12 months and
produce $10,000 monthly in profits from the first month.
Plan B has an initial cost of $20,000 and requires an additional investment of $10,000 at the end.
from the eighth month. During its 12 months of life, this plan produces $8000 monthly from
income, $ 12000 at the end of the project. Assuming a monthly TREMA of 3%
determine which of the two plans is more convenient.

SOLUTION
 Plan A: Plan B:
Ci = 25000 $us Ci = 20000 $US
Inv3 = 5000 $us Inv8 = 10000 $us
Inv7 = 8000 $us n = 12 meses
n = 12 months Ing = 8000 USD/month
Ing = 10000 $us/month Ing12 = 12000 $us.

TREMA = 3 % mensual
VAN = ?
TIR = ?

VAN = 63459.6 ==> TIR = 34.65%

VAN = 54543 ==> TIR = 37.86%

I CHOOSE PLAN B, BIG THROW!

PROPOSED PROBLEMS
CHAPTER #5
THEME: CASH FLOW

Problem #1:
A project produces 10,000 units at 100% capacity. The first two years (0 and 1)
It has the following budgeted cash flow:
a) You, as a Project Evaluator, must estimate the Project Size for year 1 of
in such a way that it ensures that the net cash flow is zero

b) Cual seria el Punto de Equilibrio en porcentajes, unidades y pesos

RESOLVED CASES
CHAPTER #5
THEME: CASH FLOW

Caso # 1:
When analyzing a project, it has been found that the IRR is equal to 12%. The
Estimated income and expenses are given in the table. Calculate the NPV, the IRR, and the B/C ratio.
decide whether to invest or not through an analysis of these three indicators.

Solution:

PROJECT A

VAN= 23740.66 > 0

TIR
 i = 32.08% > 12%

B / C= 83263.54 / 59522.87

B / C = 1.3988 > 1PROFITABLE PROJECT

PROJECT B

VAN= -1318.12 < 0

TIR
i = 10.31% <12%

B / C = 10213.68 / 51985.99

B / C = 0.196469 < 1 NON-PROFITABLE PROJECT

PROJECT C

VAN= 2269.25 > 0

TIR
i = 8.82% < 12%

B / C = 61281.19 / 59011.94

B / C = 1.038454 > 1 IT SHOULD NOT BE INVESTED ACCORDING TO THE 'IRR' INDICATOR

Case # 2:
Pig Rearing Project:
The cooperative 'Hoynil Ltda.' wants to make the decision to invest in a breeding project.
de cerdos, donde la planificación de ejecución del proyecto, que se realiza el año cero, tiene
the following schedule:

To achieve the appropriate financing, it is proposed that all deferred assets will be
financed by the Cooperative, while the remaining will have a structure of 20% of
own contribution and 80% credit, where the credit conditions are for a term of five
years, 1 grace period and an interest of 5% semiannually. The disbursements of the credit for the
fixed investments will be provided in the fourth month of the start of construction, just to begin the
project operations. The following investments are anticipated:
Land $15000, Civil Works $9000, Machinery and Movable Assets $17500. the cost of
the study amounts to $1000.
The planned production program is 80% in the first year of production and 100% in the following ones.
remaining years. According to the production projection, it is expected that they will produce 19
ton/year at 100% production; the price of the kilogram of pork, delivered for sale is
$1.5. Three years after operations, income from the sale of stallions is expected.
equivalent to $5000.
The annual operating costs of the project are distributed as follows:
Sueldos y Salarios $4500, Alimento balanceado $4000; materiales $350, Gastos Generales
$250, Advertising and Propaganda $200; Transportation $300; and unforeseen events 5%. The months of
Estimated coverage is given by: accounts receivable 1 month, all of them deducted from
operating costs. With this information, prepare:

a) The Statement of Financial Performance, to analyze Liquidity.

b) The Net Cash Flow table and calculate NPV, IRR and B/C ratio
c) The Recovery Period
What would you recommend to the Hoynil cooperative after its evaluation?

Solution

FIXED ASSET

Land: 15000
Civil Works: 9000
Machinery: 17500
TOTAL : 41500

DEFERRED ASSET600

OPERATION COSTS

CALCULATION OF WORKING CAPITAL (K.T.):

FINANCING STRUCTURE :

41500 x 0.8 = 33200

1 year of Grace
5% Semester

a) INCOME STATEMENT

FLOW OF SOURCES AND USES :

NET FLOW
With t = 15%
NET PRESENT VALUE NPV =

PROPOSED CASES
CHAPTER #5
TOPIC: CASH FLOW

Case # 1:
In the feasibility study of a new project, it is estimated that it is possible to sell 30 tons.
annual sales of a product at $1000 per ton during the first two years and at $1200 thereafter
from the third year, when the product has consolidated in the market. The projection of
Sales show that starting from the sixth year, these increased by 40%. The technical study
define an optimal technology for the project that will require the following investments for
the volume of 30,000 tons.

However, the growth of production to meet the increase in sales,

I would again require the investment in machinery and carry out physical works worth $
40,000. The manufacturing costs for a volume of up to 40,000 tons are: Labor
Obra $150; Materiales $200 y Costos Indirectos $80.
At this level, it is possible to achieve volume discounts on the purchase of materials.
equivalent to 10%. The fixed manufacturing costs are estimated at $5,000, not including
depreciation. The expansion of capacity by 40% will cause these costs to
increase by $1,500.00. The variable sales expenses correspond to a commission of
3% on sales, while the fixed costs amount to $1,500,000 annually. The increase
sales will not vary that amount. Administrative expenses would reach $1,200,000
annual for the first five years and $1,500,000 when the level of operation increases.

Current legislation allows for the depreciation of assets as follows: Physical Works 2%
annual, Machinery 10% annual and nominal assets at 20% annual. The setup costs of
march amount to $22,000,000, which includes the study cost that amounts to
$8,000,000. The investment in working capital is estimated to be equivalent to 6 months of
total disbursable cost. After 10 years, it is estimated that the physical infrastructure (with
the land will have a commercial value of $100,000,000. The machinery will have a value of
market of $28,000,000 The income tax rate is 15% a) build the
Cash flow that measures the profitability of the project b) if it is assumed that 60% of the
The initial investment will be financed with a loan over eight years at an 8% annual interest. What?
What will be the cash flow from the investor's perspective?

Case # 2:
A project will be evaluated over a time horizon of 5 years, where year 0 is
considered as the construction period. The investments for this study in $us. are
given by:

The proposed financing structure for an evaluation from the point of view of
the investor is 80% allocated to credit and the rest considered as own contribution in the
SAC system with a semi-annual interest rate of 6% with a grace period of one year and for one period
of 5 years. The opportunity cost of equity capital is 4.5% semiannually. The investment in
Working capital will be estimated as 25% of the total operating costs.
The production capacity at 100% is 5000 units developed for years 4 and 5 of
evaluation horizon. It is known that the effective demand for the project has had a
5% annual growth until stabilizing at its nominal capacity. The price of the product.
For the first year of operation, it is $10 per unit, increasing at a rate of 5%.
annually. The variable unit costs are $3 per unit and the fixed costs amount to $2500
per semester. The taxes have a rate of 15%.

Determine:

a. What will be the production schedule of the project?

b. The net operational flow of the project, the three indicators, with their
corresponding interpretations.
c. For years 2 and 3 of the project's operation, determine the optimal size that
it can ensure that the net operating flow is zero.
d. Conduct a sensitivity analysis for a 5% increase in costs,
for a price distribution of 5%, for the combined case
(5% decrease in prices and 5% increase in costs).

Case # 3:
A project will be built during the year 2000 and will have an evaluation horizon.
defined until the year 2005. the production program is estimated at 50% for the first year
of operation, 75% for the second year of operation and 100% for the remaining ones. The
The required investments for this study are: Land $100,000 executed in the year 2000;
Obras civiles $25000 ejecutadas el año 2000 y $25000 el año 2003, Maquinaria y Equipo
$15000 ejecutadas el año 2000 y el año 2003.

The capital expenses prior to the operation incurred throughout the construction year,
They are $20,000 of which $2,000 corresponds to the feasibility study conducted. The costs
fixed costs are around $5000 and were estimated on a quarterly basis; the variable cost
The unit price is $80 per unit. The nominal capacity of the project was estimated at 600.
units at 100% operation and the revenue equation is given by: Y = 200 * T,
where t is the size of the project. For the calculation of working capital, a criterion is estimated.
equivalent to taking 20% of the total variable costs.

The financing structure states that 80% of the Fixed Capital will be financed by a
institution whose credit conditions are: Term equal to 5 years payable from
2001; semiannual interest rate of 8%, PRICE system. Physical works depreciate at 40.
years, the machinery for 10 years, the deferred assets for 5 years. The tax rate at the
The utilities are 15%

Using the IRR criterion, what can be concluded about the project from that perspective?
from the investor? What additional considerations could be made regarding the
results found?