Discussion: Net present value criterion

1. Explain the reasons why the net present value criterion is the best way to evaluate proposed investments.
2. Discuss the relevant incremental cash flows for project evaluation.
3. Contrast the differences between a flexible short-term financing policy and a restrictive one. What are the pros and cons of each?
4. A company has sales of ¬46,200, costs of ¬23,100, depreciation expense of ¬2,200, and interest expense of ¬1,700. The tax rate is 22 percent. What is the operating cash flow (OCF)?
5. Two mutually exclusive projects have an initial cost of ¬47,500 each. Project A produces cash inflows of ¬25,300, ¬37,100, and ¬22,000 for Years 1 through 3, respectively. Project B produces cash inflows of ¬43,600, ¬19,800 and ¬10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why?
6. A project has an initial cost of ¬7,900 and cash inflows of ¬2,100, ¬3,140, ¬3,800, and ¬4,500 a year over the next four years, respectively. What is the payback period?
7. A company has beginning inventory of ¬11,062, accounts payable of ¬8,010, and accounts receivable of ¬7,844. The end of year values are ¬11,362 for inventory, ¬7,898 for accounts payable, and ¬8,029 for accounts receivable. Net sales are ¬109,100 and costs of goods sold are ¬56,220. How many days are in the cash cycle?
8. As of the beginning of the quarter, a company had a cash balance of ¬710. During the quarter, the company collected ¬1,860 from customers and paid suppliers ¬1,520. The company also paid a loan payment of ¬320 and a tax payment of ¬510. What is company’s cash balance at the end of the quarter?
9. A company is considering a new three-year expansion project that requires an initial fixed asset investment of ¬2,320,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate ¬1,735,000 in annual sales, with costs of ¬650,000. The tax rate is 21 percent and the required return on the project is 12 percent. What is the project’s NPV?
10. A company has sales of ¬19,700, net income of ¬3,517, fixed assets of ¬18,282, current liabilities of ¬2,940, current assets of ¬3,018, long-term debt of ¬7,600, and equity of ¬10,760. Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 50 percent dividend payout ratio. Next year’s sales are projected to increase by 7 percent. The firm is currently operating at full capacity. What is the amount of external financing needed?

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