Project Evaluation Cases

Cash Flow

Part 2 - Methodologies1. Consider a project with the following features:

Initial investment = 80 thousand euros;

Annual constant Cash Flows from year 1 (inclusively) onwards;

Project lifetime = 4 years;

Consider that the investors demand a minimum return of 12%; NPV = 72 thousand euros.

Compute the Discounted Payback Period (DPP) of the project to one decimal place. Comment on the acceptance or rejection of the project.Solution: 1.92. A project with only an initial investment in CAPEX of 100 thousand euros has a PI of 1.35.a)Compute its NPV;b)Its DPP is 2 years and the lifetime of the project, including the year of disinvestment, is 3 years. Knowing that the discounted Cash Flow in the first year of operating is 60 thousand euros, determine the remaining discounted Cash Flows of the project.Solution: a) 35

b) -100; 60; 40; 353. An investment project, besides the initial CAPEX, has three annual Cash Flows. Knowing that the value of the last Cash Flow is 100 thousand euros, that the DPP is 2.2 years and that the investors require a minimum return of 12%, determine the NPV for the project.Solution: 56.944. Consider an investment project with the following features:

Initial (and only) investment = 150 thousand euros; PI = 2.5;

Annual Cash Flows;

Lifetime = 2 years;

Value of Cash Flow 1 = 90 thousand euros;

Required minimum return = 5%.

Show the calculation formula for the IRR.Solution: Cf's: -150; 94.5; 314,215. Consider a project with an IRR of 12% and a minimum required return by shareholders of 5%. Knowing that the lifetime of the project is two years, that the Cash Flow of year 1 is 100 thousand euros, and that the initial investment is 300 thousand euros, determine:a)The value of the Cash Flow of year 2;b)The DPP.Solution: a) 264.32

b) 1.856. Consider a project with the following features:

Initial investment = 70 thousand euros;

Reinvestment in CAPEX on year 2 = 40 thousand euros;

Discounted value of Cash Flow 1 = 40 thousand euros;

Discounted value of Cash Flow 2 = 30 thousand euros;

Project lifetime = 3 years;

Consider that investors require a minimum rate of return of 7%;

Consider an IRR of 12%.

Compute the PI and comment on the acceptance or rejection of the project.

Solution: 1.057. A project has an initial investment of 1,000 thousand euros. Its Discounted Payback Period is exactly 3 years. On the 4th and 5th years its Cash Flows, already discounted, are respectively 200 thousand euros and 100 thousand euros. Is it possible to compute the NPV using only this information? Justify.8. A project has, after the year of investment, only two annual Cash Flows of 100 thousand euros each. It generates an IRR of 8%, 2 percentage points less than the minimum rate of return required by investors, reason why the project was rejected. Determine its NPV.Solution: -4.789. Comment/answer in a clear and concise manner the/to the following statements/questions:a)Determining the disinvestment in CAPEX and the Residual Value in Working Capital is irrelevant to the computation of the Discounted Payback Period;b)The assumption of the reinvestment of the Cash Flows, implicit on the IRR calculation, may lead to an undue acceptance of an investment project;c)In an investment project, what is the effect on the NPV from increasing simultaneously in one month the Receivables Average Term, the Payables Average Term and the Tax Payables Average Term (VAT)? Justify;d)An investment project has a NOPLAT of zero in every year. Consider a discount rate of zero. Is it still possible for the NPV to be positive? e)Consider that the disinvestment value of the CAPEX is equal to its Book Value. In this situation, is it indifferent to consider the disinvestment in the last year of activity or in the next one?f)In a project was chosen, for the calculation of the depreciation, the reducing-balance method (the value of the depreciation decreases every year) instead of the straight-line depreciation. What is the effect of this decision on the NPV of the project?g)Imagine a project without investment (CAPEX) and a positive EBIT in every year. Are these conditions enough to ensure a positive NPV? Justify;h)In an existing firm it is known the following information regarding an investment project for the launch of a new product: For the store it will be hired a new sales person with an annual cost of 8,000 euros. He will be busy with the promotion of this new product in only 70% of his time, having the remaining 30% available for another possible product;

It was performed some months ago a market test, with a cost of 10,000 euros, to 300 potential consumers for the choice of the final color for the product.

Regarding the described information, what is the total value that you would include in the projects evaluation? Explain briefly why;i)A project with a positive NPV very close to zero should be, to be cautious, rejected, in the case it was assessed on the evaluation process that it is a project with a very high risk;j)The DPP is one of the most used profitability indicators in the projects evaluation process, because it allows you to calculate, with no margin of error, the number of years required to equal the NPV to zero.