Examples Example A: … Price 2 Units 200000 Costs 1,5 Total Income Question: A widget manufacturer currently produces 200,000 units a year. It buys widget lids from an outside supplier at a price of $2 a lid. The plant manager believes that it would be cheaper to make these lids rather than buy them. Direct production costs are estimated to be only $1.50 a lid. The necessary machinery would cost $150,000. This investment could be written off for tax purposes using the seven-year tax depreciation schedule. The plant manager estimates that the operation would require additional working capital of $30,000 but argues that this sum can be ignored since it is recoverable at the end of the 10 years. If the company pays tax at a rate of 35 % and the opportunity cost of capital is 15 %, would you support the plant manager’s proposal? State clearly any additional assumptions that you need to make. in the foreseeable future-в недалечно бъдеще Price 2 Units 200000 Costs 1,5 Total Income 100000 Profit/Margin 0,5 Depreciations 21429

Examples Example B: … Question: A widget manufacturer currently produces 200,000 units a year. It buys widget lids from an outside supplier at a price of $2 a lid. The plant manager believes that it would be cheaper to make these lids rather than buy them. Direct production costs are estimated to be only $1.50 a lid. The necessary machinery would cost $150,000. This investment could be written off for tax purposes using the seven-year tax depreciation schedule. The plant manager estimates that the operation would require additional working capital of $30,000 but argues that this sum can be ignored since it is recoverable at the end of the 10 years. If the company pays tax at a rate of 35 % and the opportunity cost of capital is 15 %, would you support the plant manager’s proposal? State clearly any additional assumptions that you need to make.

Examples Answer: Example C: … Question: You can purchase a turbo powered machine tool gadget for $4,000. The investment will generate $2,000 and $4,000 in cash flows for two years, respectively. What is the IRR on this investment?

28.08 % Examples Answer: Example C: … Question: You can purchase a turbo powered machine tool gadget for $4,000. The investment will generate $2,000 and $4,000 in cash flows for two years, respectively. What is the IRR on this investment?

Examples Example D: … Company X is in the process of preparing a new investment project. Its realization is associated with the purchase of new equipment worth 1.8 million leva. Installation costs are 400 thousand leva, its transportation costs are 150 thousand leva and the costs of designing, permits, etc. amounted in total to 160 thousand leva. Putting into operation will lead to an increase in net working capital of 480 thousand leva, Due to installing the new equipment used equipment will be sold so far for 400 thousand leva with book value of the last 200 thousand leva. Corporate tax is 10%. The expected annual net cash flow from operation of the project is 840 thousand leva and the project duration is 5 years. A. Define the gross and net investment. B. Define whether the investment have to be made, using net present value if the required rate of return is 12%. C. Define the internal rate of return, modified internal rate of return and profitability index of the project.

Examples Example E: … Company Y is in the process of preparing a new investment project, the projected net amount of initial investment is 600 thousand Leva and duration of the project is 4 years. Estimates of the marketing department are for sales in the first year of 750 thousand Leva, each year they increased by 20% by the end of the project. Annual operating costs excluding depreciation amounted to 80% of revenue and are projected depreciation leva 120 thousand per year. At the end of the project are expected to frequent the proceeds of liquidation of fixed assets amounting to 110 thousand Leva and release of net working capital of 80 thousand Leva. Corporate tax rate is 10%. The coefficient beta of the company is 1.2, risk-free rate is 5.4% and market risk premium is 8%. A. Identify significant cash flows for project evaluation. B. Determine the net present value, internal rate of return, modified internal rate of return and profitability index of the project.