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Tutorial 6 Complete Solution With Corrections

The document discusses a case study for a company called Simple Structures analyzing the cash flows and financial metrics of a potential project over multiple years. It provides sales projections, costs, contributions, tax calculations, and cash flow statements to determine the net present value and internal rate of return for the project.

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74 views

Tutorial 6 Complete Solution With Corrections

The document discusses a case study for a company called Simple Structures analyzing the cash flows and financial metrics of a potential project over multiple years. It provides sales projections, costs, contributions, tax calculations, and cash flow statements to determine the net present value and internal rate of return for the project.

Uploaded by

api-3708231
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Hey there,

Edited the solution where mistakes occurred but please


note that there was an error in the case study that I
couldn’t d edit. Please note that cash flow from
operations has been added twice they should appear as
follows:
1 2 3 4
Annual Net R 5 900 000 R 1 753 000 R 2 663 000 R 4 374 000
Cash Flow of
Project

Please alter the solution accordingly with regards to


NPV and IRR.

All mistakes corrected are highlighted in bold.

Good luck for your test tomorrow,

Doug.
FINANCE I: TUTORIAL 6 SOLUTION:
INVESTMENT DECISIONS & PROJECT ANALYSIS
HAND IN DATE: MONDAY 17TH SEPTEMBER 2007 (By 10h00 latest)
TUTORIAL QUESTIONS FOR SUBMISSION
Chapter: 10 [3 Problems] 12,15, 22. Chapter 11: [5 Problems]
7,10, 11,12,20.

CHAPTER 10
12. Annual depreciation charge = R290 000/5 = R58 000
After-tax salvage value = R50 000(1 – 0,34) = R33 000
OCF = R90 000(1 – 0,34) + 0,34(R58 000) = R79 120
NPV = – R290 000 – R27 000 + R79 120(PVIFA10%,5) + [(R33 000+R27 000) / 1,15]
= R20 182.33

15. NPV = – R150 000 – R32 500 – 5750(PVIFA15%,5) + R32 500/1,155 = – R185
616.65
EAC = – R185 616.65 / (PVIFA15%,5) = -185 616.65 / 3,352155 = – R 55 372.33

22. Annual depreciation = R13 250 000/6 = R2 208 333


Year 0 1 2 3 4 5
Ending book R11 041 667 R8 833 334 R6 625 001 R4 416 668 R2 208 334
value
Units/year 100 000 105 000 110 000 114 000 80 000
Price/unit R325 R325 R325 R325 R325
Variable cost/unit R200 R200 R200 R200 R200

Sales 32 500 000 34 125 000 35 750 000 37 050 000 26 000 000
Variable costs (20 000 000) (21 000 000) (22 000 000) (22 800 000) (16 000 000)
Fixed costs (200 000) (200 000) (200 000) (200 000) (200 000)
Depreciation (2 208 333) (2 208 333) (2 208 333) (2 208 333) (2 208 333)
PBIT 10 091 667 10 716 667 11 341 667 11 841 667 7 591 667
Taxes (3 532 083) (3 750 833) (3 969 583) (4 144 583) (2 657 083)
Add back depr. 2 208 333 2 208 333 2 208 333 2 208 333 2 208 333
Operating CF 8 767 917 9 174 167 9 580 417 9905 417 7 142 917
Cash flow from sale of assets = (13 250 000 x 25%) – [{(13 250 000 x 25%) –
2 208 350} x 0,35]
= R2 926 041
.4545
Year 0 1 2 3 4 5
Operating CF 8 767 917 9 174 167 9 580 417 9 905 417 7 142 917
Change in NWC (600 000) (650 000) (650 000) (520 000) 0 2 420 000
Capital spending (13 250 000) 0 0 0 0 2 926 041

Total cash flow (R13 850 8 117 917 8 524 167 9 060 417 9 905 417 12 488 958
000)

Net present value = R10 888 375 IRR = 57,3%

CHAPTER 11

7. (1): Qc = R16M/(R2K – R1,75K) = 64 000; Qa = (R16M + R7M)/(R2K – R1,75K)


= 92 000
(2): Qc = R60K/(R30 – R25) = 12 000; Qa = (R60K + R150K)/(R30 – R25) = 42
000
(3): Qc = R200/(R7 – R2) = 40; Qa = (R200 + R365)/(R7 – R2) = 113

10. Qcf = FC/(P–v); 11 000 = R110 000/(P–R20); P = R30


Qacc = (FC+D)/(P–v); 16 000 = (R110 000 + D)/(R30 – R20); D = R50 000
D = I / N; I = 5(R50 000) = R250 000
OCFfinc = I/(PVIFA15%,5) = R250 000/3,3522 = R74 577,89
Qfinc = (R110 000 + R74 577,89)/(R30 – R20) = 18 458

11. DOL = %∆OCF/%∆Q; %∆OCF = 2[ (40K–30K)/30K ] = 66,67%


The new level of operating leverage is lower since FC/OCF is smaller.

12. DOL = 2 = 1 + R150 000/OCF; OCF = R150 000 New OCF = R150 000(1,6667)
= R250 000
New DOL = 1 + (R150 000/R250 000) = 1,60

20. a. NPVbase = –R3 500 000 + R750 000(PVIFA17%,10) = –R6 047,28


b. R250 000 = (R125)Q(PVIFA17%,9) ; Q = 250 000/[125(4,4506)] = 450
Abandon the project if Q < 450 units, because PV(abandonment) > PV (project CF’s)
c. The R250 000 is the market value of the project. If you continue with the project in
year one , you forego the R250 000 that could have been used for something else.
CASESTUDY
QUESTION 2.1 a)
SIMPLE STRUCTURES (PTY) LTD
ACCOUNTING INCOME
STATEMENT 2007
Projected Sales Units 2,100
Selling price per unit 5,000
Variable Costs per unit 4,000
Unit Contribution 1,000
Total Contribution 2,100,000
Cash Fixed Costs 110,000
Accounting Depreciation 600,000
Total Fixed Costs 710,000
Accounting Net Income 1,390,000
Accounting Break Even (UNITS) 710

b) and c)
SIMPLE STRUCTURES (PTY) LTD NOW FINANCIAL YEAR END
ITEMS TO BE CONSIDERED 2006 2007 2008 2009
Projected Sales Units 2,100 2,000 1,800
Selling price per unit 5,000 4,800 4,600
Variable Costs per unit 4,000 3,100 4,200
Unit Contribution 1,000 1,700 400

Total Contribution 2,100,000 3,400,000 720,000


Fixed Costs (110,000) (110,000) (110,000)
Cash from Operating Income 1,990,000 3,290,000 610,000

SARS Wear and Tear Allowance (1,200,000) (1,200,000)


Taxable Income from Project 790,000 2,090,000 610,000
Tax 237,000 627,000 183,000
Priofit after tax 553,000 1,463,000 427,000
Add back Wear and Tear 1,200,000 1,200,000 0
Cash flows from operations 1,753,000 2,663,000 427,000
Cost (2,400,000)
Operating Cash flows 1,753,000 2,663,000 427,000
Working Capital requirement (3,500,000) 3,500,000
Scrap value 600,000
Recoupment 0 (180,000)
Annual Net Cash Flow of Project (5,897,994) 3,506,000 5,326,000 4,774,000
PV FACTOR AT 12% 0.8929 0.7972 0.7118
Present Value of Cash Flows 10,774,251 3,130,357 4,245,855 3,398,039
Net Present Value R 4,876,257
Internal Rate of Return 53.0% THIS ONLY NEEDS TO BE ESTIMATED

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