Practice Problems

Corporate Finance
Practice Problems for Estimating Cash Flow

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1. The firm decided to invest in a new equipment to increase efficiency. The new equipment
will cost Taka 2,50,000. The equipment has to be modified before installing and it will take an
additional Taka 40,000. It will replace an old equipment installed 2 years ago and had a
depreciable basis of Taka 1,20,000. This equipment qualified for accelerated depreciation and
has been 80 percent depreciated so far. It can be sold for net of Taka 30,000 now. Investment
in additional working capital is estimated to be Taka 50,000. Marginal tax rate is 40 percent.
Determine the initial Outlay, IO, for the investment proposal.
2. The proposal for a new investment estimates the cost of new equipment to be Taka
2,54,500 to replace an old equipment. The equipment must be modified at installation and
total cost of installation and modification is Taka 44,000. The old equipment installed 2 years
ago at a cost of Taka 1,84,000. This equipment qualified for accelerated depreciation and has
been 80 percent depreciated so far. It can be sold for net of Taka 68,000 now. The new
equipment is technologically very advanced and can handle greater number of output requiring
working capital needs to increase by Taka 52,000. Marginal tax rate is 38 percent.
Determine the initial Outlay, IO, for the investment proposal.
3. The initial investment is an average risk project is Taka 2,25,00,000. The project is
expected to generate after-tax cash flows of Taka 40,00,000 in the first year, Taka 60,00,000 in
the second year and Taka 75,00,000 in the third year. The cash flows are expected to increase
at 12 percent per year from that point on. Use a discount rate of 25%.

What is the terminal value of the project at the end of the 3 rd year?

4. Use the following information to produce the five years of after-tax operating project
flows.
The proposed investment will increase revenue by Taka 12,00,000. The cost of goods sold and
operating cost (together) is 65 percent of revenue. The depreciable basis (cost plus installation)
of the proposed investment is Taka 16,00,000. This equipment qualifies for three year
accelerated depreciation and will be depreciated, 50%, 30%, and 20% in the first three years
respectively. Marginal tax rate is 40 percent.
5. The initial investment in an average risk project is Taka 2,90,00,000. The project is
expected to generate after-tax cash flows of Taka 1,40,00,000 in the first year, Taka 1,30,00,000
in the second year and Taka 1,15,00,000 in the third year. The book value of the initial

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 Practice Problems

investment at the end of the third year will be zero, but the equipment could be sold to fetch
Taka 20,00,000. The firm’s marginal tax rate is 40 percent. The firm uses a discount rate of 18
percent.

(a) What is the additional flow at the end of the third year?

(b) Compute the IRR, MIRR and NPV of the project.

(c) State the accept/ reject decision.

6. The proposal for a new investment estimates the cost of new equipment to be Taka 2,54,500
to replace an old equipment. The equipment must be modified at installation and total cost of
installation and modification is Taka 44,000. The old equipment installed 2 years ago at a cost
of Taka 1,84,000. This equipment qualified for accelerated depreciation and has been 80
percent depreciated so far. It can be sold for net of Taka 68,000 now. The new equipment is
technologically very advanced and can handle greater number of output requiring working
capital needs to increase by Taka 52,000. Marginal tax rate is 38 percent.
Determine the initial Outlay, IO, for the investment proposal.

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