Home Assignment (3): Project 101 of Billya Spare Parts

"Billya Spare Parts" is a company specialized in the manufacturing of

auto-spare parts. The first project of the company coded "Project 101" is
now under study and the following data and information are presented:
1. The establishment year of "Project 101" will be followed by seven
operating years. This project is exempted from the income tax for the first
five years of operating while it will be taxed at a flat rate of 20% for each
of the last two years of operating.
2. The cash current operating sales revenue is estimated at L.E 5 million for
each of the first five years of operating and L.E 5.09 million for each of the
last two years of operating. In addition to the cash current operating sales
revenue, it is expected to collect in cash a net residual value of L.E 1.146
million at the end of the seventh year of operating.
3. The investment costs are estimated at a total of L.E 10 million including
L.E 2.5 million for the project's land, L.E 6 million for the depreciable fixed
assets where the annual depreciation is estimated at L.E 0.84 million for
every operating year, L.E 1 million for the long-term intangibles which will
be equally amortized during the first four years of operating, and L.E 0.5
million for the first working capital of the first 3 months of operating.
4. 11% interest loan of L.E 4.5 million will be obtained just before the start of
the first year of operating. The principal of the loan will be repaid through
three yearly equal installments. The interest charges at the end of each of
these first three years of operating are estimated as follows in L.E
millions: 0.495, 0.330 and 0.165 respectively.
5. The accounting net profit at the end of each of the first five years of
operating will be in L.E millions: 0.915, 1.08, 1.245, 1.41 and 1.66
respectively. The "after-tax accounting net profit" will be L.E 1.4 million
for each of the last two years of operating. All cash operating costs will be
paid when it will be incurred.
6. The discount rate of the company is currently 17%.
Required:
a. Calculate the annual income tax for each of the seven years of operating.
b. Prepare a table to compute for each operating year the current operating
cash cost exclusive of interest.
c. Use the direct way to prepare a table to compute the NCF from the
project's view.
d. Calculate the Net Present Value (NPV), and give a brief comment.
e. Is the Internal Rate of Return (IRR) of "Project 101" 16% or 17% or 18%?

For guidance, the PV of L.E 1, i.e. 1/(𝟏 + 𝒓)𝒏 :

Years 1 2 3 4 5 6 7 8
16% 0.8621 0.7432 0.6407 0.5523 0.4761 0.4104 0.3538 0.3046
17% 0.8547 0.7305 0.6244 0.5337 0.4561 0.3898 0.3332 0.2848
18% 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704 0.3139 0.2660
Approximate the NPV only to the nearest L.E 1000.