Corporate finance

SEMINAR 05
Investment Decision-Making and Project Analysis – Part I.

1. The company is planning to implement an investment project for which it will use the
compound it acquired three years ago, but the existing buildings will have to be demolished. From
the following options, select the ones that will affect the project's CFs.

▪ Purchase price of the compound 3 years ago.

▪ Market value of the premises.
▪ Market value of existing buildings.
▪ Demolition costs and subsequent clearance.
▪ The cost of the driveway that was built last year.
▪ Lost cash flows from the existing product, which will be replaced by a new one as part of
the project.
▪ Depreciation within the new plant.
▪ The tax reduction that will occur due to the depreciation of the new plant.
▪ Initial investment in inventory.
▪ Funds that have already been paid for the new plant design proposal.

2. You plan with these real cash flows within the project. The value of the initial investment is 100
and the flows in the next three years are 35, 50, 30. If the nominal interest rate is 15% and the
inflation rate is 10%, what is the NPV of the project?

3. Plot the NPV for the following projects and discount rates from 0% to 30% (solution in Excel file
is enclosed in the study materials).

Project 0 1 2
A -100 20 100
B -1,000 2,260 -1,270
C 100 -50 -80
D -1,080 2,510 -1,500

▪ Which of the projects has no IRR?

▪ Which of the projects has two IRRs?
▪ What are the IRRs of the other two projects?

4. If you know the following information about the projects:

0 1 2 3 4
X -200 80 80 80 80
Y -200 100 100 100 0

▪ Determine which of the projects can be accepted based on its net present value if you
know that the opportunity cost of capital is 11%.
▪ If you had to choose only one of the projects, which one would you choose?
▪ Determine the payback period for both projects and compare with the conclusions of the
NPV method.
▪ Calculate the internal rate of return for both projects.
▪ Determine the value of the profitability index for both projects.
 Corporate finance

5. The company has several investment opportunities to choose from, but its investment budget
is limited by a limit of € 90,000. Which projects should the company implement if you know the
following information about the projects:

Project NPV Investment

A 5,000 10,000
B 5,000 5,000
C 10,000 90,000
D 15,000 60,000
E 15,000 75,000
F 3,000 15,000