Complete the following problems:Problem 14-1: Calculating Free Cash FlowsProblem 14-2: New Project Analysis 1Problem 14-3: New Project Analysis 2Problem 14-4: Risk-Adjusted NPVProblem 14-5: Spot Exchange RatesProblem 14-6: Purchasing Power ParityYou can access the problem details by clicking on excel sheet. in your course.Complete the problems in an Excel spreadsheet. Be sure to show your work to receive credit.

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Module 14 CT Problems

CASH FLOWS, OTHER TOPICS IN CAPITAL BUDGETING, INTERNATIONAL BUSINESS FINANCE

CT 14 – 1

CALCULATING FREE CASH FLOWS

Mudarraj Computers is introducing a new product and has an expected cahnge in EBIT of SAR 522,000. The company has a

30 percent marginal tax rate. The project will produce SAR 105,000 of depreciation per year. In addition, the project will cause

the following changes in year 1:

DATA

Change in EBIT

522,000

Tax rate

30%

Depreciation

105,000

Accounts Receivable

Inventory

Accounts Payable

Without

Project

62,400

69,000

79,000

What is the project’s free cash flow in year 1?

Calculating Free Cash Flows:

Change in EBIT

Less: Change in taxes

Plus: Change in depreciation

Less Change in net working capital

Less: Change in capital spending

Free cash Flows

CT 14 – 2

NEW PROJECT ANALYSIS

With Project

Change

76,000

82,500

97,200

13,600

13,500

18,200

Talhah Manufacturing is considering the purchase of a new production machine for SAR 529,000. The purchase of this

machine will result in an increase in earnings before interest and taxes of SAR 91,000 per year. To operate this machine

properly, workers would have to go through a brief training session that would cost SAR 17,000 after taxes. It would cost SAR

22,500 to install the machine properly. Also, because the machine is extremely efficient, its purchase would necessitate an

increase in inventory or SAR 23,000. This machine has an expected life of 10 years, after which it will have no salvage value.

Assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a 35 percent marginal tax

rate, and a required rate of return of 15 percent.

DATA

Change in EBIT

Purchase Price

Training Session Fee

Installation Fee

Increase in Inventory

Life

Salvage Value

Depreciation

Tax Rate

Required rate of return

91,000

529,000

17,000

22,500

23,000

10

0

35%

15%

A)

What is the initial outlay associated with this project?

Outflows

Purchase Price

Training Session Fee

Installation Fee

Increased Working Inventory

Net Initial Outlay

B)

What are the annual after-tax cash flows associated with this project for years 1 through 9?

Differential Annual Free Cash Flows (Years 1-9)

Cash Flow

Change in EBIT

Change in taxes

Change in depreciation

Project’s Free Cash Flows

C)

What is the terminal cash flow in year 10 (what is the annual after-tax cash flow in year 10 plus any additional cash

flows associated with the termination of the project)?

Terminal Free Cash Flow (Year 10)

Inflows:

Free Cash Flow in Year 10

Recapture of Working Capital (Inventory)

Total Terminal Cash Flow

D)

Should the machine be purchased?

Present Value of Free Cash Flows

Years 1-9

Year 10

Less Initial Cost

Net Present Value

Decision: The machine should be purchased, the NPV > 0.

CT 14 – 3

NEW PROJECT ANALYSIS

Trans Global Corporation is considering the purchase of a new machine for SAR 422,000. The purchase of this machine will

result in an increase in earnings before interest and taxes of SAR 97,000 per year. To operate this machine properly, workers

would have to go through a brief training session that would cost SAR 12,200 after taxes. It would cost SAR 6,500 to install

the machine properly. Also, because the machine is extremely efficient, its purchase would necessitate an increase in inventory

or SAR 28,500. This machine has an expected life of 10 years, after which it will have no salvage value. Assume simplified

straight-line depreciation and that this machine is being depreciated down to zero, a 32 percent marginal tax rate, and a

required rate of return of 10 percent.

DATA

Change in EBIT

Purchase Price

Training Session Fee

Installation Fee

Increase in Inventory

Life

Salvage Value

Depreciation

Tax Rate

Required rate of return

A)

What is the initial outlay associated with this project?

Outflows

Purchase Price

Training Session Fee

Installation Fee

Increased Working Inventory

Net Initial Outlay

B)

97,000

422,000

12,200

6,500

28,500

10

0

32%

10%

What are the annual after-tax cash flows associated with this project for years 1 through 9?

Differential Annual Free Cash Flows (Years 1-9)

Cash Flow

Change in EBIT

Change in taxes

Change in depreciation

Project’s Free Cash Flows

C)

What is the terminal cash flow in year 10 (what is the annual after-tax cash flow in year 10 plus any additional cash

flows associated with the termination of the project)?

Terminal Free Cash Flow (Year 10)

Inflows:

Free Cash Flow in Year 10

Recapture of Working Capital (Inventory)

Total Terminal Cash Flow

D)

Should the machine be purchased?

Present Value of Free Cash Flows

Years 1-9

Year 10

Less Initial Cost

Net Present Value

Decision:

CT 12 – 4

RISK-ADJUSTED NPV

Qusaiba Corporation is considering two mutually exclusive projects. Both require an initial outlay of SAR 22,500 and will

operate for 5 years. Project A will produce expected cash flows of SAR 6,800 per year for years 1 through 5, whereas project B

will produce expected cash flows of SAR 7,400 per year for years 1 thorough 5. Because project B is the riskier of the two

projects, management of Qusaiba Corporation decided to apply a required rate of return of 20 percent to its evaluation but only

a 7 percent required rate of return to project A. Determine each project’s risk-adjusted net present value.

Initial outlay

Year 1

Year 2

Year 3

Year 4

Year 5

req. rate of return=

Project A

(22,500)

6,800

6,800

6,800

6,800

6,800

Project B

(22,500)

7,400

7,400

7,400

7,400

7,400

7%

20%

NPVa=

NPVb=

CT 14 – 5

SPOT EXCHANGE RATES

Country

Canada – dollar

Japan – yen

SAR 1 Quotes for Foreign Currencies

Contract

per day

Spot

30

90

Spot

SAR per

Currency

2.7215

2.8514

2.6543

0.0289

Switzerland – franc

30

90

Spot

30

90

0.0290

0.0295

3.6572

3.7942

3.7815

A Saudi business needs to pay (a) 35,000 Canadian dollars, (b) 2 million Japanese yen, and (c) 49,000 Swiss francs to

buinesses abroad today. What are the SAR payments to the respective countries?

DATA

Saudi business pays in local currency:

Canadian dollars

Japanese yen

Swiss francs

35,000

2,000,000

49,000

In SAR:

a) Canadian payment

b) Japanese payment

c) Swiss payment

UAE business pays SAR 72,400, SAR 65,300, and SAR 84,700 to suppliers in, respectively, Japan, Switzerland, and

Canada. Payments to the Japanese and Canadian suppliers is due in 90 days. The Swiss supplier is due in 30 days. How

much, in local currencies, would the suppliers receive?

DATA

Saudi business pays in SAR:

Japanese payment

Swiss payment

Canadian payment

In local currency:

74,000

63,500

84,700

a) Japanese yen

b) Swiss francs

c) Canadian dollars

CT 14 – 6

PURCHASING-POWER PARITY

A pair of Men’s Burton lace-up dress shoes cost SAR 510 in Saudi Arabia but costs GBP 88 in England. Assuming that purchasingpower parity (PPP) holds, how many SAR are required to purchase 1 GBP.

Cost in Saudi Arabia =

Cost in England =

pair of Burton shoes

1

1

510

88

SAR

510

SAR

GBP

GBP

SAR/shoes

510

88

SAR/GBP =

(SAR/shoes)*(shoes/GBP) =

shoes/GBP

ming that purchasing-

GBP/SAR

…

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