TOPIC 4 – Problem Set
PROBLEM 1
Mrs. Puig wants to set up a sportswear making business. For this purpose, she needs to
buy machine with an amount of 19,000 euros and a van of 7,500 euros. Also, she must
purchase raw material for a total of 3,300 euros and the necessary tools with an amount of
3,000 euros. The following data is given:
Average cost of capital: 5 %
Annual Net Cash Flows is 7.600€
Duration of the project is 4 years
The company will be liquidated at the end of the fourth year the assets on a value of 7.115€
In order to finance this investment project, she must request a loan. The bank will give it
only if the project is economically viable. The loan amount is of 7.000 euros with 5% of
annual interest rate during four years with fixed annual fee of 1.974 euros.
1) Give arguments to justify whether Mrs. Puig will get the loan or not. It means doing
calculations whether her project is economically viable (using NPV).
Machines 19.000 Loan 7.000
Vehicles 7.500 Quotas 1.974
Raw Materials 3.300
Tools 3.000
Cash Flows 7.600
Sale of assets 7.115
0 1 2 3 4
INVESTMEN
T
-32,800 7.115
Loan 7.000
Cash Flow 7.600 7.600 7.600 7.600
Interest -1.974 -1.974 -1.974 -1.974
TOTAL -25.800 5.626 5.626 5.626 12.741
2) Using NPV method, calculate if loan cost is equivalent to total annual fees paid.
From the point of view of the financial institution:
NPV = -7.000 + + + + = 0 m.u.
PROBLEM 2
