EXERCISES UNIT 4

- The first six exercises are solved

- Solutions of the rest of exercises appear at the end of the document

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SOLVED EXERCISE 4.1

Find what effective annual rate is equivalent to

a) 8% payable quarterly.

b) 12% payable monthly.

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RESOLUTION:
a) We call 'i' the nominal interest rate, 'm' the number of accruals within the year, and 'j' the
annual effective interest rate. To calculate the latter, the following expression will be
applied:
i m
1 + j = �1 + �
m
Given that i = 8% (0.08 times one) and m = 4 (number of quarters in the year), the effective
interest rate will be:

0.08 4 0.08 4
1 + j = �1 + � → j = �1 + � −1
4 4

j = 0.0824 → 8.24%
b) In the same way, when i = 12% and m = 12 → j = 12.68%

1
SOLVED EXERCISE 4.2

We deposit 10,000 euros in a savings account that is remunerated at the annual effective interest
rate of 4%. Knowing that interest accrues quarterly
a) Calculate the interest paid in the first quarter.
b) Calculate the account balance one year from now.
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RESOLUTION:

a) 4% is the annual effective interest. To calculate the interest accrued in the first quarter,
we must first obtain the quarterly interest rate from the following expression:
i m i 4 𝑖𝑖
4
1 + j = �1 + �  1 + 0.04 = �1 + �  = √1 + 0.04 = 0.0099
m 4 4

𝑖𝑖
The quarterly interest will be: = 0.99%
4

Interest accrued in the first quarter will be:

Interests (1st quarter) = 10,000 * 0.0099 = 99 euros

b) There are two ways to calculate the accumulated capital after one year:

Using the quarterly interest rate, and capitalizing 4 quarters:

C1 year = C0 (1 + i)n = 10,000 ∗ (1 + 0.0099)4 = 10,400 euros

Or by directly applying the annual effective interest rate (j), and compounding one year
ahead:
C1 year = C0 (1 + j)n = 10,000 ∗ (1 + 0.04)1 = 10,400 euros

2
SOLVED EXERCISE 4.3

A company agrees to repay a loan through 8 quarterly payments of 1,000 euros each. Due to
lack of liquidity, it stops complying with the first 3 payments. Calculate what payment you will
have to make when the fourth payment is due to keep up with the debt. What if I wanted to
repay all the debt in that payment?
The operation was contracted at an annual 9% accrual on a quarterly basis.
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RESOLUTION:

Since the operation is carried out with quarterly accruals, we need to calculate the
quarterly interest rate. To do this, we will divide the annual nominal interest rate accruing
quarterly by four:

i 0.09
im = = = 0.0225 → i4 = 2.25%
m 4

-c -c -c -c -c -c -c -c

0 1 2 3 4 5 6 7 8

The amount that must be paid in the fourth quarter to keep up with payments is calculated
from the capitalization factor of a constant income:
(1+i)n −1
Vf = C . S n¬i = C .
i

(1+0.0025)4 −1
V4 = C . S 4¬0.0025 = 1000 . = 4,137.04 €
0.0025

Keep in mind that it is necessary to also include the quota for the fourth quarter.

If you now wanted to pay not only what you owe until then (installments 1 to 4), but also
everything that remains to be paid in the future (installments 5 to 8), the amount to be paid
would be calculated as follows:

(1+0.0025)4 −1
V4 = 1000 . S 4¬0.0025 + 1000 . a 4¬0.0025 = 1000 . +
0.0025
1−(1+0.0025)−4
1000 . = 7,921.78 €
0.0025

3
SOLVED EXERCISE 4.4

A loan of 3,000 euros is amortized through a constant annuity of 500 euros over 8 years.
Calculate the interest rate at which the loan was arranged.
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RESOLUTION:

We propose the expression of the loan as the update of a constant income:

1 − (1 + i ) −8
3000 = 500 ⋅ a8 ¬i = 500 ⋅
i

Our goal is to calculate the interest rate (i). Since it is not possible to solve it from the
previous expression, we will have to carry out an interpolation. To do this, we first solve for
the update factor (we still do not know the value of i):

3000
a8 ¬i = =6
500

To carry out the interpolation, we give values to the i of the update factor ( a8 ¬i ) so that it
is close to 6 above and below and, if possible, they are not very distant from each other.

After a few iterations, we have that the update factors for i = 0.065 (6.5%) and i = 0.07
(7%) are:

1−(1+0.065)−4 1−(1+0.07)−4
a 8¬0.065 = = 6.089 € a 8¬0.07 = = 5.971 €
0.065 0.07

With these values we can carry out the interpolation and solve for the unknown (x), which
will be the interest rate we are looking for:

i a8 ¬i

0.065 6.089

X= i 6

0.07 5.971

(0.065-0.07) (6.089 – 5.971)

(0.065 - x) (6.089 - 6)

Operating and solving for x, we obtain:

4
(0.065-0.07) · (6.089 - 6) = (0.065 – x) · (6.089 – 5.971)

x = 0.06876 i = 6.87 %

5
SOLVED EXERCISE 4.5

The multinational company International Investment Ltd. is studying two alternative

investment projects. Both are aimed at the manufacture and marketing of a new electronic
product.

Alternative A involves the installation of a new production plant, expected annual sales of
500,000 units. with a market price of 600 euros / unit. The initial investment would be 280
million euros. The direct variable costs (mainly materials and supplies) are estimated at 100
euros / unit, while the indirect and personnel costs for this production capacity would be
approximately 105 million euros per year. The company will carry out a depreciation by the
straight-line method (a useful life of the assets of 10 years is estimated). Finally, it is expected
to obtain a residual value of 30 million.

Alternative B involves expanding the current plant (machinery renewal, etc.) with an initial
investment of 50 million. Both the price and the units sold would be the same as the previous
alternative, however, it is foreseeable that the direct costs per unit would be 125 euros / unit,
and that the indirect and personnel costs would amount to 200 million per year. The
amortization would also be linear but, after 10 years, the residual value of the investment would
be zero.

Knowing that the tax rate is 35% and the cost of capital of the company is 8%,

a) Obtain the cash flows of each of the investments.

b) What is the best investment according to the criterion of the payback period?

c) And according to the criterion of the average rate of return?

d) And according to the NPV criteria?

e) Calculate the IRR of each alternative.

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RESOLUTION:

a) We first calculate the Profit After Tax of alternative A:

Alternative A: (in millions of euros)

Sales 300 = 500000·600
- Direct costs -50 = 500000·100
- Indirect costs -105
Initial Investment 280−30
- Amortization -25 Amortization payment = = = 25
Useful life 10
EBIT 120 = (300-50-105-25)
- Taxes -42 =120 · 0.35
Profit after tax 78 =120-42

The annual constant Cash Flow (CF) (years 1 to 9) will be equal to the sum of Profit after
taxes plus amortization (a cost that does not imply a cash outflow for the company):

6
CFA (years 1 to 10) = Profit after tax + Amortization payment = 78 + 25 = 103 millions of euros.

The income due to the sale of the asset at the end of its useful life must also be considered
(residual value = 30 million).

Regarding the Profit after tax (BDT) of alternative B:

Alternative B: (in millions of euros)

Sales 300 = 500000·600
- Direct costs -62.5 = 500000·125
- Indirect costs -200
Initial Investment 50−0
- Amortization -5 Amortization payment = = =5
Useful life 10
EBIT 32.5 = (300-62.5-200-5)
- Taxes -11.375 = 32.5 · 0.35
Profit after tax 21.125 =32.5-11.375

The Cash Flow (CF), in the case of alternative B, will be constant, since the residual value
is 0:

CFB (years 1 to 10) = Profit after tax + Amortization payment = 21.125 + 5 = 26.125 millions of
euros

b) The Payback Term is the period of time that elapses until the accumulated cash flows reach
the amount of the initial investment.

C0 280
Pay Back A = = = 𝟐𝟐. 𝟕𝟕𝟕𝟕 years → 2 years and 262 days (0.71 ∗ 365 days)
Cash Flow 103
C0 50
Pay Back B = = = 𝟏𝟏. 𝟗𝟗𝟗𝟗 years → 1 year and 332 days (0.91 ∗ 365 days)
Cash Flow 26.125

According to this criterion, the best investment is B because it has a shorter payback
period.

c) The Average Return Rate (ARR) of each alternative is calculated from the following
expressions:

1 T (10 ∗ 103) + 30
∑t=1 CFt
ARR A= T = 10 = 0.3785 = 𝟑𝟑𝟑𝟑. 𝟖𝟖𝟖𝟖%
C0 280
1 T 10 ∗ 26.125
∑t=1 CFt
ARR B= T = 10 = 0.5225 = 𝟓𝟓𝟓𝟓. 𝟐𝟐𝟐𝟐%
C0 50

By this criterion, the preferred alternative is B.

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d) The Net Present Value (NPV) of each alternative, given a discount rate r = 8%, is calculated
as follows:

RVt 30
NPV A = −C0 + CF . a n¬i + ( = −280 + 103 . a 10¬0.08 + ( =
1 + r)T 1 + 0.08)10

= 425.03 millions of euros

NPV B = −50 + 26.125 . a 10¬0.08 = 125.3 millions of euros

Since the NPV of project A is higher than that of B, this would be the chosen project.

e) We calculate the Internal Rate of Return (IRR) of each alternative through an interpolation.
In the case of project A, if we introduce the discount rates r = 0.30 and r = 0.40 in the NPV
expression of the previous section, we obtain results of NPV (r = 0.30) = 40.60 and NPV
(r = 0.40) = -30.36. Applying the interpolation, we obtain that the r that makes the NPV =
0, that is, the IRRA = 0.3572 (35.72%)

In the same way, we would calculate the IRRB = 51.5%.

8
SOLVED EXERCISE 4.6

The company Simon Ltd. presented the following balance sheet at the end of 2021:

ASSETS LIABILITIES AND

EQUITY

Fixed Assets 5,000 Equity Funds 2,000

Current Assets 2,500 Bank debts 2,500

Payment obligations 1,000

Debts without cost 2,000

7,500 7,500

The cost of equity, obtained from the company's stock market data, is 8%. Bank debts have a
cost of 6%, and obligations of 6.5%. Knowing that the tax rate is 35%, calculate the weighted
average cost of capital for the company.
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RESOLUTION:

The first step consists of eliminating the liabilities without explicit cost (usually suppliers
and other short-term debts), also subtracting them from current assets. The new balance is as
follows:

ASSETS LIABILITIES AND

EQUITY

Fixed Assets 5,000 Equity Funds 2,000

Current Assets 500 Bank debts 2,500

Payment obligations 1,000

5,500 5,500

The cost of external sources (debt) is tax deductible, so its effective cost after taxes is:

Effective cost of the bank´s debt = 0.06 · (1 – 0.35) = 0.039 (3.9 %)

Effective cost of the obligations =0.065 · (1 - 0.35) = 0.04225 (4.225 %)

9
El coste de capital medio ponderado por la importancia relativa de cada fuente será:

Own resources External resources

∝= ∗ RE + ∗ RD
Total resources Total resources

Equity Debt
∝= ∗ RE + ∗ RD
Equity + Debt Equity + Debt

2,000 2,500 1,000

∝= ∗ 0.08 + ∗ 0.039 + ∗ 0.04225 = 0.0545 (5.45%)
5,500 5,500 5,500

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PROPOSED EXERCISE 4.7.

A construction company sells its under construction apartments under the following
conditions:

1. $15,000, as a down payment, in t = 0, when the apartment is reserved.

2. 18 monthly installments of $1,200. The first of these installments is made in t = 1.
3. At “key delivery”, within eighteen months, they offer their clients two alternatives:
(i) a single payment of $120,000 in cash; or (ii) the subrogation on a mortgage of
such amount to be paid in equal monthly installments.

This deal has an effective interest rate of 8%. Calculate:

a. The value of the apartment at “key delivery”.
b. Amount to be paid if the entire apartment had to be paid when the apartment is
reserved.
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PROPOSED EXERCISE 4.8.
A bank decided to launch a mortgage loan with the following conditions: waiting period of 3
years and annual effective interest rate of 3.5%.
Calculate:
a) The equal monthly installments (annuity) during the first three waiting periods for a loan of
75000 € with a 15 years term.
b) The equal monthly installments (annuity) during the fourth year.
c) The equal monthly installments (annuity) during the fifth year if the interest rate is 4% annual
effective.
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PROPOSED EXERCISE 4.9.
A company pays the bank an annuity of 1200 € for a loan received with an interest rate of 3.5%
nominal annual monthly compounded.
a) The financial director would like to know the quantity to pay if there are 3 years until the
cancellation.
b) Calculate the initial value of the loan, taking into account that it has been 7 years since the
loan was granted, and 2 of them were waiting period.
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11
PROPOSED EXERCISE 4.10.
A company has received a loan with an interest rate of 5% nominal annual monthly
compounded. The firm is paying a monthly installment of 3000 € and owes 40 monthly
installments.
By investment needs, the firm decided to replace the previous loan by a new loan, extending it
in 72000 €. The new loan has an interest rate of 7% nominal annual monthly compounded and
has a 6 years term, with two waiting periods.
a) Calculate the new monthly installment, both in the waiting period and the following period.
b) Calculate the effective interest rate of the operation.
c) Calculate the cost of capital if we know that the 40% are own resources, with an estimated
cost of 8%, and the 60% corresponds to the previous loan (tax rate=30%).
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PROPOSED EXERCISE 4.11.
A company has signed a loan for an amount of 50,000 euros, to pay back in 10 years, at a 6%
nominal annual interest rate, monthly compounded.

a) Calculate the monthly installment, and the amortization schedule for the first and last 5
months.
b) The company is going through a difficult economic situation, and cannot meet the fifth
year installments. What will be the amount that you will have to pay at the end of the
fifth year, if you want to catch up on the payments?
c) What would the capital outstanding 6 months before the final payment?
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PROPOSED EXERCISE 4.12.
A construction company acquires a land. This acquisition has been financed through a loan,
with the following conditions:
1- 100000 € as down payment.
2- 10 years with equal monthly installments of 5000 € (The first of these installments is
made in month 1).
3- A single payment of 200000 €, that will be paid at the end of year 9.
4- A single payment of 400000 €, that will be paid at the end of year 10.
The interest rate is an interest of 7% nominal annual monthly compounded.
a) Calculate the value of the loan in t=0.
b) Due to the economic crisis, during the first four years the company cannot deal with the
payments (including the down payment). Calculate the outstanding debt after these four years.
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12
PROPOSED EXERCISE 4.13.
Mr. Marcial has been granted a mortgage loan to be repaid in monthly installments of 500
euros for 20 years, with the first two years of grace (only paying interest). The interest rate of
the operation is an effective annual interest of 4%.
a) Calculate the total capital loaned at t = 0.
Five years after t = 0, there is a revision of the interest rate due to market circumstances. The
new interest rate is an annual nominal accrued monthly of 5%. Due to the liquidity needs
during the first years of the new loan, he agrees with the bank that the monthly payment for
the first five years has an amount of 250 euros.
b) What will be the amount of the monthly payments during the last 10 years?
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PROPOSED EXERCISE 4.14.
A company decides to invest a temporary excess of liquidity of 25000 m.u. acquiring a series
of bonds, which offer an interest rate of 4.5% nominal annual compounded quarterly, with a
4 years term.
Calculate:
(a) The interest accrued after 9 months.
(b) The interest accrued after the 4 years.
(c) In addition, the company decides to sign a financial product that yields a monthly
income of 100 euros for 5 years. If the nominal interest rate on this product is 6%
nominal annual monthly compounded, what will be the total savings achieved within 5
years?
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PROPOSED EXERCISE 4.15

A worker subscribes a pension plan with the aim of indefinitely receiving a monthly income
of 2000 euros from the moment of his retirement. Knowing that you have 20 years to go to
that point, calculate:
a) The monthly contribution in the pension plan to be able to enjoy this income as of his
retirement. The annual effective interest rate for the entire operation is 6%.
b) Five years after making the first contribution, the worker receives an inheritance of
100,000 euros. Then, he decides to use the amount accumulated in the pension plan plus the
amount received in inheritance in an investment plan at an interest of 8% per year, accruing
quarterly. What will be the amount available to the worker at the time of his retirement?
What interest will the investment fund have generated after six months?
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13
PROPOSED EXERCISE 4.16

Marcelo has been making monthly contributions to a savings plan from the birth of his
grandson until his 20th birthday. From that moment on, he decides to give his savings in the
following terms and amounts: 50,000 euros when the grandson turns 21, 100,000 euros when
he turns 22 and 150,000 euros when he turns 23. In addition, the generous grandfather wants
his grandson to receive a monthly income of 3,000 euros for 10 years from the moment he
turns 20. The effective interest rate for the entire operation is 8% annual.

What is the monthly contribution that Marcelo has been making for 20 years so that his
grandson can enjoy that inheritance?
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PROPOSED EXERCISE 4.17
The company Artemisa Ltd. have applied for a loan for an amount of 50,000 euros, to be
repaid in fixed monthly installments for 10 years and an interest rate of 3% nominal per
year, payable monthly.
Make the amortization table according to the fixed installment modality for the first four
months of the first year of the life of the loan.
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PROPOSED EXERCISE 4.18.
There are two alternative investment projects: A and B, whose initial investment is,
respectively, $10,000 and $12,000. Suppose the discount rate is 6%. The annual and
constant data during the life of both projects are:

Project A Project B
Revenues 125,000 100,000
Expenses 120,000 95,000
Depreciation 10% 10%
Tax 35% 35%

Decide on which project to choose in terms of the ARR, payback, NPV and IRR.

14
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PROPOSED EXERCISE 4.19
An entrepreneur is considering conducting a project whose initial investment is 500,000
euros. Estimated revenues and costs for the coming years are as follows:

• During the first five years, revenues will be 600,000 euros, while direct and
indirect costs amount to 200,000 and 100,000 euros, respectively (amounts will
remain constant during these five years).

• For the sixth year, income will be 50,000 euros; direct costs will be 100,000
euros and indirect costs 100,000 euros.

• During the last four years, revenues will be 800,000 euros, and the direct and
indirect costs amount to 300,000 and 100,000 euros, respectively.

The entrepreneur estimates a project life of 10 years. The depreciation method is a

straight-line depreciation. It is also expected that the residual value at the end of the
project life will be 100,000 euros. The tax rate is 30%.

Calculate:
a. The Cash Flows for each year.
b. The project’s NPV with an expected return of 10%.
c. The ARR and the payback.

To meet the initial investment, the entrepreneur had been making monthly installments in a
savings account of 6,000 euros over the last five years, at an annual effective interest rate of
8%. In addition, three years before the project began; the entrepreneur invested 50,000 euros
with an annual nominal interest rate of 6% quarterly compounded.

d. Calculate if the savings obtained are enough to cover the project’s initial
investment.
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15
PROPOSED EXERCISE 4.20
A company is considering carrying out a project whose initial investment is 2,000,000 euros.
Constant income for each year of 1,400,000 euros, variable costs of 500,000 and fixed costs
(not including amortization) of 200,000 have been estimated. The company will apply a linear
(constant) amortization system for each of the 8 years of the project. A residual value of
200,000 euros is expected at the end of the project's life. Knowing that the corporate tax rate is
30%:
a) Calculate the cash flows for each year and the NPV of the project (take a discount rate of
6%). Will the company accept the project? Calculate the payback time.
Assuming that the company could invest that money in another project of the same duration
that offers a guaranteed return of 22.5% per year, what would you advise the company?
b) The company is financed with a 10-year loan, the first of which is a grace period, and an
annual effective interest rate of 7%, for which it pays monthly installments of 5,000 euros.
Calculate the total capital loaned by the bank at t = 0.
c) After 2 years from t = 0, there is a revision of the interest rate, which becomes an annual
nominal accrual monthly of 5.5%.
Calculate the amount of the new monthly installments.
d) The company has 10,000 shares in circulation, trading on the market at a price of € 100. It
is also known that it distributes a constant dividend of € 5.
The corporate tax rate is t = 30%.
e) Calculate the cost of capital of the company (take as external resources the value of the loan
from the previous section).
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16
PROPOSED EXERCISE 4.21

The C. PARKER company tries to analyze a new investment project (project 1). The estimated
data for each of the 4 years that the project lasts is presented in the following table (figures in
euros):

Initial Cash flow Cash flow Cash flow Cash flow

investment Year 1 Year 2 Year 3 Year 4
Project 1 … 190000 475000 610000 640500

a) Calculate what should be the maximum value of the initial disbursement required by project
1 so that, according to the NPV investment selection criteria, the project would be suitable for
the company. Use a constant annual update rate of 5%.
b) The company is evaluating undertaking a second investment project (project 2) that lasts
three years and presents the following data (in euros):

Down Year 1 Year 2 Year 3

payment Collections Payments Collections Payments Collections Payments
Proyecto 2 150.000 100.000 50.000 X 75.000 350.000 90.000

To carry out project 2, the company imposes as a condition that the payback period be exactly
1.5 years. What would have to be the charges in year 2 for the project to meet this condition?
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PROPOSED EXERCISE 4.22
The C. BAKER company is considering undertaking an investment project that involves an
initial outlay of 60,000 euros and which it estimates will last 10 years. The company calculates
that it will obtain an operating profit (EBIT) of 8,000 euros each year that the project lasts. At
the end of the project, the company expects to obtain a residual value of 7,500 euros. Knowing
that the tax rate of corporation tax is 25%, and that it will propose a linear amortization system,
answer the following questions:
a) Calculate the cash flows for each of the years that the project lasts.
b) Calculate the Net Present Value (NPV) of the project, knowing that the company's cost of
capital (α) is 4%, and interpret the result.
c) Calculate the Internal Rate of Return (IRR) of the project and interpret the result.
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PROPOSED EXERCISE 4.23
The company Capital Ltd. has its liabilities distributed as follows: Own funds: 40% and
external funds with cost: 60%. The return that shareholders expect to obtain as compensation
for the funds they contribute to the company is 10%. The average cost of debt is 8%. Knowing
that the tax rate is 30%, calculate the cost of capital for the business.
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17
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PROPOSED EXERCISE 4.24
A company has 500,000 ordinary shares outstanding, whose market price is € 100. It is known
that the return required by shareholders to invest in this company is 10%.

The company is also financed with a loan of 20,000,000 euros, at a rate of 7% annual effective
interest; and through an issue of bonds that amount up to 30,000,000 euros, which pay a 8%
annual nominal interest quarterly compounded. The tax rate on benefits is 30%.

Calculate the weighted average cost of capital.

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PROPOSED EXERCISE 4.25
The company Velasco S.A., as of January 1, 2022, maintains a financial structure made up of
50 million euros of long-term loans, 40 million euros in obligations/bonds and 100,000
ordinary shares listed on the Stock Exchange at 150% of the nominal value. The loan was
subscribed at a nominal annual interest rate accruing monthly of 5%, while for the obligations
the company pays an effective annual interest rate of 6%. The capital of the company reflected
in the balance sheet is 200 million euros. Like every year, the company expects to distribute a
constant dividend per share equivalent to 10% of its nominal value at the end of the year. The
tax rate is 25%.

Calculate the firm's weighted average cost of capital.

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PROPOSED EXERCISE 4.26
The company FORTIUS, dedicated to the sale of equipment for mountaineers, has a share
capital of 1,500,000 euros, divided into 1,000,000 euros of ordinary shares, which are listed on
the market at 200% of their nominal value. The company distributes a constant dividend each
year of 0.25 euros per share. As for its external resources, they come entirely from a loan of
1,000,000 euros, to be repaid in constant quarterly installments, with a duration of 7 years and
a nominal annual interest rate accruing quarterly of 6%. The company pays 25% profit tax.
Calculate:

a) Effective cost of the company's Own Funds.

b) Market value of the company's Own Funds.
c) Effective interest rate of the loan.
d) Effective cost of the company's External Funds.
e) Cost of capital of the company.
f) Quarterly fixed installment of the loan.
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18
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PROPOSED EXERCISE 4.27
The market value of the company's own funds NEVSKI amounts to 7,500,000 euros, which
are divided into 300,000 ordinary shares listed on the Madrid Stock Exchange. These shares
are trading at 200% of their nominal value. Each year the company distributes a constant
dividend equal to 20% of the nominal value of the share. Regarding external resources, they
consist exclusively of a loan of 2,500,000 euros, contracted with a bank at a nominal interest
rate of 7%, accruable monthly. The tax rate on profits paid by the company is 25%.

Calculate:

a) Market price and par value of the share.

b) Cost of equity
c) Annual effective interest rate of the requested loan
d) Effective cost of foreign funds
e) Cost of capital of the company

The aforementioned loan is going to be repaid in constant monthly installments for 10 years,
with the first two years being grace periods.

f) Calculate the monthly fee corresponding to the grace period and the monthly fee
corresponding to the subsequent period.

g) Prepare the loan amortization table, corresponding to the first two installments of the third
year.

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19
SOLUTIONS TO THE PROPOSED EXERCISES

PROPOSED EXERCISE 4.7

a) Value at “key delivery” = € 159,641.42

b) Present value = € 142,322.73

PROPOSED EXERCISE 4.8

a) Constant monthly payment with grace period = € 215.25

b) Constant monthly payment during the fourth year = € 636.61

c) Constant monthly payment during the fifth year = € 652.52

PROPOSED EXERCISE 4.9

a) Capital pending 3 years before cancellation = € 40,957.6

b) Total amount requested = € 100,381

PROPOSED EXERCISE 4.10

a) Constant monthly payment with grace period = € 1,063.6; Monthly payment

subsequent period = € 4,336.2

b) Effective interest rate = 7.22 %

c) Cost of capital = 6.23 %

PROPOSED EXERCISE 4.11

a) Monthly installment = € 555.1

b) Amount to pay at the end of the fifth year = € 6,847.4

c) Capital pending six months before cancellation = € 3,273.1

PROPOSED EXERCISE 4.12

a) Total amount requested = € 836,383.7

b) Outstanding debt after 4 years = € 408,251.5

PROPOSED EXERCISE 4.13

a) Total capital loaned = € 77,338.4

b) Monthly payment during the last 10 years = € 742.6

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 PROPOSED EXERCISE 4.14

a) 9-month interest = € 853.2

b) 4-year interest = € 4,900.3

c) Total savings = € 6,977

PROPOSED EXERCISE 4.15

a) Monthly contribution = € 908.53
b) Amount available at the time of retirement = € 535,157.1
Interest generated after six months = € 6,589.4

PROPOSED EXERCISE 4.16

Monthly payment = € 881.2

PROPOSED EXERCISE 4.17

MONTH Pending Capital Interests Amortization Installment

(t) Pending capital (t-1) – Amortization (t-1) Pending Capital* 0.0025 Monthly interests C
1 50000 125 357.803 482.80

2 49642.20 124.11 358.70 482.80

3 49283.50 123.21 359.59 482.80

48923.91 122.31 360.49 482.80
4
… … … … …
120
50000 Total capital

PROPOSED EXERCISE 4.18

Project A Project B
Cash Flow 3,600 3,670
Payback 2.78 years 3.27 years
Average Rate of Return 36% 30.6%

For both evaluation criteria, the selected project would be A.

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PROPOSED EXERCISE 4.19

a) CFyears 1-5 = 222,000 euros; CFyear 6 = -150.000 euros; CFyears 7-10= 292,000 euros

b) NPV = 817,915.4 euros

c) ARR = 44.56 %; Pay back = 2.25 years

d) Savings = 497,448.81 euros

PROPOSED EXERCISE 4.20

a) CFyears 1-5 = 557,500 euros; CFyear 8 (including residual value) = 757,500 euros; Payback = 3.58
years; NPV (α=6 %) = 1,587,442.52 euros.

b) The NPV of the project is calculated with α = 22.5%. Given that NPV (α = 22.5%) =
28,595.47 euros> 0, it follows that the project in the previous section has a profitability
greater than 22.5% and is therefore preferable to the project in section b).

c) Total capital loaned = 403,302.55 euros

d) New monthly installment = 4,768.005 euros
e) Cost of capital = α = 4.97 %
PROPOSED EXERCISE 4.21

a) C0= 1,665,673.33 €

b) Collections2 = 275,000 €

PROPOSED EXERCISE 4.22

a) CFt= 11,250 € (t= 1 to 9 years) ; CF10= 18,750 € (including residual value)

b) NPV = 36,314.3 €

c) IRR = 14.3% (depending on the NPV values with which the interpolation is made, this figure
may vary slightly).

PROPOSED EXERCISE 4.23

α = 7.36%

PROPOSED EXERCISE 4.24

α = 7.71 %

PROPOSED EXERCISE 4.25

Effective cost of the loan = 3.83 %

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 Effective cost of the obligations = 4.5%

Cost of equity = 6.6 %

α = 6.07 %

PROPOSED EXERCISE 4.26

a) Ke= 8.33%.

b) Valor de mercado de los Fondos Propios = 3,000,000 €.

c) Effective interest rate of the loan (j)= 6.13%.

d) Cost of the external resources (re) = 4.6%.

e) Cost of the capital (α)= 7.4%.

f) Quarterly installment of the loan = 44,014.08 €.

PROPOSED EXERCISE 4.27

a) Share market price = 25€. Share nominal value= 12,5€.

b) Own resources cost = ke= 10%.

c) Effective interest rate of the loan (j)= 7.22%.

d) Effective cost of the external resources (re)= 5.41%.

e) Cost of capital (α) = 8.85%.

f) Loan grace period = 14,575€. Subsequent installment of the loan = 34,087.81 €.

g) Loan Amortization Chart:

Month Pending capital Amortization Interests Fix Installment

25 2,500,000 19,512.81 14,575 34,087.81

26 2,480,487.19 19,618.30 14,469.50 34,087.81

23