Net Cash Flow – Adjusted Financial Year

Welcome to this article whose sole purpose is to help you progress in the chapter entitled choosing investments using corrected exercises on the Operational Management subject of the BTS MCO.

This series Net Cash Flow – Corrected Exercise includes 3 exercises of different levels.

If you would like to first see or review the course on choosing investments, I invite you to read my article the choice of investments.

Lesson 3 net cash flow exercises corrected (FNT) on this page mainly focus on developing the FNT table and calculating the NPV (net present value).

You will also find corrected exercises on the following concepts: the calculation of the profitability index (PI), the internal rate of return (IRR) (or the internal rate of return (IRR).

Here is the list of the 3 exercises corrected on net cash flows:

Net Cash Flow – Corrected Exercise No. 1

States

The Café business unit, which specializes in the manufacture of machines for bars and restaurants, wants to invest in new machine tools.

The manager, Mr Lacaféine, gives you some points in appendix 1.

Annex 1: Investment project

Acquisition cost: €100

Financing: 100% financing

Annual FNT: €31, €000, €32, €000.

Discount rate: 6%

Work to do

Adjusted net cash flows – Exercise No. 1

1/ Calculate the payback period for the invested capital.
2/ Calculate the net present value.

For these first two questions, it is necessary to present a preparatory table:

Here is the detailed explanation of the amounts:

(1): the amounts in this column are given in the statement.

(2): the discount formula must be applied, i.e.: Annual FNT x (1 + Discount rate) exponent (-n). With the figures, we therefore have the following formula: 31 x (000 + 1) exponent (-0.06) for the first year. For the second year, we must not forget to change the exponent (-1) to (-1). and so on.

(3): this involves adding the updated FNTs as you go along. The first year, simply copy the figure on the left.

(4): this involves adding the updated FNTs as we go along. For year 2, we therefore have 29 (amount just above in the cumulative updated FNT column) + 245,28

(5): this involves adding the updated FNTs as we go along. For this year 3, we take 57 + 725,16.

(6): This is the column total.

For the determination of the payback period of the invested capital, we can see in the table that the invested amount (€100) is exceeded in year 000. You must look at the column “Cumulative discounted FNT”.

We can therefore conclude that the investment will be profitable in year 4.

But it is possible to be much more precise by determining a date in the following way:

DRCI = [(Invested amount – Cumulative discounted FNT closest to the invested amount) / Discounted FNT for the following year] x 360 days.

With the numbers, this gives: [(100 – 000) / 85] x 432,60 or 23 days rounded to 762,81 days.

To find the exact month, we divide by 30 (because we assume that a month has 30 days) or 221 / 30 = 7,36 months.

We therefore have 7 months AND 0,36 of the following month expressed in number of days, that is to say 30 x 0,36 = 11 days.

So the date is August 11, Year 4. The company starts to recover its funds from 11/08/Year 4.

To calculate the net present value (NPV), the following management formula must be applied:

Sum of updated FNTs – Amount invested

So with the numbers we have: 109 – 195,42 = €100

Net present value is therefore 9 euros. This is a potential gain if the company decides to invest in this investment.

3/ Calculate the profitability index.

To determine the profitability index, the following formula must be applied:

Sum of actualized FNT / Invested equity

We therefore have the following calculation: 109 / 195,42 or 100

The investment therefore provides for a return of 9,19%.

4/ Conclude.

The project is profitable because the net present value is positive. In addition, it is recovered during the first 4 years. Furthermore, the profitability index is greater than 1. The only downside is that it is still a late profitability because it is made during the 4th year.

Net Cash Flow – Corrected Exercise No. 2

States

From the following elements, you are asked to establish the net cash flow table:

The investment is financed over 15 years at 100% by a loan.

The revenues generated by the investment are as follows: €5, €725, €8, €390 and €10.

The operating costs (excluding depreciation) generated by the project are as follows: €3, €225, €4, €388 and €5.

The company applies linear depreciation over the period.

The investment amount is €40.

The applicable corporate tax rate is 28%.

The banking conditions are summarized in the following table:

Furthermore, the company has already calculated its self-financing capacity, the figures for the first 5 years being as follows: €1, €320, €2, €812, €3.

Work to do

Present the net cash flow statement for the first five years.

Adjusted net cash flows – Exercise No. 2

The net cash flow table must include all the elements, taking into account the financing method (borrowing) as well as the self-financing capacity (CAF).

Here is the FNT table (in two parts: years 0 to 2 then years 3 to 5) followed by detailed explanations:

(1): Amount of investment given in the statement.

(2): Amount of the loan implied in the statement.

(3): The revenues generated by the project are given in the statement.

(4): Operating costs are given excluding depreciation.

(5): The amount of depreciation corresponds to the amount of the investment spread over the duration of the project. Thus, the calculation is as follows: €40 / 000 years, or €15 per year.

(6): It is necessary to recover the amount of interest that can be found in the repayment table of a loan in the “Interest” column. This is a charge that must be taken into account for the calculation of the tax.

(7): The result before tax corresponds to the difference between operating income and all expenses. We therefore have the following calculation for year 1: €5 – (€725 + €3 + €225)

(8): The amount of corporate tax is calculated as follows: you must take the pre-tax result and apply the tax rate. We therefore have the following calculation for the third year: 1 x 388,77%, or €28.

(9): Net income is the difference between the income before corporate tax and the amount of tax. We therefore have the following calculation for year 3: €1 – €388,77 or €388,86.

(10): The amount of depreciation is a calculated and undisbursed expense. This is why it is only used for calculating tax and it is necessary to remove it by adding it to the net result.

(11): The CAF is equal to the sum between the net result and the amount of depreciation.

(12): In accounting, the repayment of the loan is not an expense as such (it is not part of the accounts of class 6.). This is the reason why it must be taken into account at the end of this table and especially not in the operating expenses. The repayment remains an outflow of money and must therefore be deducted from the amount of the CAF.

Net Cash Flow – Corrected Exercise No. 3

States

You are employed in a world-renowned department store specializing in electronic products. Your manager wants to invest in two vending machines, one for three-meter-long audio headphones, the other for phone chargers. These machines would operate 24 hours a day and would be placed in strategic locations (high school, university, library, student campus).

This way customers could have a charger or headphones available at any time without any time or location constraints.

Before you start, your manager asks you to study the project's expected profitability. He sends you the following information:

Additional revenues :

Operating costs incurred (excluding depreciation) by the project :

Depreciation charges :

Amount required: €60

Financing method: Self-financing.

Corporate tax rate: 33,33%

Discount rate: 4%

Work to do

1. Calculate the updated FNTs.
2. Calculate the net present value.
3. Calculate the profitability index of this project.
4. Conclude.

Adjusted net cash flows – Exercise No. 3

1. Calculate the updated FNTs.

To answer this first question, you need to create a detailed table with the purpose of discounted net cash flows.

Detailed explanation of the references:

(1): The investment amount must always appear in column 0 and nowhere else.

(2): The turnover figures are given in the statement. Please note that these are turnover figures achieved over the years. They are not the company's current turnover.

(3): The operating costs generated by this project are given in the statement.

(4): Please note that the operating costs generated by the project are excluding depreciation. You should therefore not forget to add them on an additional line. In this exercise the amounts are given, which is not the case in the majority of Operational Management exercises.

(5): To calculate the Profit before tax, the following formula must be applied: Additional turnover minus all expenses. So for the first year we have 11 – (000 + 4), which gives – €000.

(6): To calculate the amount of corporate tax, you must take the Profit before tax and apply the tax rate given in the statement. Thus we will have the following calculation for year 3: €4 x 600 or €0,33333333.

(7): To calculate the Net Profit, you must apply the following formula: Profit before tax – Corporate tax. So for year 3 we have the following calculation: €4 – €600, i.e. a Net Profit of €1.

(8): Depreciation is not a disbursed expense, it is just a calculated expense. Indeed, there is no outflow of money when we talk about depreciation. In the FNT table, depreciation is necessary to calculate the tax because it is an expense above all. As for the amount, simply copy the amounts indicated above in the table.

(9): To determine the amount of annual FNT, you must take the Net Result and add the amount of depreciation. So for the year we have the following calculation: €3 + €066,67 or €15. As for the interpretation for year 000, the project would bring in €18 in year 066,67.

(10): To calculate the discounted FNT, you must use the annual FNT of the same period. So you must apply the following formula: Discounted FNT = Annual FNT x (1 + Discount rate) exponent (-n). With "n" the number of the period. For year 3, we therefore have the following calculation: 18 x (066,67 + 1) exponent -0,04.

2. Calculate the net present value.

To calculate the net present value (NPV), the following formula must be applied: Sum of discounted NTFs – Amount invested. To do this, you have the option of creating a table or doing calculations without a table.

3. Calculate the profitability index of this project.

To calculate the IP of this project, you must divide the sum of the discounted FNT by the amount invested. We therefore have the following calculation: 73 / 785,89, i.e. an IP of 60.

4. Conclude.

The net present value of the project is positive, which is favorable for the company. The company would make money if it decided to invest in this project. In addition, the profitability index is greater than 1, which supports future profitability for this project. This is a project that should be considered.