“ABS” Project Case

“ABS” is the first project of the CU Company. The economic life of this project is 8
years including one year of establishment the project which will be subjected to the
income tax at a flat rate of 20%. For the “ABS” project, the following data and
information are available:
1) The historical cost of the land is LE 1 million while its fair market value is
estimated at LE 3.1 million.
2) The capital cost of the buildings of the project which will be completed during
the establishment year is estimated at LE 0.6 million.
3) During the establishment year, the machinery of the project will be imported
from Italy at an estimated CIF cost of LE 4.75 million exclusive of customs
and duties estimated at LE 0.25 million. The total capital cost of the machinery
will be financed by a 13%-interest loan which will be obtained just before the
start of the first year of operating. The loan will be repaid over 5 yearly equal
installments covering the first five years of operating.
4) The capital costs of the trucks and the furniture which will be purchased in the
fourth quarter of the establishment year are estimated at LE 0.5 million and LE
0.2 million respectively.
5) An “Italian Know-how” with expected capital cost of LE 1 million will be
acquired at the start of the establishment year.
6) The first working capital required for only the first cycle of operating which
will be arranged during the last month of the establishment year is estimated at
LE 0.3 million.
7) The current cash revenue of the project is estimated for each operating year at
an average of LE 4.4 million where no credit sales will be allowed in any
operating year.
8) A net residual value- net after the capital gains tax-at the end of the economic
life of the project is expected to be LE 1.3722 million when the macaroni
factory will be sold to other investors.
9) The accounting net profit which is measured on accounting basis is estimated at
an average of LE 1.4 million for each operating year. The current operating
cash costs which will be incurred in any operating year will all be paid in the
same year.
10) The annual depreciation is estimated at LE 0.9 million using the straight-line
depreciation method, while the capital cost of the “Italian know-how” will be
amortized over 5 yearly equal amortization amounts covering the first five
years of operating.
 Required:
A) Prepare the investment costs schedule, the debt service table, the table(s) to
calculate for each operating year the current operating cash costs exclusive
of interest and calculate the income taxes.
B) From the view of the macaroni factory project, prepare the net cash flow
table covering the entire economic life of this project and compute the
payback period accordingly.
Solution:
A)
The investment costs schedule (LE m.)
Long-term non-depreciable:
Land 3.1
Long-term depreciable:
Buildings 0.6
Machinery (4.75+0.25) 5.0
Trucks 0.5
Furniture 0.2
6.3
Long-term intangibles:
Italian know-how 1.0
Short-term investment costs:
First working capital 0.3
Total Investment Costs 10.7

The debt-service table (LE m.)

Loan= LE 5 m., yearly installments= LE 1 m.
Year Balance Interest Installments Total Debt-
13% service
-1 5 --- --- ---
1 4 0.65 1 1.65
2 3 0.52 1 1.52
3 2 0.39 1 1.39
4 1 0.26 1 1.26
5 0 0.13 1 1.13
Total 1.95 5 6.95
The table to calculate the current operating cash costs exclusive of interest and
not including of course the depreciation and the amortization charges:
LE m.
Y1 Y2 Y3 Y4 Y5 Y6 Y7
The current operating cash revenue 4.4 4.4 4.4 4.4 4.4 4.4 4.4
Less: The accounting net profit 1.4 1.4 1.4 1.4 1.4 1.4 1.4
= The accounting cash and non-cash
current operating costs including the
interest, the depreciation and the
amortization charges A 3 3 3 3 3 3 3
The interest on the loan 0.65 0.52 0.39 0.26 0.13 --- ---
The annual depreciation 0.90 0.90 0.90 0.90 0.90 0.90 0.90
The amortization of the Italian 0.20 0.20 0.20 0.20 0.20 --- ---
Know-how
B 1.75 1.62 1.49 1.36 1.23 0.90 0.90
The current operating cash costs
exclusive of interest and not
including the depreciation and the
amortization charges (A-B) 1.25 1.38 1.51 1.64 1.77 2.10 2.10

Income tax for every operating year= LE 1.4 million × 20%= LE 0.28 million.
B)
The net cash flow table from the view of the macaroni factory project and
computing the payback period accordingly: LE m.
Y-1 Y1 Y2 Y3 Y4 Y5 Y6 Y7
Cash Inflows:
Current operating cash --- 4.4 4.4 4.4 4.4 4.4 4.4 4.4
revenue
Net residual value --- --- --- --- --- --- --- 1.3722
A --- 4.4 4.4 4.4 4.4 4.4 4.4 5.7722
Cash Outflows:
Investment costs 10.7 --- --- --- --- --- --- ---
Current operating cash
costs exclusive of
interest
--- 1.25 1.38 1.51 1.64 1.77 2.10 2.10
Income tax --- 0.28 0.28 0.28 0.28 0.28 0.28 0.28
B 10.7 1.53 1.66 1.79 1.92 2.05 2.38 2.38
Net Cash Flow (A-B) (10.7) 2.87 2.74 2.61 2.48 2.35 2.02 3.3922
Accumulated Net (10.7) (7.83) (5.09 (2.48) =0= 2.35 4.37 7.7622
Cash Flow )
The payback period is 4 operating years after the establishment year.
 The “Tulip Chips” Project Case
The financial feasibility study of the “Tulip Chips” project that is coded as “TC”
included the following data and information:
1. The establishment year of this project will be followed by seven operating years.
The project will be exempted from the income tax for the first five years of
operating, while it will be taxed at a flat rate of 20% for each of the last two years
of operating.
2. No credit sales will be allowed and the cash current operating sales revenue is
estimated at LE 10 million for each of the first five years of operating, and at LE
10.18 million for each of the last two years of operating. In addition to the sales
revenue, it is expected to collect a net residual value of LE 2.286 million at the
end of the seventh year of operating.
3. The investment costs are estimated at a total of LE 20 million including LE 5
million for the project’s land, LE 12 million for the depreciable fixed assets which
will be depreciated at a yearly fixed rate of 14% starting from the end of the first
year of operating, LE 2 million for the long term intangibles which will be equally
amortized during the first four years of operating, and LE 1 million for the first
working capital of the first 3 months of operating.
4. 11% interest loan of LE 9 million will be obtained just before the start of the first
year of operating. The principal of this loan will be repaid through 3 yearly equal
installments. The interest rate will be applied to the loan principal standing in each
of the first 3 years of operating.
5. The accounting net profit at the end of each of the first five years of operating will
be in LE million: 1.83, 2.16, 2.49, 2.82 and 3.32 respectively. The “after-tax
accounting net profit” will be LE 2.8 million for each of the last two years of
operating. All cash current operating costs will be paid when it will be incurred.

Required:
A) Prepare the debt-service table, compute the income tax, calculate the annual
depreciation and the amortization charges, then prepare a table to calculate the
cash current operating costs exclusive of interest and not including the
depreciation and the amortization charges.
B) Prepare the table to compute the NCF from the project view. Determine the
payback period.
 Solution:
A)
The debt-service table (LE m.)
Loan= LE 9 m., yearly installments= LE 3 m.
Year Balance Interest Installments Total Debt-
11% service
-1 9 --- --- ---
1 6 0.99 3 3.99
2 3 0.66 3 3.66
3 0 0.33 3 3.33
Total 1.98 9 10.98

Computing the income tax for each of the last two years of operating:
Let X= the taxable accounting net profit or the pre-tax accounting net profit
The “after tax accounting net profit” = x – 20%x
2.8= x-0.2x , 2.8= 0.8x
Thus, X= 2.8 / 0.8 = 3.5 (the pre-tax net profit)
Income tax= LE 3.5 million × 20%= LE 0.7 million

Annual Depreciation= LE 12 million ×14%= L.E 1.68 million.

Amortization= LE 2 million / 4 years= LE 0.5 million.
The table to calculate the cash current operatingcosts exclusive of interest and
not including of course the depreciation and the amortization charges:
LE m.
Y1 Y2 Y3 Y4 Y5 Y6 Y7
The current operating revenue 10 10 10 10 10 10.1 10.18
8
Less: The accounting net profit 1.8 2.16 2.49 2.82 3.32 3.50 3.50
3
= The accounting cash and non-
cash current operating costs
including the interest, the
depreciation and the amortization
charges A 8.1 7.84 7.51 7.18 6.68 6.68 6.68
7
The interest on the loan 0.9 0.66 0.33 --- --- --- ---
9
The annual depreciation 1.6 1.68 1.68 1.68 1.68 1.68 1.68
8
The amortization of the Italian 0.5 0.5 0.5 0.5 --- --- ---
Know-how
B 3.1 2.84 2.51 2.18 1.68 1.68 1.68
7
The current operating cash costs
exclusive of interest and not
including the depreciation and
the amortization charges
(A-B) 5 5 5 5 5 5 5

B)
The net cash flow table from the project view and the payback period
accordingly: LE m.
Y-1 Y1 Y2 Y3 Y4 Y5 Y6 Y7
Cash Inflows:
Current operating --- 10 10 10 10 10 10.1 10.18
cash revenue 8
Net residual value --- --- --- --- --- --- --- 2.286
A
--- 10 10 10 10 10 10.1 12.466
8
Cash Outflows:
Investment costs 20 --- --- --- --- --- --- ---

Current operating
cash costs exclusive
of interest --- 5 5 5 5 5 5 5
Income tax --- --- --- --- --- --- 0.7 0.7
B
20 5 5 5 5 5 5.7 5.7
Net Cash Flow (A- (20) 5 5 5 5 5 4.48 6.766
B)
Accumulated Net (20) (15) (10) (5) =0= 5 9.48 16.246
Cash Flow

The payback period is exactly 4 operating years after the establishment year.
 Project PE8 Case
Use the following data and information to determine the best choice for each of
the following statements:
Company CU is preparing a feasibility study for an investment expansion project
coded PE8 and the following data and information are now presented on Novemner
23, 2017:
a) PE8 requires one establishment year (Y-1) followed by 6 operating years (Y1,
….., Y6), where the first five years of operating will be exempted from the
income tax, while the sixth year of operating will be exempted from the income
tax, while the sixth year of operating will be taxed at a flat rate of 20%.
b) The “After-tax Accounting Current Operating Net Profits or (Losses)” are
computed for PE8 as follows (in LE million):
Y1 Y Y3 Y4 Y Y6
2 5
The “Pre-tax Accounting Current Operating 10 10 (3.5) 13.5 0 2.25
Net Profits or (Losses)”
Less: Income Tax (20%) 0 0 0 0 0 0.45
The “After-tax Accounting Current 10 10 (3.5) 13.5 0 1.8
Operating Net Profits or (Losses)”

C) The total of the investment costs will be LE 60 million. Part of this total will be
financed during Y-1, by a capital owned by Company CU, while the other part
will be financed by a loan which shall be obtained at the end of the
establishment year (Y-1). This loan will be repaid through four yearly equal
installments covering the first four years of operating. The annual interest rate
is fixed at 15% and the interest charge at the end of Y1 will be applied to the
declining balance of the loan’s principal.
D) A depreciation expense of LE 9 million is expected at the end of each year of
operating, while an amortization expense of LE 1 million is expected at the end
of the first five years of operating.
E) The “Accounting Current Operating Cash and Non-cash Costs” are estimated
in PE8 as follows in LE million:
Y1 Y2 Y3 Y4 Y5 Y6
 34 32.5 31 29.5 28 27

F) It is expected to collect in cash at the end of the economic life of PE8, a net
residual value of LE 8.8056 million when the project will be sold to other
investors.
G) No credit sales will be allowed by PE8 and all the “Current Operating Cash
Costs” of PE8 will be paid in cash when it will be incurred.
1) The principal of the loan which will be obtained just before the start of year
Y1 will be in LE million:
A. 40 B. 30 C. 20 D. 10
2) The total of all the interest charges will be in LE million:
A. 55 B. 40 C. 51 D. 15
3) The total of all amounts of the debt-service will be in LE million:
A. 55 B. 40 C. 51 D. 15
4) The total of the capital which will be owned by Company CU in PE8 will in
LE million be:
A. 40 B. 30 C. 20 D. 10
5) During Y1, the “Current Operating Cash Revenue” will be in LE million:
A. 28 B. 27.5 C. 43 D. 44
6) During Y5, the “Current Operating Cash Revenue” will be in LE million:
A. 28 B. 27.5 C. 29.25 D. 44
7) During Y6, the “Current Operating Cash Revenue” will be in LE million:
A. 28 B. 27.5 C. 29.25 D. 44
8) During each operating year, the “Current Operating Cash Costs Exclusive
of Interest” will be in LE million:
A. 18 B. 19 C. 20 D. 21
9) By using the direct way to compute the NCF from the project’s view, the
NCF at the end of Y3 will be in LE million:
A. 9.5 B. 25 C. 35 D. 54.6056
10)By using the direct way to compute the NCF from the project’s view, the
final accumulated NCF will be in LE million:
A. 9.5 B. 25 C. 35 D. 54.6056
11)By using the direct way to compute the NCF from the project’s view, the
NCF at the end of Y2 will be in LE million:
A. 26 B. 24.5 C. 25 D. 10
12)By using the direct way to compute the NCF from the project’s view, the
total of the “Cash In-flows” in Y6 will be in LE million:
 A. 27.5 B. 43 C. 28 D. 38.0556
13)By using the direct way to compute the NCF from the project’s view, the
total of the “Cash Out-flows” in Y6 will be in LE million:
A. 18 B. 25 C. 18.45 D. 10
14)Byusing the direct way to compute the NCF from the project’s view, the
total of “Cash Out-flows” in each of the first five years of operating will be
in LE million:
A. 18 B. 25 C. 18.45 D. 10
15)Byusing the direct way to compute the NCF from the project’s view, the
NCF at the end of economic life of PE8 will be in LE million:
A. 19.6065 B. 25 C. 10 D. 19.6056
16)The pay-back period of the total investment costs of PE8 after Y-1 will
exactly be:
A. Two operating years B. Three operating years
C. Four operating years D. Five operating years

Solution:
Loan principle x Interest Rate = Interest Charge
? x 15% = 6, So loan principle = 6/ 15% = 40
The debt-service table (LE m.)
Year Balance Interest Installments Total Debt-
15% service
-1 40 --- --- ---
1 30 6 10 16
2 20 4.5 10 14.5
3 10 3 10 13
4 0 1.5 10 11.5
Total 15 40 55

The table to compute the Current Operating Cash Sales Revenue in LE

million:
Y1 Y2 Y3 Y4 Y5 Y6
The Accounting Current Operating
Cash and Non-Cash Costs 34 32. 31 29.5 28 27
5

+The Pre-Tax Accounting 10 10 (3.5) 13.5 0 2.25

CurrentOperating Net Profits
 = The Current Operating Cash Sales 44 42. 27.5 43 28 29.25
Revenue 5

The table to compute for each operating year the Current Operating Cash
Costs Exclusive of Interest in LE million:
Y1 Y2 Y3 Y4 Y5 Y6
The Accounting Current Operating
Cash and Non-Cash Costs 34 32.5 31 29.5 28 27
Less: Interest Charges (6) (4.5) (3) (1.5) - -
Depreciation Expenses (9) (9) (9) (9) (9) (9)
Amortization Expenses (1) (1) (1) (1) (1) (1)

= Current Operating Cash Costs 18 18 18 18 18 18

Exclusive of Interest

Using the Direct way to compute NCF from the project’s view: (LE million)
Y-1 Y1 Y2 Y3 Y4 Y5 Y6
Cash In-flows:
Current operating cash revenue --- 44 42.5 27.5 43 28 29.25
Net residual value --- --- --- --- --- ---- 8.8056
A --- 44 42.5 27.5 43 28 38.0556
Cash Out-Flows:
Investment costs 60 --- --- --- --- --- ---
Current operating cash costs
exclusive of interest
--- 18 18 18 18 18 18
Income tax --- 0 0 0 0 0 0.45
B 60 18 18 18 18 18 18.45
Net Cash Flow (A-B) (60) 26 24.5 9.5 25 10 19.6056
Accumulated Net Cash Flow (60) (34) (9.5) =0= 25 35 54.6056

The payback period is 3 operating years after the establishment year.

 Project PGR of CUCO Case
Use the following data and information to determine the best choice for each of
the following statements:
The economic life of the project coded PGR of company CUCO is six years starting
by one establishment year (Y-1) followed by five operating years (Y1,,…, Y5). For
PGR the following selected data and information are presented:
(a) The investment costs of year Y-1 are estimated as follows in LE million:
14 Land, 5 Buildings, 20 Machinery, 3 Trucks, 2 Furniture, 2.5 Russian Know-
how, 1.5 Other various long-term intangibles, and 12 for the first working capital.
(b) The long-term tangible depreciable assets will be equally depreciated over the
five years of operating, while the long-term intangibleswill all be equally
amortized over the first four years of operating.
(c) Part of the total of the investment costs will be financed by an owned capital
which will be provided in cash during Y-1, while the remaining part of the total
of the investment costs will be financed by a 14% interest loan which CUCO
will manage to obtain at the end of Y-1. This loan will be repaid over four
yearly equal installments covering the first four years of operating. At the end
of Y1, the interest of this loan will be LE 2.8 million. After Y1, the annual
interest rate will be applied to the declining balance of the loans’ principle.
(d) It is expected to collect in cash at the end of Y5, a net residual value of LE
14.424 million without expecting any capital gains or losses when PGR will be
sold to other investors.
(e) The annual “Pre-tax Accounting Current Operating Net Profits” at an annual
flat rate of 20% and the income tax at the end of each of the first four years of
operating will be LE 2 million, while the income tax at the end of Y5 will be
LE 1.6 million.
(f) No credit sales will be allowed and all the “Current Operating Cash Costs” will
be paid in cash when it will be incurred.
1) The total of the classified investment costs of PGR will be in LE million:
A. 30 B. 48
C. 34 D. 60

2) The annual depreciation expense will be in LE million:

A. 6 B. 5
C. 1 D. 0

3) The amortization expense at the end of Y5 will be in LE million:

A. 6 B. 5
C. 1 D. 0
4) The total of all the interest charges will be in LE million:
A. 7 B. 20
C. 27 D. 60
5) The total of all the annual debt- service will be in LE million:
A. 7 B. 20
C. 27 D. 60
6) At the end of each of the first four years of operating, the “Pre-tax Accounting
Current Operating Net Profit” will be in LE million:
A. 10 B. 8
C. 9 D. 7
7) The principle of the loan is in LE million:
A. 20 B. 30
C. 40 D. 60
8) The total of the owned capital will be in LE million:
A. 20 B. 30
C. 40 D. 60
9) If it is known that the “Accounting Current Operating Cash and Non-Cash
Costs” will be LE 30 million during every operating year, then the “Current
Operating Cash Sales Revenue” during each of the first four years of operating
will be in LE million:
A. 37 B. 38
C. 39 D. 40
10) On the basis of the data given in (9) above, the “Current Operating Cash Sales
Revenue” during Y5 will be in LE million:
A. 37 B. 38
C. 39 D. 40
11) On the basis of the data given in (9) above, the “Current Operating Cash Costs
Exclusive of Interest” in Y4 will be in LE million:
A. 20.2 B. 20.9
C. 21.6 D. 22.3
12) By using the direct way to compute the NCF from the project’s view, the total
of the “Cash In-Flows” at the end of each of the first four years of operating will
be in LE million:
A. 10 B. 20
C. 30 D. 40
13) By using the direct way to compute the NCF from the project’s view, the total
of the “Cash Out-Flows” at the end of Y4 will be in LE million:
A. 22.2 B. 22.9
C. 23.6 D. 24.3
14) At the end of Y4, the accumulated NCF from the project’s view will be in LE
million:
A. (42.2) B. (25.1)
C. (8.7) D. 7
15) The pay-back period of the total investment costs of PGR is:
A. Exactly four operating years B. Three operating years and
after Y-1 about seven month in the
fourth year of operating after
Y-1
C. Five operating years after Y-1 D. None of the above

Solution:
The investment costs schedule in LE m.
Long-term non-depreciable assets:
Land 14
Long-term tangible depreciable assets:
Buildings 5
Machinery 20
 Trucks 3
Furniture 2
30
Long-term intangible assets:
Russian know-how 2.5
Other various long-term intangibles 1.5

4
Short-term investment costs:
First working capital 12
Total Investment Costs 60
- The depreciation expense at the end of every operating year= LE 30 million /
5 years = LE 6 million.
- The amortization expense at the end of each of the first four years of
operating = LE 4 million / 4 years = LE 1 million.
- The loan’s principle = the first interest charge / 14% = LE 2.8 million / 14% =
LE 20 million.
The installments = LE 20 million / 4 years = LE 5 million.
The total owned capital = The total of the investment costs – the loan’s
principle
=LE 60 million- LE 20 million = LE 40 million.

The Debt-Service Table:

The debt-service table (LE m.)
Year Balance Interest Installments Total Debt-
14% service
-1 20 --- --- ---
1 15 2.8 5 7.8
2 10 2.1 5 7.1
3 5 1.4 5 6.4
4 0 0.7 5 5.7
Total 7 20 27

- The annual Pre-Tax Accounting Current Operating Net Profits – Income tax =
The After-tax Accounting Current Operating Net Profits.
X-20%X= LE 8 million, 0.8 X = 8, X= 8/0.8= LE 10 million in Y1, Y2, Y3,
Y4.
Y5: X =6.4/0.8= LE 8 million.
- The annual income taxes at the end of each of Y1, Y2, Y3 and Y4: LE 10
million x 20% = LE 2 million
and the income tax at the end of Y5 = LE 8 million x 20%= LE 1.6 million.
 The table to compute the Current Operating Cash Sales Revenue in LE
million:
Y1 Y2 Y3 Y4 Y5
The Accounting Current Operating Cash and
Non-Cash Costs 30 30 30 30 30
+The Pre-Tax Accounting Current Operating
Net Profits 10 10 10 10 8

= The Current Operating Cash Sales Revenue 40 40 40 40 38

The table to compute for each operating year the Current Operating Cash
Costs Exclusive of Interest in LE million:
Y1 Y2 Y3 Y4 Y5
The Accounting Current Operating Cash and
Non-Cash Costs 30 30 30 30 30
Less: Interest Charges (2.8) (2.1) (1.4) (0.7) --
Depreciation Expenses (6) (6) (6) (6) (6)
Amortization Expenses (1) (1) (1) (1) --

= Current Operating Cash Costs Exclusive of 20.2 20.9 21.6 22.3 24

Interest

Using the Direct way to compute NCF from the project’s view: (LE
million)
Y-1 Y1 Y2 Y3 Y4 Y5
(A)Cash In-flows
Current operating cash revenue --- 40 40 40 40 38
Net residual value --- --- --- --- --- 14.424
A --- 40 40 40 40 52.424
(B) Cash Out-Flows
Investment costs 60
Current operating cash costs
exclusive of interest --- 20.2 20.9 21.6 22.3 24
Income tax --- 2 2 2 2 1.6
B 60 22.2 22.9 23.6 24.3 25.6
Net Cash Flow (A-B) (60) 17.8 17.1 16.4 15.7 26.824
Accumulated Net Cash Flow (60) (42.2)_ (25.1) (8.7) 7 33.824

The payback period is 3 operating years and about 7 monthin the fourth year of
operating after the establishment year.
The 7 months= (8.7 / 15.7) x 12 month = 6.6496812 = 7 month