1.1 Present value calculation

You are going to receive a total of five payments

, one per year. The first cash flow amounts to 100 SEK and will be

received in one years time.The Subsequent cash flows will then increase by 10 % annually. Use an annual discount rate of 8 % in your calculations.

1.2 Internal Rate of Return (IRR)

What is the IRR of an investment with the following numbers:

Initial Outlay 15 MSEK

Net Cash Flows year 1-10 3 MSEK

Salvage Value 2 MSEK

Give us the IRR with one decimal (It is not possible for you to find an exact IRR, but you should be certain that it is rounded to 12.1 % and not to 12.2 % or 12.0 %)

1.3 Compare two investments

Which of the following two investments is preferred if they can be repeated many times in the future?

Investment A Investment B

Initial Outlay 100 MSEK 150 MSEK

Annual Net Cash Flows 20 MSEK 21 MSEK

Salvage Value 60 MSEK 100 MSEK

Lifespan of Project 5 years 10 years

Discount Rate 10% 10%

1.4 Comparing several investments

You just won the highest prize in a lottery and are given the opportunity to choose how you want your prize to be paid to you. The different alternatives are given in the table below.

Alternative Payment plan

A 750,000 SEK today

B 8,650 SEK per month for 20 years. The first payment is

received in one months time.

C 54,000 SEK every 6 months, with the first payment being paid

immediately (31 payments in total).

D One payment of 130000 SEK today, and then 130,000

SEK annually for 10 years (a total of 11 payments).

E 22,000,000 SEK received in 30 years.

Use an annual discount rate of 12 % in your calculations.

Which of the alternatives should you choose, and what is the present value of that alternative?

1.5 Annual savings

You plan to travel around the world 10 years from now. You estimate

that you will need 59,000 SEK and decide to start saving today. You

will make your first deposit today and plan to make a total of 10 deposits into your savings account (including the one today). If every deposit you make is an equally large sum, how big does that sum have to be in order for you to have 59,000 SEK 10 years from now?

Assume that the interest rate paid by the bank is 4.3 % and that you have to pay 30 % in taxes on interest gains.

1.6 Present value with real cash flows

You wish to purchase a car 4 years from now. The price of the car today is 500,000 SEK and you believe that the price will increase by the annual

inflation.

Assume that the annual inflation is 2 % and that the bank offers you an annual interest rate of 1 %, how much money do you need to put in your account today in order to be able to purchase the car in 4 years time?

1.7 Free Cash Flow valuation

a) You have been given the following numbers from the management of a company as an estimation of future performance (numbers in MSEK):

Year 0 1 2 3

EBIT 180 200 230

Depreciation 20 24 27

Working Capital 100 120 125 130

Investments 50 55 60

The free cash flow (FCF) in year 4 is estimated to be 150 MSEK and

is expected to grow by 4 % until the end of time. The WACC of the company is 13 % and the company tax paid is 25 %.

What is the enterprise value of the firm ?

b)Suppose the company has 100 million shares outstanding and 400 MSEK in debt, what is its share price?

1.8 Bonds

You are considering purchasing the following bond:

Face Value: 1,000,000 SEK

Coupon rate: 5.0 % (coupons are paid once per year)

Time to maturity1: 30 years

The yield to maturity of the bond is 6 %.

a) What is the price of the bond today?

b) For the same bond in item a, assume that we wish to sell

10 years time after the coupon has just been paid and that the yield to maturity has dropped to 5 % by then. What price do we receive when we sell the bond?2

c) Use the table in the answer sheet and indicate the cash flows

received from an investment consisting in buying the bond

30 years before its maturity, keeping it for 10 years and selling it right after coupon number 10 is paid (the investment in year 0, the coupon

payments and the payment received when we sold the bond at the

price computed in item b). Use the values actually paid out those

years, not the present value. Also, indicate by using the sign + or if it was a cash outflow or a cash inflow).