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TOPIC $1$st

$1/.$ ABC is considering two mutually exclusive investment projects

which have a shelf life of two years. The cash flows of the two programs $($in thousands

euros$),$ as well as the corresponding probabilities of their realization are presented

in the tables below:

GREEK REPUBLIC PMS BANKING, FINANCE

AND FINANCIAL TECHNOLOGY

$($FINTECH$)$

$2$

INVESTMENT A

Year $0$ Year $1$ Year $2$

Cost Probability Cash Flow Probability Cash Flow

$-400$

$40\%440$

$60\%460$

$40\%420$

$60\%380$

$70\%410$

$30\%360$

INVESTMENT B

Year $0$ Year $1$ Year $2$

Cost Probability Cash Flow Probability Cash

Flow

$-700$

$35\%480$

$40\%490$

$60\%480$

$65\%340$

$55\%380$

$45\%330$

A$/.$ Consider, based on the criterion of Expected Net Present Value,

which of the two investments would you choose, given that its weighted average cost

capital in the case of Investment A is estimated at $10\%,$ Investment B at $8\%,$

while the risk$-$free interest rate is $3\%.$

B$/.$ Let's say at the end of the first year a prospective buyer comes along

and submits an offer to buy the investment you chose to

implement in query a$/.$ According to his offer, he intends to her

buy instead of the amount of $400,000$ euros. Considering his offer,

justify whether or not it is profitable to sell the investment at the end of the first year.

$2/.$

A$/.$ Outline the similarities and differences of the equivalence method

with the certainty and method of adjusting the discount rate.

B$/.$ Assume that an initial cost investment of $1,000$ monetary units and

life of one year yields a cash flow equal to $1,500$ monetary units. The

discount rate adjusted to the risk of the particular investment

is estimated at $14\%,$ while the risk$-$free rate is $2\%.$ How much should it be$?$

equivalence factor with certainty to give us the same Net Present

Value the discount rate adjustment method and the method

equivalence with certainty?

GREEK REPUBLIC PMS BANKING, FINANCE

AND FINANCIAL TECHNOLOGY

$($FINTECH$)$

$3$

SUBJECT $2$

A$.$ If a firm sells $100,000$ units of a product at $15$ euros per unit, it has

fixed costs of $200,000$ euros and variable costs of $11$ euros per unit of product, and

increase its sales by $10\%,$ by what percentage will net operating income increase

its profits?

B$.$ If the above company succeeds in reducing the variable cost per unit

of product at $9$ euros $($with the rest of the assumptions remaining the same as in $2$A$),$ at what

product level $($in units sold$)$ and at what sales value its profits

of business before interest and taxes are zeroed out?

C$.$ Based on the data of fixed costs $(200,000$ euros$)$ and sales of $2$A $(100,000$

units of product at $15$ euros per unit$),$ the variable cost of $2$B $(9$ euros per

unit of product$)$ and assuming that the business has an invested capital of $4,000,000$

of which $2/3$ are loan funds with a borrowing rate of $5\%,$ who is the

degree of financial leverage of the firm?

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