Corporate Finance

Free Cash Flow Valuation 
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QUESTIONS

1. The cash flows from two investments are:

Years

Investment 0 1 2 3

A 100,000 70,000 70,000

B 120,000 60,000 60,000 60,000

Which of them would you choose if the cost of capital is 17 percent?

2. The rates of The Indian Management Journal are as follows:

1 year – Rs 215

2 years – Rs 395

3 years – Rs 540

Assuming that subscription rates do not change, which offer would you choose? Assume an opportunity cost of capital of

16 percent.

3. A company has the following investments:

(Rs million)

Project Investment NPV

A 2.50 1.75

B 1.0 0.8

C 1.5 1.5

D 2.0 2.0

E 2.0 2.4

If the company has a capital constraint of Rs 50 lac, which set of projects would you choose?

4. You are evaluating two alternative machines for your machine shop. They have the following characteristics.

Machine Cost Operating cost per year Expected life

A 800,000 40,000 8 years

B 1,000,000 32,000 5 years

If the discount rate = 16 percent, which machine would you choose?