First identify or calculate the capital spending, the operating cash flow, the c
ID: 2666322 • Letter: F
Question
First identify or calculate the capital spending, the operating cash flow, the change in net working capital, and finally the free cash flow to the firm of the project. Free Cash Flows are cash flows available to the firm after stakeholders have been paid (interest and dividends). It is these free cash flows that you find that are discounted at the weighted average cost of capital to calculate the net present value and the internal rate of return.You will assess whether to make the investment or not. Use your accept-reject rules for the net present value and the internal rate of return.
Redbird, Inc. is considering an addition to its current operations. The figures are below.
Cost of the new project
$3,000,000
Installation costs
$100,000
Estimated unit sales in year 1
40,000
Estimated unit sales in year 2
65,000
Estimated unit sales in year 3
35,000
Estimated sales price in year 1
$200
Estimated sales price in year 2
$200
Estimated sales price in year 3
$150
Variable cost per unit
$130
Annual fixed cost
$40,000
Initial working capital needed
$60,000
Additional Working capital needed
5 % of sales
Depreciation method
5 years straight-line method, no salvage value
Redbird’s tax rate
40%
Redbird’s cost of capital
15%
Calculate Operating Cash Flow, change in Net Working Capital, and calculate Free Cash Flow. Show your calculations in a Word document or an Excel spreadsheet.
Determine the NPV and IRR of the project. Show your calculations in a Word document or an Excel spreadsheet.
Assess the project. Be sure to state the basis upon which you made your option choices. You should prepare a one-page executive summary of your findings, with 3–5 pages of supporting analysis.
You must submit your backup in Excel or other supporting documentation showing how answers were reached.
Explanation / Answer
Year 1
Year 2
Year 3
Net
Cost of Capital
Discounted
Cost of Capital
Discounted
Years
Cash Flows
15 % - ( L1 )
Cash Flows
20% - ( L2 )
Cash Flows
Year 1
Year 2
Year 3
Sales Units 40000 65000 35000 Unit Cost 200 200 150 8000000 13000000 5250000 Variable Cost 130 per unit 5200000 8450000 4550000 Contribution 2800000 4550000 700000 Fixed Cost 40000 40000 40000 Income before Tax 2760000 4510000 660000 Depreciation 620000 620000 620000 2140000 3890000 40000 Less: Tax 40% 856000 1556000 16000 Net Income 1284000 2334000 24000 Add: Depreciation 620000 620000 620000 Operating Cash Flow - ( A ) 1904000 2954000 644000 Less: Additional Working Capital 400000 650000 262500 Net Cash Flow 1504000 2304000 381500 Working Capital 400000 650000 262500 Changes in Working Capital - ( B ) 400000 250000 -387500 Free Cash Flow - ( A - B ) 1504000 2704000 1031500Related Questions
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