Q)12 Answer Questions 11-15 based on the following information about Capital Pro

Question

Q)12

Answer Questions 11-15 based on the following information about Capital Projects A & Z. Project A has a cost of $17.0M & delivery & installation costs of $1.5M. Weighted Average Cost of Capital 5th in forecast = 2. (WACC) = 15 %. The FCF growth rate (G) after the year the (timeline) period % Terminal Value (TV) = (FCFs) (1+G) + (WACC - G) Expected Net After-Tax Free Cash Flows for Project A are shown below. Year Net Free Cash Flow (M$) -17.0 (remember to consider the delivery/installation costs) 8.7 11.9 15.1 12.0 (remember to consider the terminal value") 11. Calculate the Payback (not discounted) for Project A. (10 points) A. 3.07 years B. 2.91 years C, 2.36 years D. 1.77 years 12. Calculate the Net Present Value (NPV) for Project A. (20 points)

Explanation / Answer

Cash flows would be

Year 0: -17-1.5=-18.5

Year 1: 5.5

Year 2: 8.7

Year 3: 11.9

Year 4: 15.1

Year 5: 12+Terminal Value=106.15

Terminal Value=Cash flow in Year 6/(r-g)=12*1.02/(0.15-0.02)=94.15

11 Option C

Cumulative Cash Flows

Year 0: -18.5

Year 1: -18.5+5.5=-13

Year 2: -13+8.7=-4.3

Year 3: -4.3+11.9=7.6

As we see year 2 is the last year where cumulative cash flows was negative, hence payback=2+4.3/11.9=2.36 years

12 Option C

So, NPV=-18.5+5.5/1.15+8.7/1.15^2+11.9/1.15^3+15.1/1.15^4+106.15/1.15^5

=$62.09 M

13

NPV=-18.5+5.5/(1+r)+8.7/(1+r)^2+11.9/(1+r)^3+15.1/(1+r)^4+106.15/(1+r)^5

So, IRR is that value of r at which NPV is 0

=>r=68.51%

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