You are a major grocery chain (Fine Foods R Us) and are now contemplating starti
ID: 2781948 • Letter: Y
Question
You are a major grocery chain (Fine Foods R Us) and are now contemplating starting a food truck supply service. You will prepare (pre-cook and then freeze or chill) 'small plates' - like Tapas, which will then be sold to owners of food trucks. The start-up cost is $120 million. Your financial analysts calculate that the operation will produce free cash flow (FCFF) of $7million the 1t year, and that this free cash flow will grow by 10% over the following 25 years (i.e., g-10% for t through t-26). After that, free cash flow is expected to grow at a constant rate of 4% forever Your WACC for this project is 8%, what is the project's NPV? USE TVM FORMULAS!Explanation / Answer
NPV=-120+7/1.08+7*1.1/1.08^2.................7*1.1^25/1.08^26+Horizon Value/1.08^26
=-120+7/1.08*(1-(1.1/1.08)^26)/(1-1.1/1.08)+Horizon Value/1.08^26
=93.9755+1971.916/1.08^26
=$ 360.582 million
Horizon Value=FCFF27/(r-g)=7*1.1^25*1.04/(0.08-0.04)=1971.916 million
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