Projected Net Cash Flows Estimation Statement YEARS 2015 2016 2017 2019 Investme
ID: 2806119 • Letter: P
Question
Projected Net Cash Flows Estimation Statement YEARS 2015 2016 2017 2019 Investment Outlays Building Equipment Operating Cash Flows Over the Project's Life $12,000 $8,000 Units sold Sales price Sales revenue Variable costs Fixed operating costs Depreciation (building) Depreciation(equipment). Operating income before taxes (EBIT). Taxes on operating income (40%) Net operating profit after taxes (NOPAT) Add back depreciation Operating cash flow 20,000 20,000..... 20,000. 20,000 $3.00 $3.06 .. $3.12. $3.18 60,000 $ 61,200 S 62,424 S 63,672 42,000 42,840 43,697 44,571 8,000 8,080 8,161 8,242 156 312 312 312 1,600 2,560 960 8,244 7,408 8,734 9,587 3,298 2,963 3,494 3,835 4,946 4.445 5,241 5,752 1,756 2,872 1,832 1,272 6, 702 $ 7,317$ 7,073$ 7,024 1.520 Cash Flows Due to Net Operating working Capital Net Operating Working Capital (based on sales), Cash flows due to investment in NowC S6,000 ($6,000) $6,120 ($120) S6, 242 ..(S122) S6,367 so ...($125).6,367 Salvage Cash Flows: Long-Term Assets Net salvage cash flow: Building Net salvage cash flow: Equipment Total salvage cash flows $8,863 $1,744 $10,607 ($26,000) $6,582 $7,194 $6,948 Net Cash Flow (Time line of cash flows) $23,999 Con to thisExplanation / Answer
A
cost of debt
interest+(face value-market value)/years to maturity / (face value+market value)/2
80+(1000-941)/10 / (1000+941)/2
84.9/975.5
8.85%
after tax cost of debt
before tax cost of debt*(1-tax rate)
8.85*(1-.35)
5.7525
cost of equity
(expected dividend/net proceeds)+growth rate
(2.1266/20)+.085
19.13%
expected dividend
present dividend*(1+growth rate)
1.96*(1.085)
2.1266
net proceeds
22-2
20
growth rate
8.50%
8.50%
cost of preferred stock
preferred dividend/net proceeds
2.15/50
4.30%
preferred stock
2.15
net proceeds
52-2
50
source
weight
cost
weight*cost
debt
0.35
5.7525
2.013375
equity
0.4
19.13
7.652
preferred stock
0.25
4.3
1.075
weighted average cost of capital
10.74038
Year
cash flow
present value of cash flow = present value/(1+r)^n r= 10.74%
0
-26000
-26000
1
6582
5943.652
2
7194
5866.261
3
6948
5116.185
4
23999
15957.88
net present value
sum of present value of cash flow
6883.973
yes company should undertake the project as its results in positive NPV
B
Year
cash flow
0
-26000
1
6582
2
7194
3
6948
4
23999
IRR =using irr function in ms excel spreadsheet =irr(-26000,6582,7194,6948,23999)
20.12%
C
yes company should go with the project as its IRR is greater than weighted average cost of capital of 10.74% so it should be accepted.
D
Company should undertake the project using the IRR when its rate of return is greater than the weighted average cost of capital.
A
cost of debt
interest+(face value-market value)/years to maturity / (face value+market value)/2
80+(1000-941)/10 / (1000+941)/2
84.9/975.5
8.85%
after tax cost of debt
before tax cost of debt*(1-tax rate)
8.85*(1-.35)
5.7525
cost of equity
(expected dividend/net proceeds)+growth rate
(2.1266/20)+.085
19.13%
expected dividend
present dividend*(1+growth rate)
1.96*(1.085)
2.1266
net proceeds
22-2
20
growth rate
8.50%
8.50%
cost of preferred stock
preferred dividend/net proceeds
2.15/50
4.30%
preferred stock
2.15
net proceeds
52-2
50
source
weight
cost
weight*cost
debt
0.35
5.7525
2.013375
equity
0.4
19.13
7.652
preferred stock
0.25
4.3
1.075
weighted average cost of capital
10.74038
Year
cash flow
present value of cash flow = present value/(1+r)^n r= 10.74%
0
-26000
-26000
1
6582
5943.652
2
7194
5866.261
3
6948
5116.185
4
23999
15957.88
net present value
sum of present value of cash flow
6883.973
yes company should undertake the project as its results in positive NPV
B
Year
cash flow
0
-26000
1
6582
2
7194
3
6948
4
23999
IRR =using irr function in ms excel spreadsheet =irr(-26000,6582,7194,6948,23999)
20.12%
C
yes company should go with the project as its IRR is greater than weighted average cost of capital of 10.74% so it should be accepted.
D
Company should undertake the project using the IRR when its rate of return is greater than the weighted average cost of capital.
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