Activity 18 Capital Budgeting: Net Present Value (NPV) The purpose of this assig

ID: 2562821 • Letter: A

Question

Activity 18 Capital Budgeting: Net Present Value (NPV) The purpose of this assignment is to practice capital budgeting via NPV calculation. Group Number Class meeting Morning / Afternoorn You are asked to evaluate a new tractor project for Deere. The engineers and marketing and accounting folks have pooled their efforts to generate the following expectations about the project's cash flows (FCFF). The WACC = 10%. t-0 1 4 9 10 CF 30 40 50 40 50 50 30 30 20 10 -200 What is the NPV of the project? 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 1st 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

Net present value is the value of the cash flows, present value of cash inflow-present value of cash outflow, adjusted with the present value factor.

Year

Cash flow

PV factor

NPV=Cash flow*PV factor

-200

1.0000

-200.0000

0.9091

27.2727

0.8264

33.0579

0.7513

37.5657

0.6830

27.3205

0.6209

31.0461

0.5645

28.2237

0.5132

15.3947

0.4665

13.9952

0.4241

8.4820

0.3855

3.8554

Net present value

26.2140