FINCORP is evaluating whether to build a new manufacturing plant. It plans to us

Question

FINCORP is evaluating whether to build a new manufacturing plant. It plans to use a 15% cost of capital to evaluate the project. It has prepared the following incremental cash flow projections (in millions of dollars).
Fill in the blanks in the Free Cash Flow Row (12) and then compute the NPV for this investment.

$ millions) Year 1-9 10 Free Cash Flow Forecast Sales Manufacturing Marketing Expenses Depreciation EBIT Income tax at 30% Unlevered Net Profit Depreciation Inc. in NWC Capital Expenditures Continuation Value Free Cash Flow 120 -35 -10 -15 60 -18 42 15 120 35 -10 -15 60 -18 42 15 2 4 8 10 -150 12 12 NPV-

Explanation / Answer

Here the FCF for yr 0 = $ -150 mn.

And FCF for yr 1-9 = $ 52 mn.

FCF for yr 10 = $ 64 mn (including the terminal cash flows i.e the continuation valuation.

NPV = 52 / 1.15 + 52 / (1.15)2 + ...... + 52 / (1.15)9 + 64 / (1.15)^10 - 150

= $ 113.94 mn

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