Federal Express is contemplating a new venture project and has done a detailed f
ID: 2657259 • Letter: F
Question
Federal Express is contemplating a new venture project and has done a detailed five year cash flow estimate with the following result ($000):
C0 C1 C2 C3 C4 C5
(300) (60) 70 100 120 180
The firm’s cost of capital is 12%.
a. What is the project’s NPV and IRR, and make the appropriate recommendation to management.
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b. Peter Morton, Federal Express’s Marketing VP, has argued that it’s unreasonable to exclude cash flows past year five from the analysis. Calculate the project’s terminal value assuming year five’s cash flow goes on forever. Recalculate the project’s NPV and IRR under that Peter’ assumption.
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c. Peter further argues that the most appropriate assumption is that cash flows beyond the fifth year incorporate a three percent long run growth rate. Calculate the terminal value, NPV, and IRR implied by this assumption.
(Any advice on how to solve using excel is appreciated)
Explanation / Answer
The projects NPV = - 48.19 and IRR is 7.54%
The Project should be rejceted because NPV is negative and it decreases the value of the firm and IRR is less than cost of capital so it shopuld be rejected.
2.
Project's Terminal value = 1500
NPV = 802.95 and IRR = 46.35%
Hence project must be accepted as NPV is positive and IRR is greater than Cost of Capitlal
c)
Terminal Cash flow = 2060,
NPV = 1120.71
IRR = 53.78%
Best of Luck. God Bless
A B C D E F Year 0 1 2 3 4 5 1 Cash Flows -300 -60 70 100 120 180 2 Cost of capital 12% NPV -48.19 NPV using Excel Formula=NPV(A2,B1:F1) + A1 IRR 7.54% IRR using excel formula = IRR(A1:F1)Related Questions
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