Jobs R Us, Inc. is a recruiting firm that specializes in post – college placemen

Question

Jobs R Us, Inc. is a recruiting firm that specializes in post – college placement in the finance industry. Its clients are currently concentrated in the North-Eastern United States. It is contemplating expanding into the Mid-West and accesses the risk of the new venture to be similar to that of the existing company.

Your summer intern created a summary for Jobs R Us, Inc. potential in the Midwest market over the next 5 years:

-Revenue is expected to be $7,500,000 in the first year and grow 8% per year for the next 4 years.

-Variable cost is expected to be 45% of revenue.

-Fixed cost (including depreciation) is expected to be $1,250,000 of revenue each year.

-Depreciation expense is expected to be $75,000 each year.

-Maintenance capex is expected to be $150,000 each year.

-Change in Net working capital is expected to be $100,000 in year 1, growing at the same percentage as revenue thereafter.

-Taxes are 40%.

-Initial investment today is estimated to be $2,500,000.

-After tax cost of capital is 12%

Question: What is the NPV? (answer in millions. round to 1 decimal)

Explanation / Answer

In year 1, revenue = 7500000

It is growing at 4% per year so revenue in year 2 = 1.04*7500000 = 8100000

Similarly we can calculate revenue of all years

variable cost is 45% of revenue i.e. 0.45*revenue

Variable cost for year 1 = 0.45*7500000 = 3375000

Fixed cost including depreciation = 1250000

Depreciation = 75000

maintenance capex = 150000

change in Working capital in year 1 = 100000

It will grow at 8% annually

So change in working capital in year 2 = 100000*1.08 = 108000

Taxes = 40%

Cash flow = (revenue - variable cost - fixed cost)*(1-tax) + depreciation - capex - change in net working capital

Cash flow in year 1 = (7500000-3375000-1250000)*(1-0.4) + 75000 - 150000 -100000 = 1550000

Similarly cash flow can be calculated for each year

It is given in table below

After tax cost of capital i.e. r = 12%

Initial investment = 2500000

CF0 = -2500000 (negative sign indicates cash outflow)

NPV is sum of present value of all cash flows

Present value = Cash flow/(1+r)n, where r is cost of capital and n is number of years

In this case NPV = CF0 + CF1/(1+r)1 + CF2/(1+r)2 + CF3/(1+r)3 + CF4/(1+r)4 +  CF5/(1+r)5

NPV = -2500000 + 1550000/(1.12)1 + 1740000/(1.12)2 + 1945200/(1.12)3 + 2166816/(1.12)4 + 2406161.3/(1.12)5

Solving this equation we will get

NPV = 4,397,972.1

Year Revenue VC FC Capex NWC cash flow 1       7,500,000.0     3,375,000.0     1,250,000.0     150,000.0     100,000.0     1,550,000.0 2       8,100,000.0     3,645,000.0     1,250,000.0     150,000.0     108,000.0     1,740,000.0 3       8,748,000.0     3,936,600.0     1,250,000.0     150,000.0     116,640.0     1,945,200.0 4       9,447,840.0     4,251,528.0     1,250,000.0     150,000.0     125,971.2     2,166,816.0 5     10,203,667.2     4,591,650.2     1,250,000.0     150,000.0     136,048.9     2,406,161.3

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