You are a major grocery chain (Fine Foods R Us) and are now contemplating starti
ID: 2781144 • Letter: Y
Question
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=2 through t-26). After that, free cash flow is expected to grow at a constant rate of 4% forever. Your WACCfor this project is 8%. What is the project's NPV? USETVM FORMULAS!Explanation / Answer
Year Cashflow ( Calculations ) Cashflows PV 0 (120.00) (120.00) (120.00) 1 7.00 7.00 6.48 2 7.00 *110% = 7.70 6.60 3 7.70 *110% = 8.47 6.72 4 8.47 *110% = 9.32 6.85 5 9.32 *110% = 10.25 6.98 6 10.25 *110% = 11.27 7.10 7 11.27 *110% = 12.40 7.24 8 12.40 *110% = 13.64 7.37 9 13.64 *110% = 15.01 7.51 10 15.01 *110% = 16.51 7.65 11 16.51 *110% = 18.16 7.79 12 18.16 *110% = 19.97 7.93 13 19.97 *110% = 21.97 8.08 14 21.97 *110% = 24.17 8.23 15 24.17 *110% = 26.58 8.38 16 26.58 *110% = 29.24 8.54 17 29.24 *110% = 32.16 8.69 18 32.16 *110% = 35.38 8.85 19 35.38 *110% = 38.92 9.02 20 38.92 *110% = 42.81 9.19 21 42.81 *110% = 47.09 9.36 22 47.09 *110% = 51.80 9.53 23 51.80 *110% = 56.98 9.70 24 56.98 *110% = 62.68 9.88 25 62.68 *110% = 68.95 10.07 26 See note - 151.68 20.51 NPV 104.23 Since the growth is constant after year 26 we apply the following formula = 75.84 + [ (75.84 * 1.04 ) / ( 1.08 - 1.04 ) ] =151.68
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