You are a major grocery chain (Fine Foods R Us) and are now contemplating starti
ID: 2782256 • 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 WACC for this project is 896, what is the project's NPV? USE TVM FORMULAS!Explanation / Answer
Initial investment = 120 million
WACC= 8%
The Present value of the FCF from year 1-26 can be computed using the PV of growing annuity formula
= P/(r-g) multiplied by (1-((1+g)/(1+r))^n)
= 7/ -0.02 * (1-(1.1/1.08)^26)
= 350*0.61136
= $213.9755
The Cash flow at year 26 = 7*1.1^25 = $75.84294
This will grow at 4% perpetually.
PV of the perpetuity = 75.84294/ (r-g)
= 75.84294/ (0.08-0.04)
= $1896.074
Total NPV = Total PV- Initial cost
= $213.9755 +$1896.074 - 120
= $ 1990.049 million
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