Projected Net Cash Flows Estimation Statement YEARS 2015 2016 2017 2019 Investme

Question

Projected Net Cash Flows Estimation Statement YEARS 2015 2016 2017 2019 Investment Outlays Building Equipment Operating Cash Flows Over the Project's Life $12,000 $8,000 Units sold Sales price Sales revenue Variable costs Fixed operating costs Depreciation (building) Depreciation(equipment). Operating income before taxes (EBIT). Taxes on operating income (40%) Net operating profit after taxes (NOPAT) Add back depreciation Operating cash flow 20,000 20,000..... 20,000. 20,000 $3.00 $3.06 .. $3.12. $3.18 60,000 $ 61,200 S 62,424 S 63,672 42,000 42,840 43,697 44,571 8,000 8,080 8,161 8,242 156 312 312 312 1,600 2,560 960 8,244 7,408 8,734 9,587 3,298 2,963 3,494 3,835 4,946 4.445 5,241 5,752 1,756 2,872 1,832 1,272 6, 702 $ 7,317$ 7,073$ 7,024 1.520 Cash Flows Due to Net Operating working Capital Net Operating Working Capital (based on sales), Cash flows due to investment in NowC S6,000 ($6,000) $6,120 ($120) S6, 242 ..(S122) S6,367 so ...($125).6,367 Salvage Cash Flows: Long-Term Assets Net salvage cash flow: Building Net salvage cash flow: Equipment Total salvage cash flows $8,863 $1,744 $10,607 ($26,000) $6,582 $7,194 $6,948 Net Cash Flow (Time line of cash flows) $23,999 Con to this

Explanation / Answer

2. a) payback period

payback period = 3+(5276/23999)

= 3.21 years

b) NPV

c) IRR = 20%

d) PI = 31809 / 26000

= 1.22

3) Cost of debt = after tax yield on maturity

YTM = (C+ (F-P)/n) / (F+P)/2

= (80+ (1000-941)/10) / (1000+941)/2

= 8.85%

After tax cost of debt = 0.65*8.85%

= 5.75%

Price of equity stock = expected div / (cost of equity - grwoth rate)

(22-2) = 2.13 / (cost of equity - 0.085)

Cost of equity = 19.13%

Cost of preferred stock = div / price

= 2.15 / (52-2)

= 4.3%

a)NPV under new WACC

Yes, RIC should undertake the new investment.

b) When the NPV is positive, the company should accpet the project

c) New IRR = 20%, Yes, RIC should proced with the investment as IRR is more than WACC of 10.74%

d) When the IRR is more than the cost of capital, projecr should be accepted.

Time Net cash flows cumulative cash flows 0 -$26,000 -$26,000 1 $6,582 -$19,418 2 $7,194 -$12,224 3 $6,948 -$5,276 4 $23,999 $18,723

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