1. For what type of project do you think each of the three mentioned sales forecasting methods will be appropriate?
Which one is most
suited to Mascot, Comment?
NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield
2. Estimate a sales forecast for next 25 years based on the data provided. Estimate respective revenues.
By using scenario analysis, we have to find out the no. of ships manufactured by Mascot
Yes (0.7)
90
No (0.3)
120
Yes (0.6)
80
No (0.4)
100
Yes (0.6)
65
No (0.4)
80
Yes (0.5)
100
No (0.5)
140
Yes (0.5)
90
No (0.5)
125
Yes (0.3)
80
No (0.7)
110
East coast (0.4)
positive (0.3)
West coast (0.6)
East coast (0.4)
mascot
normal (0.5)
West coast (0.6)
West coast (0.4)
negative (0.2)
East coast (0.6)
Expected probability for Branch 1 = 0.3*0.4*0.7 = 0.084
Similarly 0.036, 0.108, 0.072, 0.12, 0.08, 0.15, 0.15, 0.04, 0.04, 0.036, 0.084 for the other branches.
Estimated ships/ year = (0.084*90)+(0.036*120)+(0.108*80)++(0.084*110)= 100.53
= 101 ships/ year
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
No of ships
35
101
101
101
101
101
101
101
101
101
101
101
101
101
101
101
80
80
80
80
80
Selling Price ($mn)
425
442
460
478
497
517
538
559
582
605
629
654
680
708
736
765
796
828
861
895
931
Revenue ($mn)
14,875
44,642
46,428
48,285
50,216
52,225
54,314
56,486
58,746
61,096
63,539
66,081
68,724
71,473
74,332
77,305
63,681
66,229
68,878
71,633
74,498
3. Prepare a comprehensive depreciation schedule for capital expenditures mentioned above. Also prepare an amortization schedule for
R&D expenses separately.
Depreciation schedule for Capital-expenditure
Aggregate
capex
depreciatio
n
Capital expenditiure for 0-4
years
Year
1250
2600
3200
3200
2300
5
6
7
8
9
10
1250
1153.84
6
1065.08
9
983.158
9
907.531
2
837.721
2
773.281
1
713.797
9
658.890
4
608.206
5
561.421
4
96.1538
5
96.15385
88.7574
2600
208
296.7574
81.9299
2392
0
278.260
9
254.064
3
231.971
7
211.800
3
193.382
9
539.9566
2200.64
2024.58
9
1862.62
2
1713.61
2
1576.52
3
1450.40
1
1334.36
9
3200
2933.33
3
2688.88
9
2464.81
5
2259.41
4
2071.12
9
1898.53
5
1740.32
4
1595.29
7
75.6276
191.36
176.051
2
161.967
1
149.009
7
0
266.666
7
244.444
4
224.074
1
205.401
2
188.284
5
172.594
1
158.211
3
0
209.090
9
190.082
6
172.802
4
157.093
1
142.811
9
774.3841
129.829
118.026
4
589.6039
69.8101
64.4400
9
59.4831
6
54.9075
3
50.6838
7
46.7851
2
43.1862
6
1227.62
137.089
126.121
8
116.032
1
106.749
5
98.2095
6
145.027
132.941
4
3200
2921.73
9
2667.67
5
2435.70
3
2223.90
3
2030.52
1853.95
3
1692.74
176.567
161.213
3
147.194
8
2300
2090.90
9
1900.82
6
1728.02
4
1570.93
1
1428.11
9
1298.29
919.0065
840.9054
769.4593
704.0994
644.3061
539.5583
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Book
Value
518.235
1
478.370
9
441.573
1
39.8642
4
36.7977
6
33.9671
6
1129.41
1039.05
7
955.932
6
407.606
376.251
7
347.309
2
320.593
1
295.932
1
273.168
1
252.155
2
232.758
6
214.854
1
198.326
9
31.3543
28.9424
4
26.7160
9
24.6610
1
22.7640
1
21.0129
3
19.3965
5
17.9045
1
16.5272
4
15.2559
1
14.0823
8
12.9991
2
879.458
809.101
4
744.373
3
684.823
4
630.037
5
579.634
5
533.263
8
490.602
7
451.354
4
415.246
1
382.026
4
351.464
3
183.071
168.988
6
155.9
323.3
90.3528
83.1245
7
76.4746
1
70.3566
4
64.7281
1
59.5498
6
54.7858
7
1462.35
5
1340.49
2
1228.78
5
1126.38
6
1032.52
1
946.477
1
50.403
46.3707
6
867.604
795.303
7
729.028
4
42.6611
39.2482
1
36.1083
6
33.2196
9
30.5621
1
28.1171
4
668.276
612.586
4
561.537
5
514.742
7
471.847
5
432.526
9
396.5
121.862
9
111.707
7
102.398
7
93.8655
86.0433
8
78.8730
9
72.3003
4
66.2753
1
60.7523
7
55.6896
7
51.0488
6
46.7947
9
42.8952
3
39.3206
2
36.0439
1545.54
5
1411.15
1288.44
1
1176.40
3
1074.10
7
980.706
2
895.427
4
817.564
2
746.471
6
681.561
1
622.294
9
568.182
3
518.775
1
473.664
3
432.476
1
394.8
134.395
2
122.708
7
112.038
4
102.295
9
93.4005
9
85.2788
77.8632
6
71.0925
4
64.9105
8
59.2661
8
54.1126
49.4071
6
45.1108
8
41.1882
37.6066
1
1180.26
4
1072.96
7
975.424
5
886.749
6
806.136
732.850
9
666.228
1
605.661
9
550.601
7
500.547
455.042
7
413.675
2
376.068
4
341.880
3
310.800
3
282.5
107.296
7
97.5424
5
88.6749
6
493.7719
451.8812
413.5538
80.6136
73.2850
9
66.6228
1
60.5661
9
55.0601
7
378.4859
50.0547
45.5042
7
41.3675
2
37.6068
4
34.1880
3
31.0800
3
28.2545
7
243.1013
346.3996
317.0407
290.1767
265.595
222.5178
203.6817
186.4444
170.6697
156.2333
143.0214
1553
Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Mntn
0
0
0
0
0
650
650
650
650
650
650
650
650
650
650
650
0
0
0
0
0
0
0
0
0
0
Year 5
0
0
0
0
0
650
588.0952
532.0862
481.4113
435.5626
394.0804
356.549
322.5919
291.8689
264.0719
238.9222
216.1677
195.5803
176.9536
160.1009
144.8532
131.0576
118.5759
107.283
97.06556
87.82122
Y5 Depr
0
0
0
0
0
61.90476
56.00907
50.67487
45.84869
41.48215
37.53147
33.95705
30.72304
27.79704
25.1497
22.75449
20.5874
18.62669
16.85272
15.2477
13.79554
12.48168
11.29295
10.21743
9.244339
8.363926
Year 6
0
0
0
0
0
0
650
585
526.5
473.85
426.465
383.8185
345.4367
310.893
279.8037
251.8233
226.641
203.9769
183.5792
165.2213
148.6992
133.8292
120.4463
108.4017
97.56151
87.80536
Y 6 Depre
0
0
0
0
0
0
65
58.5
52.65
47.385
42.6465
38.38185
34.543665
31.089299
27.980369
25.182332
22.664099
20.397689
18.35792
16.522128
14.869915
13.382924
12.044631
10.840168
9.7561513
8.7805362
P
R
O
C
E
E
D
I
N
G
F
U
R
T
H
E
R
S
A
M
E
Year 14
0
0
0
0
0
0
0
0
0
0
0
0
0
0
650
541.66667
451.38889
376.15741
313.46451
261.22042
217.68368
181.40307
151.16923
125.97435
104.97863
87.482191
Y 14 depr
0
0
0
0
0
0
0
0
0
0
0
0
0
0
108.333333
90.2777778
75.2314815
62.6929012
52.2440844
43.536737
36.2806141
30.2338451
25.1948709
20.9957258
17.4964381
14.5803651
Year 15
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
650
531.8182
435.124
356.0105
291.2813
238.3211
194.99
159.5373
130.5305
106.7977
87.37991
Y15 depr Aggregate
0
0
0
0
0
0
0
0
0
0
0 61.90476
0 121.0091
0 177.5959
0 231.9398
0
284.31
0 334.9755
0 384.2094
0
432.296
0 479.5397
0 526.2771
118.1818 572.8946
96.69421 489.8559
79.11345 419.3003
64.72919 359.2909
52.96024 308.1999
43.33111 264.6573
35.45272 227.5096
29.00677 195.7848
23.73282
168.663
19.41776
145.452
15.88726 125.5671
On a similar scale book value remaining is 838.7
Amortization schedule for R&D expenses:
Year
R&D
expenses
R&D
Amortization
expense
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15- 25
3,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
200
200
200
200
200
200
200
200
200
200
200
200
200
200
200
Remarks
No amortization expense there after
4. Estimate operating earnings after-tax for accounting purposes.
No. of ships :
Year-5, production is 35 ships
Year- 6 to 20, production is 101 ships for each year
Year- 21 to 25, production is 101-21 = 81 ships for each year
Unit Price : Year-5, price is 425. Afterwards, 4% inc in inflation every year
Sales Revenue = No. of ships * Unit Price
Operations Expense = 87% of Sales Revenue
Admin Expense = 4% of Sales Revenue
Capex Depreciation & R&D amortization: As per question 3
Operating Earnings = Sales revenue (Opns exp + Admin exp + Capex dep + R&D amort.)
Operating earnings after tax = 65% of Operating Earnings
Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Aggregate
Operating
depreciation Boats
Price
Revenues expenses
GSA
96.2
0
296.8
0
540.0
0
774.4
0
919.0
0
902.8
35
425.0
14875.0
12941.3
595.0
890.5
101
442.0
44642.0
38838.5
1785.7
881.7
101
459.7
46427.7
40392.1
1857.1
876.2
101
478.1
48284.8
42007.8
1931.4
873.9
101
497.2
50216.2
43688.1
2008.6
874.5
101
517.1
52224.8
45435.6
2089.0
878.0
101
537.8
54313.8
47253.0
2172.6
884.2
101
559.3
56486.4
49143.1
2259.5
893.1
101
581.6
58745.8
51108.9
2349.8
904.8
101
604.9
61095.7
53153.2
2443.8
919.3
101
629.1
63539.5
55279.4
2541.6
806.9
101
654.3
66081.1
57490.5
2643.2
709.5
101
680.4
68724.3
59790.1
2749.0
624.9
101
707.7
71473.3
62181.8
2858.9
551.3
101
736.0
74332.2
64669.0
2973.3
487.2
101
765.4
77305.5
67255.8
3092.2
Depreciated
R & D for
Operating
3000
earnings
200.0
-296.2
200.0
-496.8
200.0
-740.0
200.0
-974.4
200.0
-1119.0
200.0
235.9
200.0
2927.3
200.0
3096.8
200.0
3269.4
200.0
3445.5
200.0
3625.7
200.0
3810.3
200.0
3999.6
200.0
4194.0
200.0
4393.8
4799.3
5140.4
5475.7
5807.7
6138.6
6470.3
Tax paid
0
0
0
0
0
0
1024.559
1083.879
1144.285
1205.94
1268.995
1333.592
1399.859
1467.911
1537.846
1679.741
1799.14
1916.499
2032.698
2148.509
2264.612
Oper
ear
after
tax
-296.2
-496.8
-740.0
-974.4
-1119.0
235.9
1902.8
2012.9
2125.1
2239.6
2356.7
2476.7
2599.7
2726.1
2856.0
3119.5
3341.3
3559.2
3775.0
3990.1
4205.7
21
22
23
24
25
431.2
382.2
339.3
301.7
268.6
80
80
80
80
80
796.0
827.9
861.0
895.4
931.2
63681.4
66228.6
68877.8
71632.9
74498.2
55402.8
57618.9
59923.7
62320.6
64813.4
2547.3
2649.1
2755.1
2865.3
2979.9
5300.1
5578.3
5859.7
6145.3
6436.2
1855.046
1952.421
2050.883
2150.846
2252.687
3445.1
3625.9
3808.8
3994.4
4183.6
5. For most firms, marginal tax rate is higher than effective tax rate. Why do we use marginal tax rate to estimate after tax earnings for
projects.
Effective tax rate can be adjusted less than marginal tax rate by using techniques like double-depreciation. Initially due to these
techniques, tax may appear less when compared to marginal rate. As the time goes and capital expenditure decreases, depreciation also
starts decreasing. This decreases difference between taxable income for financial purposes and taxation purposes, results in paying the
deferred tax. So, marginal tax rate is used to estimate after tax earnings for projects.
6. Prepare a debt amortization schedule mentioning the relevant interest payments, principal balance and total payments scheduled for
each year.
Loan amount = $ 1,500 mn
Given that, Loan has to be cleared in equal instalments in 10 years. Using PMT function in excel, it is found that $ 211 mn for 10 years
would clear the loan completely.
Year 1 : Interest component = 1500 * 0.0675 = 101 ; Principal Component = 211 101 =$ 110 mn
Year 2 : Interest component = (1500-110) *0.0675 = 94; Principal Component = 211 94 =$ 117 mn
And so on till Year 10.
Year
Loan
taken
Loan Repayment
Interest
part
Principal
part
0
1
1,500
0
211
101
110
Remarks
2
3
4
5
6
7
8
9
10
11
0
0
0
0
0
0
0
0
0
0
211
211
211
211
211
211
211
211
211
0
94
86
77
68
59
49
38
26
13
0
117
125
134
143
152
163
174
185
198
0
Total Payment made for the Loan is $ 2,111 mn for 10 years.
7. Estimate net income to be used for accounting purposes.
WC
Working every
Revenues Capital
year
Year
0
1
2
3
4
5
6
7
8
9
10
11
14875.0
44642.0
46427.7
48284.8
50216.2
52224.8
54313.8
3718.8
11160.5
11606.9
12071.2
12554.0
13056.2
13578.5
14121.6
3718.8
7441.8
446.4
464.3
482.8
502.2
522.2
543.1
Testing
1200.0
Book
Value
1200.0
1080.0
Depreciated
Testing
120.0
108.0
Loan totally cleared
12
13
14
15
16
17
18
19
20
21
22
23
24
25
56486.4
58745.8
61095.7
63539.5
66081.1
68724.3
71473.3
74332.2
77305.5
63681.4
66228.6
68877.8
71632.9
74498.2
14686.5
15273.9
15884.9
16520.3
17181.1
17868.3
18583.1
19326.4
15920.3
16557.2
17219.4
17908.2
18624.5
564.9
587.5
611.0
635.4
660.8
687.2
714.7
743.3
-3406.0
636.8
662.3
688.8
716.3
1200.0
1200.0
972.0
874.8
787.3
1908.6
1717.7
1546.0
1391.4
1252.2
2327.0
2094.3
1884.9
1696.4
1526.7
1374.1
97.2
87.5
78.7
190.9
171.8
154.6
139.1
125.2
232.7
209.4
188.5
169.6
152.7
137.4
Testing depreciation left is : 1237
Profit before Tax = Sales revenue (Opns exp + Admin exp + Capex dep + R&D amort.+Interest exp)
Net Income = 65 % of Profit before Tax
Year
0
1
2
3
Aggregate
Operating
depreciation Revenues expenses GSA
96.2
296.8
540.0
774.4
Depreciated Depreciated
Testing
R&D
Interest
200.0
200.0
101.0
200.0
94.0
200.0
86.0
NI
before tax on
Tax
NIT
-296.2
-597.8
-834.0
-
NI
after
tax
-296.2
-597.8
-834.0
-
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
919.0
902.8
890.5
881.7
876.2
873.9
874.5
878.0
884.2
893.1
904.8
919.3
806.9
709.5
624.9
551.3
487.2
431.2
382.2
339.3
301.7
268.6
14875.0
44642.0
46427.7
48284.8
50216.2
52224.8
54313.8
56486.4
58745.8
61095.7
63539.5
66081.1
68724.3
71473.3
74332.2
77305.5
63681.4
66228.6
68877.8
71632.9
74498.2
12941.3
38838.5
40392.1
42007.8
43688.1
45435.6
47253.0
49143.1
51108.9
53153.2
55279.4
57490.5
59790.1
62181.8
64669.0
67255.8
55402.8
57618.9
59923.7
62320.6
64813.4
595.0
1785.7
1857.1
1931.4
2008.6
2089.0
2172.6
2259.5
2349.8
2443.8
2541.6
2643.2
2749.0
2858.9
2973.3
3092.2
2547.3
2649.1
2755.1
2865.3
2979.9
120.0
108.0
97.2
87.5
78.7
190.9
171.8
154.6
139.1
125.2
232.7
209.4
188.5
169.6
152.7
137.4
200.0
200.0
200.0
200.0
200.0
200.0
200.0
200.0
200.0
200.0
200.0
77.0
68.0
59.0
49.0
38.0
26.0
13.0
1060.4
1196.0
167.9
2868.3
3047.8
3231.4
3419.5
3492.7
3702.3
3902.4
4106.6
4315.1
4608.4
4968.6
5321.1
5668.6
6013.4
6237.6
5090.7
5389.9
5690.0
5992.6
6298.8
1003.909
1066.729
1130.985
1196.84
1222.445
1295.792
1365.839
1437.293
1510.29
1612.94
1739.019
1862.39
1984.001
2104.681
2183.167
1781.745
1886.451
1991.51
2097.409
2204.594
1060.4
1196.0
167.9
1864.4
1981.1
2100.4
2222.7
2270.3
2406.5
2536.6
2669.3
2804.8
2995.5
3229.6
3458.7
3684.6
3908.7
4054.5
3309.0
3503.4
3698.5
3895.2
4094.2
8. What adjustments do you think will be required to make a transition from accounting earnings to cash flows? Indicate each one of
them and the logic behind such adjustments.
The adjustments that are required to be done from accounting earnings to cash flows are
Since Depreciation & Amortization expenses are not physical cash flows and are used to realise cost of capital investment, those
expenses to be added back to Net profit for calculating the cash flows.
Capital Expenditure is to be subtracted from the earnings, for calculating the cash flows. These are one of the major cash flows which
were not considered while calculating the earnings.
Change in Working Capital is to be calculated for obtaining net working capital, which has to be subtracted from the earnings.
9. We have assumed that same depreciation method is used for both tax and reporting purposes. If however, we assume that different
method is used for each of these purposes, which method should we use to estimate project cash flows. Comment.
10. Estimate the After-tax sales proceed for the facility to be winded up and transfer of certification rights at the end of 25 years.
Salvage value of the facility = $ 2850 mn
Book value = $ 3628 mn (ref to que-3 : 1553 + 838.7+ 1236.7)
Profit/ Loss = 2850 3628 = ($778) mn
After tax- sale proceeds = (778) * 0.65 =$ 506.1 mn
11. Estimate free cash flows (FCF) to the FIRM.
Net Income, Dep of capex, R&D amortization exp, Int exp obtained from Que. 7
Change in working capital for year 1= Working capital requirement of year 1- year 0
Similarly,
Change in working capital for year 25= Working capital requirement of year 25- year 24
CFFO = Net Income + Dep Capex + R&D amort. Exp Change in WC
CFFI = Capex + R&D expenditure + Testing expenditure
FCF = CFFO + Interest expense - CFFI
WC
Capital
every
expenditiure Revenues year
Year
Operating
expenses GSA
Testing
R&D
3000.0
debt
@
6.75%
Annual
payments FCF
1250.0
2600.0
211.1
-2600.0
3200.0
211.1
-3200.0
3200.0
211.1
-3200.0
2300.0
211.1
-6018.8
650.0
14875.0
7441.8
12941.3
595.0
211.1
-6753.0
650.0
44642.0
446.4
38838.5
1785.7
211.1
1917.5
650.0
46427.7
464.3
40392.1
1857.1
211.1
1997.5
650.0
48284.8
482.8
42007.8
1931.4
211.1
2081.8
650.0
50216.2
502.2
43688.1
2008.6
211.1
2170.5
10
650.0
52224.8
522.2
45435.6
2089.0
211.1
1105.5
11
650.0
54313.8
543.1
47253.0
2172.6
2399.3
12
650.0
56486.4
564.9
49143.1
2259.5
2503.1
13
650.0
58745.8
587.5
51108.9
2349.8
2612.4
14
650.0
61095.7
611.0
53153.2
2443.8
2727.4
15
650.0
63539.5
635.4
55279.4
2541.6
3718.8
1200.0
1200.0
1500.0
-2750.0
1620.2
16
0.0
66081.1
660.8
57490.5
2643.2
3547.5
17
0.0
68724.3
687.2
59790.1
2749.0
3635.6
18
0.0
71473.3
714.7
62181.8
2858.9
3733.9
19
0.0
74332.2
743.3
64669.0
2973.3
3841.9
67255.8
3092.2
20
0.0
77305.5
3406.0
21
0.0
63681.4
636.8
55402.8
2547.3
3312.8
22
0.0
66228.6
662.3
57618.9
2649.1
3411.8
23
0.0
68877.8
688.8
59923.7
2755.1
3518.7
24
0.0
71632.9
716.3
62320.6
2865.3
3633.2
25
0.0
74498.2
64813.4
2979.9
7350.2
1200.0
6980.4
12. In estimating working capital needs we have assumed that additional working capital is needed for undertaking the project. However,
if we assume that Mascot will use its existing working capital, would the cash flows increase, decrease or remain constant. What can
be the impact on value or NPV? Comment.
If we assume that Mascot will use its existing working capital, No additional working capital is required to inject into the system every
year. Hence, the amount of Free Cash Flow will increase. This leads to increase in NPV of the project.
13. What adjustments do you think are needed to estimate free cash flow to EQUITY (FCFE). Estimate FCFE.
Adjustments required for calculating FCFE is, the amount of Loan re-payment for the year has to be subtracted from FCF(which obtained
in que 11)
FCFE = FCF Loan Re payment
Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Annual
CUMMULATIVE cummulative
payments FCF
FCFE
fcf
FCFE
-2750.0 -2750.0
-2750.0
-2750.0
211.1 -2600.0 -2811.1
-5350.0
-5561.1
211.1 -3200.0 -3411.1
-8550.0
-8972.2
211.1 -3200.0 -3411.1
-11750.0
-12383.3
211.1 -6018.8 -6229.9
-17768.8
-18613.2
211.1 -6753.0 -6964.1
-24521.8
-25577.3
211.1
1917.5
1706.3
-22604.3
-23871.0
211.1
1997.5
1786.4
-20606.9
-22084.6
211.1
2081.8
1870.7
-18525.1
-20213.9
211.1
2170.5
1959.3
-16354.6
-18254.6
211.1
1105.5
894.4
-15249.1
-17360.1
2399.3
2399.3
-12849.8
-14960.8
2503.1
2503.1
-10346.7
-12457.7
2612.4
2612.4
-7734.3
-9845.4
2727.4
2727.4
-5006.9
-7118.0
1620.2
1620.2
-3386.7
-5497.8
3547.5
3547.5
160.7
-1950.3
3635.6
3635.6
3796.3
1685.2
3733.9
3733.9
7530.2
5419.1
3841.9
3841.9
11372.0
9261.0
6980.4
6980.4
18352.4
16241.4
3312.8
3312.8
21665.2
19554.1
3411.8
3411.8
25077.0
22966.0
3518.7
3518.7
28595.7
26484.7
3633.2
3633.2
32228.9
30117.9
7350.2
7350.2
39579.2
37468.1
14. We have assumed that Mascot has used debt for financing. If we assume that no debt was raised, what would have been the impact
on FCFE? Would it be higher, lower or remain constant.
FCFE is a measure to calculate how much cash can be paid to equity share holders of the company after all expenses. If we assume that
no debt was raised by Mascot, then whatever the cash leftover after deducting all the expenses can be distributed to shareholders. Thus,
we can say that FCFE would be more than the case where debt was raised.
15. Use WACC as 10% and Cost of equity as 14% and estimate the NPVs for the firm and to the shareholders. Decide whether Mascot
should go ahead with the project or not. What adjustment do you think can make project looks much more attractive?
FCF & FCFE are obtained from que.13
Given that, Discount rate for WACC is 10%, ie for FCF
Discount rate for Cost of equity is 14%, ie for FCFE
PV for FCF is calculated by using the formula = FCF/( (1+disc rate)^year)
PV for FCFE is calculated by using the formula = FCFE/( (1+disc rate)^year)
Year
FCF
0
1
2
3
4
5
6
7
8
9
10
11
12
FCFE
-2750.0
-2600.0
-3200.0
-3200.0
-6018.8
-6753.0
1917.5
1997.5
2081.8
2170.5
1105.5
2399.3
2503.1
-2750.0
-2811.1
-3411.1
-3411.1
-6229.9
-6964.1
1706.3
1786.4
1870.7
1959.3
894.4
2399.3
2503.1
13
14
15
16
17
18
19
20
21
22
23
24
25
NPV
2612.4
2727.4
1620.2
3547.5
3635.6
3733.9
3841.9
6980.4
3312.8
3411.8
3518.7
3633.2
7350.2
2612.4
2727.4
1620.2
3547.5
3635.6
3733.9
3841.9
6980.4
3312.8
3411.8
3518.7
3633.2
7350.2
Firm
Investors
($4,404.27)
($9,215.14)
After calculating FCF & FCFE for each year, NPV for FCF is obtained as (4428) & FCFE as (10151). As per NPV method, both FCF & FCFE are
obtained as negative. Hence,it Is not advised to go for the project.
16. When cash flows are discounted to present values, we are biased against long term projects. Is this statement true? Comment.
NPV analysis
is
sensitive
to
the reliability
of
future
cash
inflows
that
an
investment
or
project
will
yield
17. Mascot could gain more information about the execution of the project if it could wait for 1 more year from now. Specifically, the R&D
department has indicated that they are expected to come up with a technology which could reduce the operating cost to be 85% of
revenues from the current 87%. However, Mascot will have to incur a higher cost in terms of capital expenditure to be made for 4 years
one year from now. If mascot opts to undertake project after one year rather than now, the capital expenditure for installing the
capacity will be as follows. Estimate the value of this option to the shareholders. Can we identify cost and benefits separately for this
option? If yes, identify them.
Year
0
1
2
3
4
Capital
expenditiure
Year
Capex
0
3090
3605
3605
2626.5
Aggregate
depreciation
Revenues
WC every
year
Operating
expenses
GSA
Testing
Depreciated
Testing
Depreciated
R&D
0.0
0.0
200.0
3090.0
247.2
200.0
3605.0
527.8
3605.0
798.1
2626.5
969.9
650.0
948.8
14875.0
7441.8
12643.8
650.0
932.0
44642.0
446.4
650.0
919.2
46427.7
650.0
910.1
650.0
10
Annual
payments
FCF
FCFE
-1500.0
-1500.0
211.1
-3090.0
-3301.1
200.0
211.1
-3605.0
-3816.1
200.0
211.1
-3605.0
-3816.1
200.0
211.1
-6345.3
-6556.4
595.0
200.0
211.1
-6455.5
-6666.6
37945.7
1785.7
200.0
211.1
2721.8
2510.7
464.3
39463.5
1857.1
200.0
211.1
2833.4
2622.3
48284.8
482.8
41042.1
1931.4
200.0
211.1
2950.9
2739.8
904.4
50216.2
502.2
42683.8
2008.6
200.0
211.1
3074.5
2863.4
650.0
902.1
52224.8
522.2
44391.1
2089.0
120.0
200.0
211.1
2046.2
1835.1
11
650.0
902.8
54313.8
543.1
46166.7
2172.6
108.0
200.0
3304.2
3304.2
12
650.0
906.6
56486.4
564.9
48013.4
2259.5
97.2
200.0
3442.9
3442.9
13
650.0
913.3
58745.8
587.5
49934.0
2349.8
87.5
200.0
3588.7
3588.7
14
650.0
922.9
61095.7
611.0
51931.3
2443.8
78.7
200.0
3741.8
3741.8
15
650.0
935.7
63539.5
635.4
54008.6
2541.6
190.9
2674.3
2674.3
16
0.0
821.6
66081.1
660.8
56168.9
2643.2
171.8
4643.0
4643.0
17
0.0
722.7
68724.3
687.2
58415.7
2749.0
154.6
4774.1
4774.1
18
0.0
636.8
71473.3
714.7
60752.3
2858.9
139.1
4917.3
4917.3
19
0.0
562.0
74332.2
743.3
63182.4
2973.3
125.2
5072.1
5072.1
20
0.0
496.8
77305.5
-3406.0
65709.7
3092.2
232.7
6796.6
6796.6
3718.8
1200.0
1200.0
1200.0
21
0.0
439.9
63681.4
636.8
54129.2
2547.3
209.4
4366.5
4366.5
22
0.0
390.0
66228.6
662.3
56294.3
2649.1
188.5
4507.3
4507.3
23
0.0
346.3
68877.8
688.8
58546.1
2755.1
169.6
4657.6
4657.6
24
0.0
308.0
71632.9
716.3
60887.9
2865.3
152.7
4817.4
4817.4
25
0.0
274.2
74498.2
63323.5
2979.9
137.4
7882.6
7882.6
firm
NPV after expiry
NPV when option is
taken
IRR
MIRR
Pay back
invesors
$600.35 ($5,871.56)
$545.77 ($5,150.49)
10.33%
9.64%
8.86%
8.56%
13.17
13.74
The value of this option for the shareholder is
$($5,150.49)
18. Comment on the methods that can be used to decide on the investment (NPV, IRR, MIRR etc.). State whether IRR can be used to decide
for FCF and FCFE and why. Make a numerical analysis of the problems you could face.
