Question

MLM Corporation, has provided you the following business operations data:

Items	Value
Equipment cost	$8,750
Salvage value, equipment, Year 4	$750
Opportunity cost	$0
Externalities (cannibalization)	$0
Units sold, Year 1	12,000
Annual change in units sold, after Year 1	13%
Sales price per unit, Year 1	$1.65
Annual change in sales price, after Year 1	3%
Variable cost per unit (VC), Year 1	$1.07
Annual change in VC, after Year 1	3%
Nonvariable cost (Non-VC), Year 1	$2,120
Annual change in Non-VC, after Year 1	2.50%
Project cost of capital (r)	12%
Tax rate	21%
Working capital as % of next year's sales	15%

Moreover, they have tabulated cash flows and performance measures as shown below:

Years	0	1	2	3	4
Unit sales		12,000	13,560	15,323	17,315
Sales price per unit		$1.65	$1.70	$1.75	$1.80
Variable cost per unit (excl. depr.)		$1.07	$1.10	$1.12	$1.15
Nonvariable costs (excl. depr.)		$2,120	$2,173	$2,227	$2,283
Sales revenues = Units × Price/unit		$19,800	$23,045	$26,822	$31,219
NOWCt = 15%(Revenuest+1)	$2,970	$3,457	$4,023	$4,683	$0
Basis for depreciation	$8,750
Annual depreciation rate (MACRS)		33.33%	44.45%	14.81%	7.41%
Annual depreciation expense		$2,916	$3,889	$1,296	$648
Remaining undepreciated value		$5,834	$1,944	$648	$0

As a corporate finance advisor, you’re required to perform the following tasks:

1- Provide a cash flow forecast for the next four years.

2. Calculate NPV, IRR, MIRR, Profitability Index (PI), Payback, and Discounted Payback.

Answer 1

Part 1)

Sl No	Years	0	1	2	3	4
i	Unit sales (Given)		12,000	13,560	15,323	17,315
ii	Sales price per unit (Given)		1.65	1.70	1.75	1.80
iii	Variable cost per unit (Given)		1.07	1.10	1.14	1.17
iv	Sales revenue (i*ii)		19,800	23,045	26,822	31,219
v	Variable cost (i*iii)		12,840	14,944	17,394	20,245
vi	Non variable cost (Given)		2,120	2,173	2,227	2,283
vii	Depreciation (8750*depreciation rate)		2,916	3,889	1,296	648
viii	EBIT (iv-v-vi-vii)		1,924	2,038	5,905	8,042
ix	Tax @ 21% (viii*21%)		404	428	1,240	1,689
x	PAT (viii-ix)		1,520	1,610	4,665	6,353
xi	Add back: Depreciation		2,916	3,889	1,296	648
xii	Operating cash flow (x+xi)		4,436	5,500	5,961	7,002
xiii	Investment (Given)	-8,750
xiv	Salvage value					750
xv	Change in Net WC (Previous year WC-Current WC)	-2,970	-487	-566	-660	4,683
xvi	Net cash flow (xii+xiii+xiv)	-11,720	3,949	4,934	5,301	12,435
xvii	PVF @ 12% (1/[1.12^year])	1.00	0.8929	0.7972	0.7118	0.6355
xviii	Net present value of cash flow (xv*xvi)	-11,720	3,526	3,933	3,773	7,902

NPV = ΣNet present value of cash flow = -11,720+3,526+3,933+3,773+7,902 = 7,415

IRR = 34.15%

Payback & Discounted payback:

Year	Net cashflow	Cummulative Net cashflow	Net present value of cashflow	Cummulative Net present value of cashflow
0	-11,720	-11,720	-11,720	-11,720
1	3,949	-7,771	3,526	-8,194
2	4,934	-2,837	3,933	-4,261
3	5,301	2,464	3,773	-487
4	12,435	14,899	7,902	7,415

Payback period = 2years+(2,837/5,301) = 2years+0.535year = 2.535years

Discounted payback period = 3years+(487/7,902) = 3years+0.062year = 3.062years