In: Finance
I asked them to conduct a cash flow analysis to make sure that the proposed t-shirt venture generate value. The students, after careful data collection and analysis, have come up with the following assumptions for T-shirt Corp.:
Assumptions:
2019 |
2020 |
2021 |
2022 |
2013 |
|
Number of t-shirts |
500 |
1,000 |
1,000 |
1,500 |
2,000 |
Please analyze this project and provide advice to T-shirt Corp. Should they start the t-shirt venture?
Operating cash flow (OCF) each year = income after tax + depreciation
Free cash flow (FCF) each year = OCF - change in working capital
The interest expense is not included in the cash flow analysis because the interest cost is a financing expense, and is already included in the cost of capital.
The amount spent on marketing research is a sunk cost, because it is not recoverable, and is not an incremental cash flow. Hence, it is not included in the cash flow analysis.
NPV is calculated using NPV function in Excel
NPV is $54,969
Yes, T-Shirt Corp. should start the venture because the NPV is positive.