Question

A firm has projected the following financials for a possible project:

YEAR	0	1	2	3	4	5
Sales		123,422.00	123,422.00	123,422.00	123,422.00	123,422.00
Cost of Goods		69,079.00	69,079.00	69,079.00	69,079.00	69,079.00
S&A		30,000.00	30,000.00	30,000.00	30,000.00	30,000.00
Depreciation		22,072.20	22,072.20	22,072.20	22,072.20	22,072.20
Investment in NWC	1,152.00	540.00	540.00	540.00	540.00	540.00
Investment in Gross PPE	110,361.00

The firm has a capital structure of 48.00% debt and 52.00% equity. The cost of debt is 9.00%, while the cost of equity is estimated at 13.00%. The tax rate facing the firm is 37.00%. (Assume that you can't recover the final NWC position in year 5. i.e. only consider the change in NWC for each year)

What is the cash flow for year 1?

What is the NPV of the project? (Hint: Be careful about rounding the WACC here!)

Answer 1

Weighted Average Cost of Capital of the Firm,

WACC = Re * We  + Rd* (1-t) * Wd

We = Weight of Equity in Capital =  52.00% = 0.52

Wd = Weight of Debt = 48.00% = 0.48

Re = Cost of Equity =   13.00% = 0.13

Rd = Cost of Debt = 9.00% = 0.09

t =tax rate =  37.00% = 0.37

WACC = Re * We + Rd* (1-t) * Wd = 0.13 * 0.52 +  0.09 * ( 1 - 0.37) * 0.48 = 0.094816

Now we will Calculate NPV of the Project :

Step 01 :

Row 10 : Here for Year 0 we have calculate total Investment in Year 01 =  Investment in NWC + Investment in Gross PPE = 1152 + 110361 = 111, 513 (- Ve Sign Indiate Net cash Outflow)

EBIT From Year 01 onwards : Sales - ( Cost of Goods + S&A + Depreciation +  Investment in NWC )

Step 02 :

Row 11 : Tax Payble = Tax Rate * EBIT

Step 03 :

Row 12 : Net Operating Cash Flow = EBIT - Tax + Depreciaton

Step 04 :

Row 13 : PV Factor = 01 / (01 + WACC)^Year

Step 05 :

Row 14 :  PV of Cash Flow = PV Factor * Net Operating Cash Flow

Step 06 :

Row 15 :  NPV = Sum of All PV of Cash Flow

NPV of the Project is = - 22,533 . 1985 (ANS)