Question

3. The Project would be a major undertaking for company X. It would require an initial investment of $10,000 and would last for about 6 years. The assets from the project would be sold at the end of year 6 for $7,000. A table showing the revenues, the initial investment, and the sale of assets at the end are shown. You must determine the cash flows for the 6 years of the project Using the WACC calculated above, discount the cash flows to determine the NPV. You can also use the Excel IRR function to determine the Internal Rate of Return. But the important question is: Would you recommend this investment? Beta = 1.5,  Expected Return = 18%, WACC is 10%,

Project Telescope Cash Flow Projections
	Capital	Revenues	COGS (60%)	Operating Margin	Fixed Costs	Net Cash Flow	Present Values
	Investments						of Cash Flows
Initial Investment	-10,000
Year 1		2,000	1,200		800
Year 2		2,200	1,320		800
Year 3		2,400	1,440		800
Year 4		1,600	960		800
Year 5		2,700	1,620		800
Year 6		3,000	1,800		800
Sale of Assets	7,000
NPV
IRR

Answer 1

		A	B	C = A - B	D	E = C - D	F = E x PVF	PVF
Project Telescope Cash Flow Projections
	Capital	Revenues	COGS (60%)	Operating Margin	Fixed Costs	Net Cash Flow	Present Values	PVF at 10%
	Investments						of Cash Flows
Initial Investment	-10,000					-10,000	(10,000.00)	1
Year 1		2,000	1,200	800	800	0	-	0.909091
Year 2		2,200	1,320	880	800	80	66.12	0.826446
Year 3		2,400	1,440	960	800	160	120.21	0.751315
Year 4		1,600	960	640	800	-160	(109.28)	0.683013
Year 5		2,700	1,620	1,080	800	280	173.86	0.620921
Year 6		3,000	1,800	1,200	800	400	225.79	0.564474
Sale of Assets	7,000					7000	3,951.32	0.564474
NPV							(5,571.99)
IRR							-52.23%
Note:
Operating margin is arrived at by deducting COGS from Rvenues
net cash flow is arrived at by deducting fixed cost from operating margin
PVF is calculated as =1.10^-n, n = 0 to 6
IRR formula for excel : =IRR(Values Year 1 to Year 5, 7400)
Since sale of assets is at end of 6 year so OCF and salvage value is combined for 6th year Net cash flow(400+7000 ) = 7400
Since NPV is negative, and IRR is -52.23%, the project is not worthwhile