Question
In: Finance
ONLY NEED PART E PLEASE SHOW ALL WORK Company X projects numbers of unit sales for...
ONLY NEED PART E
PLEASE SHOW ALL WORK
Company X projects numbers of unit sales for a new project as follows:
81,000 (year 1), 89,000 (year 2), 97,000 (year 3), 92,000 (year 4), and 77,000 (year 5).
The project will require $1,500,000 in net working capital to start (year 0) and require net working capital investments each year equal to 15% of the projected sales for subsequent years (year 1 - 5). NWC is recovered at the end of the fifth year.
Fixed costs (operating expenses) are $1,850,000 per year.
Variable costs are $190/unit, and the units are priced at $345 each.
The equipment needed to begin production has a cost of $19,500,000.
The equipment is qualified for accounting as MACRS depreciation:
Year 1: 14.29%, Year 2: 24.49%, Year 3: 17.49%, Year 4: 12.49%, Year 5: 8.93%
In 5 years, this equipment can be sold for 35% of its acquisition cost (original cost)
The company is in the 35% marginal tax bracket and has a required rate of return of 18%.
(a) Estimate FCF for each year
(b) Calculate NPV, IRR based on the estimated FCF from part a
(c) Create a NPV profile corresponding to discount rates between (6%, 8%, ... 40%)
(d) Do a sensitivity analysis using 2-input data table analyzing NPV given Selling price ($300, $320,...$400) , and VC ($160, $170, ...$210)
(e) Do a scenario analysis (optimistic and pessimistic) and report the summary results for NPV and IRR:
Optimistic case: Variable cost= $160/unit, Fixed cost= $1,600,000, selling price= $400/unit
Pessimistic case: Variable cost= $210/unit, Fixed cost= $2,050,000, selling price= $300/unit
Solutions
Expert Solution
Step 1 Summarize Given Information
| Cost Of project | |
| Equipment | $ 1,95,00,000 |
| Net working Capital | $ 15,00,000 |
| Add 15% of sales in next year | |
| Salvage Cost in year 5 (35% of cost) | $ 68,25,000 |
| Selling Price | $345 |
| Variable Cost | $190 |
| Fixed Cost | $ 18,50,000 |
| Cost of Capital | 18% |
| Tax Rate | 35% |
Part E:
Optimistic situation and pessimistic situation
| Original Situation | optimistic value |
pessimistic value |
|
| NPV | $ 53,82,514.29 | $ 2,02,51,493.50 |
$ (59,68,041.69) |
| IRR | 25% | 44.80% | 9.76% |
Part I : Optimistic Situation:
| Year | Year | Year | Year | Year | |
| 1 | 2 | 3 | 4 | 5 | |
| Units Manufactured | 81000 | 89000 | 97000 | 92000 | 77000 |
| Contribution units * (selling price - marginal cost) | $ 1,94,40,000 | $ 2,13,60,000 | $ 2,32,80,000 | $ 2,20,80,000 | $ 1,84,80,000 |
| Fixed Cost | $ (16,00,000) | $ (16,00,000) | $ (16,00,000) | $ (16,00,000) | $ (16,00,000) |
| Depreciation | $ (27,86,550) | $ (47,75,550) | $ (34,10,550) | $ (24,35,550) | $ (17,41,350) |
| Profit Before Tax | $ 1,50,53,450 | $ 1,49,84,450 | $ 1,82,69,450 | $ 1,80,44,450 | $ 1,51,38,650 |
| Tax @ 35% | $ (52,68,708) | $ (52,44,558) | $ (63,94,308) | $ (63,15,558) | $ (52,98,528) |
| Profit After Tax | $ 97,84,743 | $ 97,39,893 | $ 1,18,75,143 | $ 1,17,28,893 | $ 98,40,123 |
| Addback Depreciation | $ 27,86,550 | $ 47,75,550 | $ 34,10,550 | $ 24,35,550 | $ 17,41,350 |
| Less: Working Capital Requirement (15% of next year sales) | $ (53,40,000) | $ (58,20,000) | $ (55,20,000) | $ (46,20,000) | |
| Add: Recovery of Net working Capital | $ 2,28,00,000 | ||||
| Add: Salvage Value | $ 68,25,000 | ||||
| Free Cash Flow | $ 72,31,293 | $ 86,95,443 | $ 97,65,693 | $ 95,44,443 | $ 4,12,06,473 |
| Discount Factor @ 18% | 0.847457627 | 0.71818443 | 0.608630873 | 0.515788875 | 0.437109216 |
| D.C.F (FCF * Disc Factor) | $ 61,28,213.98 | $ 62,44,931.41 | $ 59,43,701.95 | $ 49,22,917.26 | $ 1,80,11,728.90 |
Calculation of NPV and IRR
| DCF year 1-5 |
$ 4,12,51,493.50 |
|
| Cash outflow year 0 | $ (2,10,00,000) | |
| Cost of Machinery | $ (1,95,00,000) | |
| Working Capital | $ (15,00,000) | |
| NPV |
$ 2,02,51,493.50 |
Using IRR function in excel. {formula = IRR(values for year 0: year6)}
| 0 | 1 | 2 | 3 | 4 | 5 | |
| DCF | $ (2,10,00,000) | $ 72,31,292.50 | $ 86,95,442.50 | $ 97,65,692.50 | $ 95,44,442.50 |
$ 4,12,06,472.50 |
| IRR | 44.80% |
Part II pessimistic situation
Calculation of FCF
| Year | Year | Year | Year | Year | |
| 1 | 2 | 3 | 4 | 5 | |
| Units Manufactured | 81000 | 89000 | 97000 | 92000 | 77000 |
| Contribution units * (selling price - marginal cost) | $ 72,90,000 | $ 80,10,000 | $ 87,30,000 | $ 82,80,000 | $ 69,30,000 |
| Fixed Cost | $ (20,50,000) | $ (20,50,000) | $ (20,50,000) | $ (20,50,000) | $ (20,50,000) |
| Depreciation | $ (27,86,550) | $ (47,75,550) | $ (34,10,550) | $ (24,35,550) | $ (17,41,350) |
| Profit Before Tax | $ 24,53,450 | $ 11,84,450 | $ 32,69,450 | $ 37,94,450 | $ 31,38,650 |
| Tax @ 35% | $ (8,58,708) | $ (4,14,558) | $ (11,44,308) | $ (13,28,058) | $ (10,98,528) |
| Profit After Tax | $ 15,94,743 | $ 7,69,893 | $ 21,25,143 | $ 24,66,393 | $ 20,40,123 |
| Addback Depreciation | $ 27,86,550 | $ 47,75,550 | $ 34,10,550 | $ 24,35,550 | $ 17,41,350 |
| Less: Working Capital Requirement (15% of next year sales) | $ (40,05,000) | $ (43,65,000) | $ (41,40,000) | $ (34,65,000) | |
| Add: Recovery of Net working Capital | $ 1,74,75,000 | ||||
| Add: Salvage Value | $ 68,25,000 | ||||
| Free Cash Flow | $ 3,76,293 | $ 11,80,443 | $ 13,95,693 | $ 14,36,943 | $ 2,80,81,473 |
| Discount Factor @ 18% | 0.847457627 | 0.71818443 | 0.608630873 | 0.515788875 | 0.437109216 |
| D.C.F (FCF * Disc Factor) | $ 3,18,891.95 | $ 8,47,775.42 | $ 8,49,461.54 | $ 7,41,158.96 |
$ 1,22,74,670.44 |
Calculation of NPV and IRR
| DCF year 1-5 |
$ 1,50,31,958.31 |
|
| Cash outflow year 0 | $ (2,10,00,000) | |
| Cost of Machinery | $ (1,95,00,000) | |
| Working Capital | $ (15,00,000) | |
| NPV |
$ (59,68,041.69) |
Calculation of IRR {formula = IRR(values for year 0: year6)}
| Years | 0 | 1 | 2 | 3 | 4 | 5 |
| DCF | $ (2,10,00,000) | $ 3,76,292.50 | $ 11,80,442.50 | $ 13,95,692.50 | $ 14,36,942.50 |
$ 2,80,81,472.50 |
| IRR | 9.76% |
Part III : Original situation
Calculation of FCF
| Particulars | Year | Year | Year | Year | Year |
| 1 | 2 | 3 | 4 | 5 | |
| Units Manufactured | 81000 | 89000 | 97000 | 92000 | 77000 |
| Contribution units * (selling price - marginal cost) | $12,555,000 | $13,795,000 | $15,035,000 | $14,260,000 | $11,935,000 |
| Fixed Cost | $ (18,50,000) | $ (18,50,000) | $ (18,50,000) | $ (18,50,000) | $ (18,50,000) |
| Depreciation | $ (27,86,550) | $ (47,75,550) | $ (34,10,550) | $ (24,35,550) | $ (17,41,350) |
| Profit Before Tax | $ 79,18,450 | $ 71,69,450 | $ 97,74,450 | $ 99,74,450 | $ 83,43,650 |
| Tax @ 35% | $ (27,71,458) | $ (25,09,308) | $ (34,21,058) | $ (34,91,058) | $ (29,20,278) |
| Profit After Tax | $ 51,46,993 | $ 46,60,143 | $ 63,53,393 | $ 64,83,393 | $ 54,23,373 |
| Addback Depreciation | $ 27,86,550 | $ 47,75,550 | $ 34,10,550 | $ 24,35,550 | $ 17,41,350 |
| Less: Working Capital Requirement (15% of next year sales) | $ (46,05,750) | $ (50,19,750) | $ (47,61,000) | $ (39,84,750) | |
| Add: Recovery of Net working Capital | $ 1,98,71,250 | ||||
| Add: Salvage Value | $ 68,25,000 | ||||
| Free Cash Flow | $ 33,27,793 | $ 44,15,943 | $ 50,02,943 | $ 49,34,193 | $ 3,38,60,973 |
| Discount Factor @ 18% | 0.847457627 | 0.71818443 | 0.608630873 | 0.515788875 | 0.437109216 |
| D.C.F (FCF * Disc Factor) | $ 28,20,163.14 | $ 31,71,461.15 | $ 30,44,945.26 | $ 25,45,001.60 | $ 1,48,00,943.15 |
Calculation of NPV and IRR
| DCF year 1-5 | $ 2,63,82,514.29 | |
| Cash outflow year 0 | $ (2,10,00,000) | |
| Cost of Machinery | $ (1,95,00,000) | |
| Working Capital | $ (15,00,000) | |
| NPV | $ 53,82,514.29 |
Calculation of IRR {formula = IRR(values for year 0: year6)}
| 0 | 1 | 2 | 3 | 4 | 5 | |
| DCF | $ (2,10,00,000) | $ 33,27,792.50 | $ 44,15,942.50 | $ 50,02,942.50 | $ 49,34,192.50 | $ 3,38,60,972.50 |
| IRR | 25.26% |
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