Question

QUESTION 1
ABC Inc, a publishing company is considering investing in a new press. For the purpose of
your valuation, limit the project’s life to 5 years. The press will cost $1’000’000, will required
additional $20’000 in installation fees to bring it to working condition, will have a useful life
of 5 years, salvage value of $100’000, will be depreciated on straight-line basis and sold at
the end of project’s life for an estimated value of $300’000. The press will allow for an
increase in production capacity and thus is expected to increase annual revenue by
$500’000. Additional operating expenses related to the higher volume of production are
estimated to equal $78’000 per year. Net working capital requirements are $55’000, which
are mostly related to the increase in inventory and are expected to be depleted by the end
of project’s life. Tax rate is 35%. Assume that you were able to compute the firm’s WACC
and it is equal 12%. Considering that this project would be an average risk project, meaning
that the computed WACC is applicable, find (simple) payback, discounted payback, IRR, and
NPV for this project.

Answer 1

Based on the given data,pls find below workings:

Computation of IRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%);

Computation of MIRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%, reinvestment factor%); Here, both discounting factor % and reinvestment factor% are considered same.

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;

Computation of Pay Back Period: Here, the period is computed for each project, based on cumulative discounted cash flows: If the cumulative value is less than or equal to zero, the period is considered as 12 months (it means that the net cumulative cash flow has not yet paid back the initial investment); Once the value turns positive in a particular year, the period for such year is observed at a proportion of actual discounted cash flow to the cumulative CF; This gives the period less than 12 months in such year; Once this is computed, total of all the years is taken and divided by 12, to arrive at the Payback period in no.of years.