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A firm has projected the following financials for a possible project: YEAR 0 1 2 3...

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

YEAR 0 1 2 3 4 5
Sales 123,751.00 123,751.00 123,751.00 123,751.00 123,751.00
Cost of Goods 69,125.00 69,125.00 69,125.00 69,125.00 69,125.00
S&A 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00
Depreciation 20,811.80 20,811.80 20,811.80 20,811.80 20,811.80
Investment in NWC 1,108.00 576.00 576.00 576.00 576.00 576.00
Investment in Gross PPE 104,059.00


The firm has a capital structure of 43.00% debt and 57.00% equity. The cost of debt is 10.00%, while the cost of equity is estimated at 12.00%. The tax rate facing the firm is 35.00%. (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 WACC for the project?

What is the cash flow for year 0? (express answer as a negative...)

What is the cash flow for year 1?

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

Solutions

Expert Solution

Calculation of WACC for the project

Weight of Debt = Wd = 43%

Weight of Equity = We = 57%

Cost of Debt = rd = 10%

Cost of Equity = re = 12%

t = tax rate = 35%

WACC = [Wd * rd * (1-t)] + [We * re]

= [43% * 10% * 91-35%)] + [57% * 12%}

= 2.795% + 6.84%

= 9.635%

Therefore, WACC for the Project is 9.635%

> Cash Flow for Year 0 is -$105,167

> Cash Flow for Year 1 is $23,823.03

> NPV of the Project is -$15,197.30

Calculation of NPV of the Project
Particulars 0 1 2 3 4 5
Sales (A) 123751 123751 123751 123751 123751
Cost of Goods (B) 69125 69125 69125 69125 69125
S&A (C ) 30000 30000 30000 30000 30000
Depreciation (D) 20811.8 20811.8 20811.8 20811.8 20811.8
Profit Before Tax (E = A-B-C-D) 3814.2 3814.2 3814.2 3814.2 3814.2
Tax @35% (F = E*35%) 1334.97 1334.97 1334.97 1334.97 1334.97
Profit After Tax (G = E-F) 2479.23 2479.23 2479.23 2479.23 2479.23
Add back Depreciation (H = D) 20811.8 20811.8 20811.8 20811.8 20811.8
Investment NWC (I) -1108 532 0 0 0 576
Investment in Gross PPE (J) -104059
Free Cash Flows (K = G+H+I+J) -105167 23823.03 23291.03 23291.03 23291.03 23867.03
Discount Factor @9.635% (L)
1/(1+9.635%)^n n=0,1,2,3,4,5		 1 0.912117481 0.831958299 0.758843707 0.692154611 0.63132632
Discounted Cash Flows (M = K*L) -105167 21729.40211 19377.16569 17674.25156 16120.9938 15067.88421
NPV of the Project -15197.30263

jeff jeffy answered 1 year ago
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