Question

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

YEAR	0	1	2	3	4	5
Sales		124,757.00	124,757.00	124,757.00	124,757.00	124,757.00
Cost of Goods		65,261.00	65,261.00	65,261.00	65,261.00	65,261.00
S&A		30,000.00	30,000.00	30,000.00	30,000.00	30,000.00
Depreciation		20,786.40	20,786.40	20,786.40	20,786.40	20,786.40
Investment in NWC	1,197.00	559.00	559.00	559.00	559.00	559.00
Investment in Gross PPE	103,932.00

The firm has a capital structure of 34.00% debt and 66.00% 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 34.00%. (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!)

Answer 1

ans 1	Computation of WACC
	WACC = weight of debt *cost of debt *(1-tax rate)+ weight of equity * cost of eqiuty
		=34%*10%*(1-34%)+66%*12%
		10.1640%
ans 2	Cash flow in year 0 =	-=(1197+103932)
		-105129
ans 3
	cash flow in year -1
	YEAR	1
i	Sales	124,757.00
ii	Cost of Goods	65,261.00
iii	S&A	30,000.00
iv	Depreciation	20,786.40
v=i-ii-iii-iv	Profit before tax	8,709.60
vi=v*34%	tax @ 34%	2961.264
vii=v-vi	Profit after tax	5,748.34
viii=vii+iv	Operating cash flow	26,534.74
ix	Less : Working capital	-559
x	Cash flow in year 1	25,975.74
ans 4
	YEAR	0	1	2	3	4	5
i	Sales		124,757.00	124,757.00	124,757.00	124,757.00	124,757.00
ii	Cost of Goods		65,261.00	65,261.00	65,261.00	65,261.00	65,261.00
iii	S&A		30,000.00	30,000.00	30,000.00	30,000.00	30,000.00
iv	Depreciation		20,786.40	20,786.40	20,786.40	20,786.40	20,786.40
v=i-ii-iii-iv	Profit before tax		8,709.60	8,709.60	8,709.60	8,709.60	8,709.60
vi=v*34%	tax @ 34%		2961.264	2961.264	2961.264	2961.264	2961.264
vii=v-vi	Profit after tax		5,748.34	5,748.34	5,748.34	5,748.34	5,748.34
viii=vii+iv	Operating cash flow		26,534.74	26,534.74	26,534.74	26,534.74	26,534.74
ix	Total operating cash flow		26,534.74	26,534.74	26,534.74	26,534.74	26,534.74
x	Investment	-103,932.00
xii	working capital	-1,197.00	-559.00	-559.00	-559.00	-559.00	-559.00
xiii=ix+x+xii	Net cash flow	-105,129.00	25,975.74	25,975.74	25,975.74	25,975.74	25,975.74
xiv	PVIF @ 10.1640%	1.0000	0.9077	0.8240	0.7480	0.6790	0.6163
xv=xiv*xiii	present value	(105,129.00)	23,579.15	21,403.68	19,428.93	17,636.36	16,009.19	(7,071.69)
	therefore net present value =	(7,071.69)
Note : since in question its mentioned that Net working capital is non recoverable at the end of 5th year. Therefore no cash inflow is considered toward the working capital recovery