Question
In: Finance
A firm is considering a new project. The project costs 100M in yr 0, it will...
A firm is considering a new project. The project costs 100M in yr 0, it will generate FCF over the next 3 years and become obsolete afterward.
Debt to equity ratio :0.4
pretax WACC:8.86%
WACC:8.26%
Here are the expected FCF's
Year 0: -100M
Year 1: 50M
Year 2: 100M
Year 3: 70M
1) what is the unlevered value of the project?
2) what is the levered value of the project?
What is the total npv of the project including the npv of financing?
Solutions
Expert Solution
| Pre tax | ||||||||
| 1 | WACC=8.86% | |||||||
| Discount Factor | NPV | |||||||
| Year 0 | -100 | Discount Factor formula | ||||||
| Year 1 | 50 | 0.92 | 45.93 | 1 / (1 x (1 + WACC) ^ YearNumber) | ||||
| Year 2 | 100 | 0.84 | 84.38 | |||||
| Year 3 | 70 | 0.78 | 54.26 | |||||
| 184.58 | ||||||||
| Unlevered value of the project | ||||||||
| = | NPV of the FCF (without considering. Financial obligations) | |||||||
| - | ||||||||
| Cost of the project | ||||||||
| = | 184.58 -100 | |||||||
| 84.58 | ||||||||
| Discount Factor formula | ||||||||
| 2 | Post tax | 1 / (1 x (1 + WACC) ^ YearNumber) | ||||||
| WACC=8.26% | ||||||||
| Discount Factor | NPV (FCF) | Interest | NPV(Interest) | Net NPV (FCF - Interest) | ||||
| Year 0 | -100 | |||||||
| Year 1 | 50 | 0.92 | 46.19 | 8.26 | 7.63 | 38.56 | ||
| Year 2 | 100 | 0.85 | 85.32 | 8.26 | 7.05 | 78.27 | ||
| Year 3 | 70 | 0.79 | 55.17 | 8.26 | 6.51 | 48.66 | ||
| 186.68 | 21.19 | 165.49 | ||||||
| Levered value of the project | ||||||||
| = | NPV of the FCF (after considering. Financial obligations + tax) | |||||||
| - | ||||||||
| Cost of the project | ||||||||
| = | 165.49-100 | |||||||
| 65.49 | ||||||||
| Total NPV of the project including the NPV of Financing is 165.49Mn | ||||||||
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