Question

Apply WACC in NPV. Brawn Blenders has the following incremental cash flow for its new​ project:

Category	T0		T1	T2	T3
Investment	−​$3,390,000
Net working capital change	−​$279,000				​$279,000
Operating cash flow			​$1,427,000	​$1,427,000	​$1,427,000
Salvage					​$212,000

Should Brawn accept or reject this project at an adjusted WACC of

a) 11.73​%,

b)13.73​%,

or c) 15.73​%?

Answer 1

Cashflow calculation:

Category	Investment	Net working capital change	Operating cash flow	Salvage	Net cashflow
T0	-      3,390,000	-             279,000			-         3,669,000
T1			1,427,000		1,427,000
T2			1,427,000		1,427,000
T3		279,000	1,427,000	212,000	1,918,000

NPV Calculation

(a)

Time	Cashflow	PVF @ 11.73%	PV
T0	-      3,669,000	1.0000	-     3,669,000
T1	1,427,000	0.8950	1,277,186
T2	1,427,000	0.8011	1,143,100
T3	1,918,000	0.7170	1,375,116
		NPV	126,402

Accept the project

(b)

Time	Cashflow	PVF @ 13.73%	PV
T0	-      3,669,000	1.0000	-     3,669,000
T1	1,427,000	0.8793	1,254,726
T2	1,427,000	0.7731	1,103,250
T3	1,918,000	0.6798	1,303,838
		NPV	-              7,186

Reject the project

(c)

Time	Cashflow	PVF @ 15.73%	PV
T0	-      3,669,000	1.0000	-     3,669,000
T1	1,427,000	0.8641	1,233,042
T2	1,427,000	0.7466	1,065,448
T3	1,918,000	0.6452	1,237,402
		NPV	-         133,108

Reject the project