Question

Using the following data: (Pleae prove answers in excel spreadship & show calculations)

• Initial Investment = $10,000,000

• Cash Inflow – Year 1 = $3,000,000

• Cash Inflow – Year 2 = $3,500,000

• Cash Inflow – Year 3 = $4,000,000

• Cash Inflow – Year 4 = $4,900,000

• Cash Inflow – Year 5 = $5,000,000

a. Calculate Internal Rate of Return b. Calculate Net Present Value (assuming a required return of 8%)

2). Using the following data:

• Debt o Market value - $7,000,000 o Current yield to maturity – 8%

• Equity o Market value - $35,000,000

• Tax rate – 35%

• Expected return on market – 10%

• Current 10 year US Treasury – 2.3%

• Beta – 1.60 Calculate weighted average cost of capital

3). Using the following free cash flow data:

Year Cash Flow 2017 $4,000,000

Year Cash Flow 2018 $4,400,000

a. Prepare a 10-year cash flow forecast based upon the rate of growth in cash flow between 2017 and 2018.

b. Calculate the net present value of the forecasted cash flows assuming an immediate investment cost of $18,500,000

4. Estimate cost of capital using the following data:

• Market value of debt - $600,000

• Market value of equity - $1, 400,000

• Current yield on debt – 7.3%

• Tax rate – 35%

• Expected market return – 12%

• Current 10 year US Treasury – 3.8%

• Beta – 2.1

Answer 1

As multiple questions are asked answering the first question.

1. a. Calculating IRR by using trial and error as Internal rate of return is the interest that makes the NPV zero.

Formula for PV = Future value / (1 + r)^n

NPV = Cash inflow - Cash outflow

Using interest rate as 20%

	Cash inflow	(1+r)^n	NPV
Year 1	3000000	1.2	2500000
Year 2	3500000	1.44	2430556
Year 3	4000000	1.728	2314815
Year 4	4900000	2.0736	2363040
Year 5	5000000	2.48832	2009388
Total			11617798

NPV = 11617798 - 10000000 = 1617798

Using interest rate as 26%

	Cash inflow	(1+r)^n	NPV
Year 1	3000000	1.26	2380952
Year 2	3500000	1.5876	2204586
Year 3	4000000	2.000376	1999624
Year 4	4900000	2.520474	1944079
Year 5	5000000	3.175797	1574408
Total			10103649

NPV = 10103649 - 10000000 = 103649

Using interest rate as 26.46%

	Cash inflow	(1+r)^n	NPV
Year 1	3000000	1.2646	2372292
Year 2	3500000	1.599213	2188576
Year 3	4000000	2.022365	1977882
Year 4	4900000	2.557483	1915946
Year 5	5000000	3.234193	1545981
Total			10000678

NPV = 10000678 - 10000000 = 678

Lets stop here as the nearest we can get is 26.46%, so the IRR is 26.46%

b. Calculating NPV at the interest rate of 8%:

	Cash inflow	(1+r)^n	NPV
Year 1	3000000	1.08	2777778
Year 2	3500000	1.1664	3000686
Year 3	4000000	1.259712	3175329
Year 4	4900000	1.360489	3601646
Year 5	5000000	1.469328	3402916
Total			15958355

NPV = 15958355 - 10000000 = 5958355

So the NPV at 8% interest with the initial investment of $10,000,000 is $5,958,355