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Time ZERO- Year 12 Year 2- Year 3- Year 4 Cash Flow from Capital Investment t t + t + + + t t Inventory Level: Accounts receivable Net Working Capital- + t + + + t t t Cash Flow from Changes in Working Capital t t t t t t t t t t + t + + + + t t t t t t t t t t t t t Cash Flow from Ongoing Operations Annual Components:- Revenue Fixed Expenses Variable Expenses Total Expenses Total Cash Flow from Ongoing Operations Depreciation Taxes After Tax Profit Operating Cash Flow t + t t t t t t t t t + t t t Please evaluate the cash flows for the project - t + t t t t t t NPV? t t t t
Time ZERO- Year 12 Year 2- Year 3- Year 4 Cash Flow from Capital Investment t t + t + + + t t Inventory Level: Accounts receivable Net Working Capital- + t + + + t t t Cash Flow from Changes in Working Capital t t t t t t t t t t + t + + + + t t t t t t t t t t t t t Cash Flow from Ongoing Operations Annual Components:- Revenue Fixed Expenses Variable Expenses Total Expenses Total Cash Flow from Ongoing Operations Depreciation Taxes After Tax Profit Operating Cash Flow t + t t t t t t t t t + t t t Please evaluate the cash flows for the project - t + t t t t t t NPV? t t t t
Expert Solution
| Equity info |
| The market value of the equity is $250, |
| and the beta is 1.8 |
| Risk free rate is 5% |
| The market risk premium is 12% |
| The rate investors would expect to earn on the equity given its risk is: as per CAPM, Cost of equity, ke=RFR+(beta*Market risk premium) |
| ie.ke= 5%+(1.8*12%)= |
| 26.60% |
| Debt Info- |
| Book value of the debt is 150k |
| Coupon is 12%, YTM is 7.5% |
| Term is 5 years with annual coupons |
| Market Value of the debt=its price , given the YTM--which is the PV of all its coupons+Face value to be recd.at maturity |
| ie.((150*12%)*(1-1.075^-5)/0.075)+(150/1.075^5)= |
| 177.31 |
| mlns. |
| Percentage of the capital structure is in debt= Debt/(Debt+Equity),ie.177.31/(250+177.31)= 41.49% |
| Percentage of the capital structure is in equity= Equity/(Debt+Equity), ie.250/(250+177.31)= 58.51% |
| WACC = (Wt.D*kd*(1-Tax Rate)+(wt.e*ke) |
| ie.(41.49%*7.5%*(1-21%)+(58.51%*26.6%)= |
| 18.02% |
| Time | 0 | 1 | 2 | 3 | 4 |
| 1.Cashflow from Capital Investment | -200000 | ||||
| 2.Inventory level | 20000 | 40000 | 40000 | 20000 | 0 |
| 3.Accounts receivable | |||||
| 4.Net working capital(2+3) | 20000 | 40000 | 40000 | 20000 | 0 |
| 5.Cash flow from Changes in Working capital(Prev.-current) | -20000 | -20000 | 0 | 20000 | 20000 |
| Cash flow from ongoing operations | |||||
| 6.Revenue | 300000 | 300000 | 300000 | 300000 | |
| 7.Fixed expenses | -125000 | -125000 | -125000 | -125000 | |
| 8.Variable expenses(sales*30%) | -90000 | -90000 | -90000 | -90000 | |
| 9.Total expenses(7+8) | -215000 | -215000 | -215000 | -215000 | |
| 10.Total cash flow from ongoing operations(6+9) | 85000 | 85000 | 85000 | 85000 | |
| 11.Depreciation(200000/4) | 50000 | 50000 | 50000 | 50000 | |
| 12.Taxes at 21%(10-11)*21% | -7350 | -7350 | -7350 | -7350 | |
| 13.After Tax profit(10-11+12) | 27650 | 27650 | 27650 | 27650 | |
| 14.Operating cash flow(13+11) | 77650 | 77650 | 77650 | 77650 | |
| 15. total Cashflows(1+5+14) | -220000 | 57650 | 77650 | 97650 | 97650 |
| 16. PV F at 18.02%(1/1.1802^yr.n) | 1 | 0.84731 | 0.71794 | 0.60832 | 0.51544 |
| 17.PV at 18.02%(15*16) | -220000 | 48847.65 | 55748.12 | 59402.59 | 50332.65 |
| 18.NPV at 18.02%(sum of row 17) | -5668.98 | ||||
| As the NPV is NEGATIVE, | |||||
| the project CANNOT BE ACCEPTED | |||||
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