Angie Watts 1 Essay examples

Free cash flows of the project for next five years can be calculated by adding depreciation values and subtracting changes in working capital from net income. In 2010, there will be a cash outflow of $2.2 million as capital expenditure. In 2011, there will be an additional one time cash outflow of $300,000 as an advertising expense. Using net free cash flow values for next five years and discount rate for discounting, NPV for the project comes out to be $2907, 100. The rate of return at which net present value becomes zero i.e.

In order to arrive at the non-operating cash flows in year 10, we must add together the net cash flows from investing and financing activities.  The non-operating cash flow when the project is terminated in year 10 is $902,000.

The cash flows of each year during the lifetime of the project are derived by net operating income plus depreciation and minus the change in net working capital. Depreciation is included in the net income because it is tax deductible, and then it is added back because depreciation is a non-cash expense and should be added back to the cash flow statements. The change in net working capital is also taken into account in OCF since it is the change in cash flows.

We focus on free cash flows rather than accounting profits because these are the flows that the firm receives and can reinvest. Only by examining cash flows are we able to correctly analyze the timing of the benefit or cost. Also, we are only interested in these cash flows on an after tax basis as only those flows are available to the shareholder. In addition, it is only the incremental cash flows that interest us, because, looking at the project from the point of the company as a whole, the incremental cash flows are the marginal benefits from the project and, as such, are the increased value to the firm from accepting the project.

Capital budgeting is the decision process that managers use to identify those projects that add value to the firm’s value, and as such it is perhaps the most important task faced by financial managers and their staff. The process of evaluating projects is critical for a firm’s success. Capital budgeting is

b) In the second table below calculate the Net Present Value (NPV) of the project.

Using a 10 percent discount rate, the net present value of all benefits is $1,645,201.46; the net present value of all costs is $1,576,173.19; the overall net present value is $69,028.27, and the project breaks even in approximately 4.04 years.

Project cash flows – Evaluations of revenues, expenses, resulting cash flow, and the changes in revenues and expenses with the fulfilment of the acquisition of the capital request must be calculated and confirmed by management and the budget committee (Nowicki, 2015).

We focus on cash flows rather than accounting profits because these are the flows that the firm receives and can reinvest. Only by examining cash flows are we able to correctly analyze the timing of the benefit or cost. Also, we are only interested in these cash flows on an after tax basis as only those flows are available to the shareholder. In addition, it is only the incremental cash flows that interest us, because, looking at the project from the point of the company as a whole, the incremental cash flows are the marginal benefits from the project and, as such, are the increased value to the firm from accepting

8. How sensitive is the Net Present Value of the project to the cost of capital?

1. Compute the Free Cash Flows for the years 2010 to 2020 for both projects

The range of the annual cash flow for Project B is $1,100 - $900 = $200

Once the cash flow has been calculated, the next part of the equation is to divide 1+discount rate ^n and add all figures together to reach the net present value (NPV). According to the figures the NPV of the proposed Caledonia project is $24,733,858.96. This is showing a positive NPV.

Investment Analysis for project A,,,,,, ,,,,,, Initial Investment ,,,,,, Cost,"830,000.00",,,,, Installation cost,"40,000.00",,,,, total investment,"870,000.00",,,,, ,,,,,, Summarized Profit an Loss Account for Product A,,,,,, year,0,1,2,3,4,5 Revenue (EBIT),,"250,000.00","270,000.00","300,000.00","330,000.00","370,000.00" Depriciation,,"174,000.00","174,000.00","174,000.00","174,000.00","174,000.00" EBIT,,"76,000.00","96,000.00","126,000.00","156,000.00","196,000.00" Tax @ 40%,,"30,400.00","38,400.00","50,400.00","62,400.00","78,400.00" PAT,,"45,600.00","57,600.00","75,600.00","93,600.00","117,600.00" ,,,,,, ,,,,,, ,,,,,, Computation of Net cash flow from Project A,,,,,, ,,,,,, Year,0,1,2,3,4,5 Investment,"-870,000.00",,,,, PAT,,"45,600.00","57,600.00","75,600.00","93,600.00","117,600.00" Depriciation,,"174,000.00","174,000.00","174,000.00","174,000.00","174,000.00"

b) Net cash flows from a project should be considered as the taxable profits (not just the taxable revenues) arising from the project (unless an indication is given to the contrary).