Fin 370 Week 3 Team Assignment Essay

Thus, final free cash flows for the project come out to be $-3.750 million, $0.889 million, $2,563 million, $5,719 million and $2,388 million for years 2011, 2012, 2013, 2014 and 2015 years respectively.

If the IRR exceeds the required rate of return (10%), the project should be accepted. Otherwise, it should be rejected.

We should accept the project because of the positive NPV and high IRR. We will gain $532 million in wealth which is a big money on the scale like this. The company has a bond rating of AA that makes the risk relatively low. So we should definitely say yes.

7) See Table 1 NPV=42,318.71 IRR = 14% MIRR = 12% Payback period= 2.93 years. Yes the project should be undertaken.

Constructing Free Cash Flows allows the calculation for NPV, which enables an even comparison of inflows and outflows of the competing projects. EBITDA does not take into account the Income Tax. Unlevered Net Income (ATCF) does not account for the separation of depreciation, capital expenditures, and changes in Net Working Capital.

Focus on cash flows, not profits. One wants to get as close as possible to the economic reality of the project. Accounting profits contain many kinds of economic fiction. Flows of cash, on the other hand, are economic facts.

The free cash flow method is used to gauge “a company’s cash flow beyond that necessary to grow at the current rate… [to ensure companies] make capital expenditures to continue to exist and to grow” (Drake, n.d.). Calculation of free cash flows utilizes various components, including a firm’s value, cash flow forecasts, a firm’s capital structure, the cost of capital, and/or discounted cash flows.

2. Compute the NPV of both projects. Which would you recommend? What if they are not mutually exclusive?

In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this

1. Incremental cash flows are ultimately the relevant cash flows to be used in project analysis. It is the difference between the cash flows the firm will have if it implements the project, and the cash flows the firm will have if it rejects the project. Although they are a cash expense, interest expenses are not included in project cash flows. We discount a projects cash flows by using its weighted average cost of capital (WACC), which already includes the cost of debt. Therefore, we do not include interest expenses in cash flows because it would essentially be counting them twice.

The easiest way to determine free cash flows is to take the difference in cash flows from the Base Case scenario and that of the Project Case, as we will do in the classroom.

NPV = PV inflows - Cost = Net gain in wealth. Accept project if NPV > 0. Choose between mutually exclusive projects on basis of higher NPV. Adds most value.

D. With the given cost of capital at 5% the project has a negative NPV of 205,123. Therefore, we should reject the project since the NPV is less than zero or negative.

Poor Cash flow management may bring about lack of working capital and in this way undermine the maintainability of a venture. While industry has extensively acknowledged successful cash flow management as an execution change component, the prevalence of scholastic examinations concerning the connection between money streams and execution looks at the issue from a static, benchmarking viewpoint (Ebben and Johnson, 2011; Farris and Hutchison, 2002, 2003; Moss and Stine, 1993). Compelling cash flow management includes anticipating, arranging, observing and controlling of money receipts and instalments. Project cash flow is for the most part registered in light of assessed expense and income over the development time frame.

The financial analysis has been done and on the basis of NPV and IRR projections we accept the project because NPV is positive at 15% nominal rate of return and the IRR is 64% without Anna’s concerns and IRR is 51% with regard to her concerns. So, we accept the project because in both the situations, the project seems acceptable and profitable.