ABC company is considering a new investment whose data are shown below for which you need to estimate the cash flows. The equipment asset would be depreciated on a straight-line basis over the project's 3-year life, would have a salvage value 1000 at the end of the 3 yrs project. ABC company would require some additional working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life.a) Estimate the Cash Flows and find the NPV and IRR of the projectb) Find the sensitivity of NPV with respect to the WACC for +30% and -30% devaition from the base value of 10% WACC10%Net investment in fixed assets75000Required new working capital15000Straight-line deprec. Rate (every year)33.33%Sales revenues( each year)75000Operating cost excluding depreciation, each year25000Salvage value of the equipmentTax Rate100035% Answer (a)FCFF0FCFF1FCFF2FCFF3NPVIRRExplanations/Assumption (if any)Answer (b)WACCNPV7.00%8.50%10.00%11.50%13.00%

The capital budgeting is a technique that helps to analyze the profitability of the project and help…

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Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter14: Security Structures And Determining Enterprise Values

Section: Chapter Questions

Problem 8EP

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ABC company is considering a new investment whose data are shown below for which you need to estimate the cash flows. The equipment asset would be depreciated on a straight-line basis over the project's 3-year life, would have a salvage value 1000 at the end of the 3 yrs project. ABC company would require some additional working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life.

a) Estimate the Cash Flows and find the NPV and IRR of the project
b) Find the sensitivity of NPV with respect to the WACC for +30% and -30% devaition from the base value of 10%

WACC
10%
Net investment in fixed assets
75000
Required new working capital
15000
Straight-line deprec. Rate (every year)
33.33%
Sales revenues( each year)
75000
Operating cost excluding depreciation, each year
25000
Salvage value of the equipment
Tax Rate
1000
35%

Answer (a)
FCFF0
FCFF1
FCFF2
FCFF3
NPV
IRR
Explanations/Assumption (if any)
Answer (b)
WACC
NPV
7.00%
8.50%
10.00%
11.50%
13.00%

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