Firm Z has invested $4 million in marketing campaign to assess the demand for the product Minish. This product will be in the market next year and will last five years. Revenues are projected to be $50 million per year along with expenses of $20 million. The firm spends $15 million immediately on equipment that will be depreciated using MACRS depreciation to zero. Additionally, it will use some fully depreciated existing equipment that has a market value of $4 million. Finally, Minish will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). But, receivables are expected to account for 15% of annual sales. Payables are expected to be 15% of the annual cost of goods sold (COGS) between year 1 and year 4. All accounts payables and receivables will be settled at the end of year 5. Based on this information and WACC of 5.418, find the NPV of the project. Identify the IRR of the project. Draw NPV vs r graph of the project. Will you accpet this project? Why? MACRS rates (%) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 20 32 19.2 11.52 11.52 5.76 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cash Inventory Receivables Payables Net Working Capital Change in Net Working Capital Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Sales Cost of Goods Sold Gross Profit Selling, General and Administrative Expenses Depreciation EBIT Tax Incremental Earnings Depreciation Change in Net Working Capital Capital Investment Opportunity Cost Incremental Free Cash Flow
Firm Z has invested $4 million in marketing campaign to assess the demand for the product Minish. This product will be in the market next year and will last five years. Revenues are projected to be $50 million per year along with expenses of $20 million. The firm spends $15 million immediately on equipment that will be depreciated using MACRS depreciation to zero. Additionally, it will use some fully depreciated existing equipment that has a market value of $4 million. Finally, Minish will have no incremental cash or inventory requirements (products will be shipped directly from the contract manufacturer to customers). But, receivables are expected to account for 15% of annual sales. Payables are expected to be 15% of the annual cost of goods sold (COGS) between year 1 and year 4. All accounts payables and receivables will be settled at the end of year 5. Based on this information and WACC of 5.418, find the NPV of the project. Identify the IRR of the project. Draw NPV vs r graph of the project. Will you accpet this project? Why? MACRS rates (%) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 20 32 19.2 11.52 11.52 5.76 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cash Inventory Receivables Payables Net Working Capital Change in Net Working Capital Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Sales Cost of Goods Sold Gross Profit Selling, General and Administrative Expenses Depreciation EBIT Tax Incremental Earnings Depreciation Change in Net Working Capital Capital Investment Opportunity Cost Incremental Free Cash Flow
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1gM
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| Firm Z has invested $4 million in marketing campaign to assess the demand for the product Minish. This product will be in the market next year and will last five years. Revenues are projected to be $50 million per year along with expenses of $20 million. The firm spends $15 million immediately on equipment that will be |
| MACRS rates (%) | ||||||
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| 20 | 32 | 19.2 | 11.52 | 11.52 | 5.76 | |
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Cash | ||||||
| Inventory | ||||||
| Receivables | ||||||
| Payables | ||||||
| Net |
||||||
| Change in Net Working Capital | ||||||
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Sales | ||||||
| Cost of Goods Sold | ||||||
| Gross Profit | ||||||
| Selling, General and Administrative Expenses | ||||||
| Depreciation | ||||||
| EBIT | ||||||
| Tax | ||||||
| Incremental Earnings | ||||||
| Depreciation | ||||||
| Change in Net Working Capital | ||||||
| Capital Investment | ||||||
| Opportunity Cost | ||||||
| Incremental |
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