Question

FCF for the following:

Year 0:

Year 1:

Year 2:

Year 3:

Year 4:

Year 5:

NPV?

PI?

IRR?

(Related to Checkpoint 12.1) (Comprehensive problem calculating project cash flows, NPV, PI, and IRR) Traid Winds Corporation, a firm in the 36 percent marginal tax bracket with a required rate of return or discount rate of 12 percent, is considering a new project. This project involves the introduction of a new product. The project is expected to last 5 years and then, because this is somewhat of a fad product, it will be terminated. Given the following information, determine the free cash flows associated with the project, the project's not present value, the profitability Index, and the internal rate of return. Apply the appropriate decision criteria. a. Determine the free cash flows associated with the project The FCF in year 0 is $ (Round to the nearest dollar.)

Answer 1

1]	FCF for years 0 - 5	0	1	2	3	4	5
	Units sold		75000	110000	110000	85000	75000
	Sales price per unit		$                 340	$                 340	$                340	$                   340	$                290
	Total sales revenue		$ 2,55,00,000	$ 3,74,00,000	$3,74,00,000	$    2,89,00,000	$2,17,50,000
	-Variable cost		$ 1,35,00,000	$ 1,98,00,000	$1,98,00,000	$    1,53,00,000	$1,35,00,000
	-Annual fixed costs		$        6,00,000	$       6,00,000	$      6,00,000	$          6,00,000	$      6,00,000
	-Depreciation expense [(14400000+170000)/5]		$     29,14,000	$     29,14,000	$    29,14,000	$       29,14,000	$    29,14,000
	=NOI		$     84,86,000	$ 1,40,86,000	$1,40,86,000	$    1,00,86,000	$    47,36,000
	-Tax at 36%		$     30,54,960	$     50,70,960	$    50,70,960	$       36,30,960	$    17,04,960
	=NOPAT		$     54,31,040	$     90,15,040	$    90,15,040	$       64,55,040	$    30,31,040
	+Depreciation		$     29,14,000	$     29,14,000	$    29,14,000	$       29,14,000	$    29,14,000
	=OCF		$     83,45,040	$ 1,19,29,040	$1,19,29,040	$       93,69,040	$    59,45,040
	Capital expenditure [14400000+170000]	$   1,45,70,000
	Increase in NWC	$         2,20,000	$     20,75,000	$     10,71,000	$                   -	$        -7,65,000	$ -26,01,000	$                        -
	Recovery of NWC
	FCF	$ -1,47,90,000	$     62,70,040	$ 1,08,58,040	$1,19,29,040	$    1,01,34,040	$    85,46,040
2]	PVIF at 12%	1	0.89286	0.79719	0.71178	0.63552	0.56743
	PV at 12%	$ -1,47,90,000	$     55,98,250	$     86,55,963	$    84,90,855	$       64,40,366	$    48,49,253	$     3,40,34,686
	NPV	$   1,92,44,686
3]	PI = 34034686/14570000 =	2.34
4]	IRR:
	IRR is that discount rate for which NPV is 0. It has to be found by trial and error by varying the discount rates till 0 NPV results.
	PVIF at 54%	1	0.64935	0.42166	0.27380	0.17779	0.11545
	PV at 54%	$ -1,47,90,000	$     40,71,455	$     45,78,361	$    32,66,204	$       18,01,772	$      9,86,646	$             -85,563
	PVIF at 53%	1	0.65359	0.42719	0.27921	0.18249	0.11927
	PV at 53%	$ -1,47,90,000	$     40,98,065	$     46,38,404	$    33,30,667	$       18,49,341	$    10,19,313	$           1,45,790
	As 0 NPV is got when discount rate is between 53% and 54% IRR also lies between 53% and 54%.
	By simple interpolation IRR = 53%+1%*145790/(145790+85563) =			53.63%
5]	DECISION:
	As the NPV is positive, the investment should be made. Because NPV is positive, PI is greater than 1 and IRR is greater than the required
	rate of return. Hence, the investment is acceptable under the PI and IRR criteria.