Homework Answers
The price of land will be not consider in calculation .
answer 3)
| Year | 0 | 1 | 2 | 3 | 4 |
| Cost | -$60 | ||||
| Increase in Working capital | -$12 | ||||
| -$72 | |||||
| Revenue | $94 | $85 | $50 | $25 | |
| COGS | -$50 | -$40 | -$30 | -$15 | |
| Operating cash flow | $44 | $45 | $20 | $10 | |
| Cost of advertisement | -$10 | -$5 | -$1 | $0 | |
| Loss of revenue | -$5 | -$4 | -$1 | $0 | |
| Increase in sales | $3 | $5 | $8 | $10 | |
| Cash from sales of machine | $5 | ||||
| Cash flow before depreciation a and tax | $32 | $41 | $26 | $25 | |
| Depreciation | -$15 | -$15 | -$15 | -$15 | |
| Cash flow before tax | $17 | $26 | $11 | $10 | |
| Tax ( 30%) | -$5 | -$8 | -$3 | -$3 | |
| Cash flow after tax | $12 | $18 | $8 | $7 | |
| Cash from working capital | $3 | $3 | $3 | $3 | |
| Add depreciation | $15 | $15 | $15 | $15 | |
| Net cash flow from project | -$72 | $30 | $36 | $26 | $25 |
| Cost of Capital | 11.00% | ||||
| PV of cash flow | -$72 | $27 | $29 | $19 | $16 |
| 29.9/1.11^1 | 36.2/1.11^2 | ||||
| NPV | $19.57756 | ||||
as NPV> 0 , they should invest in the project
Answer 4) Now there is change in capital structure , which change the cost of capital ,
| Cash flow before tax | $17.00 | $26.00 | $11.00 | $10.00 | |
| Tax ( 30%) | -$5.10 | -$7.80 | -$3.30 | -$3.00 | |
| Net income | $11.90 | $18.20 | $7.70 | $7.00 | |
| Number of share | 1 million | ||||
| EPS (net income/number of share) | $11.90 | $18.20 | $7.70 | $7.00 | |
| After debt of 5 million | |||||
| Cash before tax and interest | $17 | $26 | $11 | $10 | |
| Interest | -$5 | -$5 | -$5 | -$5 | |
| Cash flow before tax | $12.00 | $21.00 | $6.00 | $5.00 | |
| Tax ( 30%) | -$3.60 | -$6.30 | -$1.80 | -$1.50 | |
| Net income | $8.40 | $14.70 | $4.20 | $3.50 | |
| Number of share | 1 million | ||||
| EPS (net income/number of share) | $8.40 | $14.70 | $4.20 | $3.50 | |
| Effect on EPS | -29.41% | -19.23% | -45.45% | -50.00% | |
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