Question

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The assets required for the project were fully depreciated at the time of purchase. The financial staff has collected the following information on the project:

Sales revenues	$10 million
Operating costs	8 million
Interest expense	1 million

The company has a 25% tax rate, and its WACC is 13%.

Write out your answers completely. For example, 13 million should be entered as 13,000,000.

1. What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest dollar.
   $  
2. 
   
3. If this project would cannibalize other projects by $1.5 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest dollar.
   The firm's OCF would now be $   .

our division is considering two projects with the following cash flows (in millions):

0

1

2

3

Project A	-$16	$7	$9	$10
Project B	-$26	$14	$20	$11

1. What are the projects' NPVs assuming the WACC is 5%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:    $   million

   Project B:    $   million

   What are the projects' NPVs assuming the WACC is 10%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:  $   million

   Project B:  $   million

   What are the projects' NPVs assuming the WACC is 15%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:  $   million

   Project B:  $   million

2. What are the projects' IRRs assuming the WACC is 5%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:    %

   Project B:    %

   What are the projects' IRRs assuming the WACC is 10%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:    %

   Project B:    %

   What are the projects' IRRs assuming the WACC is 15%? Do not round intermediate calculations. Round your answer to two decimal places.

   Project A:    %

   Project B:    %

3. If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 48.57%.)

   If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 48.57%.)

   If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 48.57%.)

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

NPV, IRR, PBP,OCFINDEX - Microsoft Excel (Product Activation Failed) View Add-Ins Data Review - 2x = = = V General File Home Insert Page Layout Formulas % Cut Calibri 11 A A Ea Copy Paste Format Painter B I U B- A Clipboard Font CQ400 Wrap Text Fat Merge Merge & Center - Center Σ AutoSum : A Fill 2 m Sort & Find & E = 5 st .0 .00 . Insert Delete Format $ $ -% % , Number Conditional Format Formatting as Table Styles Cell Styles Clear Select Filter Editing Alignment Cells CK CL CM Formula Barco CP C Q CR CS CT CU CVS 390 COLSEN 391 392 10000000 8000000 393 SALES REVENUE OPERATING COSTS DEPRECIATION EBIT 394 395 396 TAX 2000000 500000 [25% TAX] 1500000 397 398 OPERATING INCOME AFTER TAX DEPRECIATION CASHFLOW 399 a 1500000 400 CANNIBALISATION WILL REDUCE EBIT BY 1500000, 401 402 403 404 EBIT TAX OPERATING INCOME AFTER TAX DEPRECIATION CASHFLOW 500000 [2000000 - 1500000] 125000 [25% tax] 375000 405 406 375000 407 b 408 H O FCFARM, MSI,confidenceINDEX CURRENCY LOAN CROSS OVER HEDGING MONEY MARKET GM HPR AM TAX GROWTH SUST CF CASH FLOW STATW ferences: EV49 Red PREF AND DIV POLICY I 200 130% * * 10 ENG 0 + 30-11-2019 2. 9

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut . * B Autosum " 27 8. Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format AutoSum - A Fill Sort & 2 Clear Filter Editing Find & Select Cells BX BY BZ CA 9 Calibri 11 A A = = = V Wrap Text General E Copy Paste Format Painter B I U D A E Merge & Center $ - % Clipboard Font C Alignment Number BX46 2 BR BS BT BU BV B W 46 (a) NPV AT 5% 47 PROJECT A PROJECT B YEAR CFAT PV FACTOR @5% PV OF CFAT YEAR 49 А в A*B 50 -16 -16 17 0.9524 6.67 1 52 0.9070 8.16 53 0.8638 8.64 NPV AT 5% = 7.47 48 PV FACTOR @5% CFAT А 0 -26 14 51 PV OF CFAT A*B -26 0.9524 13.33 0.9070 18.14 0.8638 9.50 14.98 9 10 11 NPV AT 5% = NPV AT 10% PROJECT A YEAR CFAT PV FACTOR @10% -26 14 PROJECT B YEAR -16 6.36 7.44 7.51 1 CFAT PV FACTOR @10% PV OF CFAT - 16 7 0.9091 9 0.8264 10 0.7513 NPV AT 10% = 59 60 61 62 63 64 65 PV OF CFAT -26 0.9091 12.73 0.8264 0.7513 8.26 11.52 16.53 5.31 NPV = I N IRRnpvbeta RATION PBP ARR ferences: SM219 invest, EAA MI-np-ir REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN id < BO! 120% 0 Rea - 2. B 19 . * 10 ENG 30-11-2019

% Cut BY BZ -26 projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x Σ AutoSum : A Calibri 11 A A = = = V Wrap Text General E Copy Fill 2 m Paste B I U D Format Painter A E Merge & Center $ - % Conditional Format 8. Cell Insert Delete Format Sort & Find & Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing BX65 _ BR BS BỊ BU BV BW | BX BZ CA 65 66 67 68 NPV AT 15% PROJECT A PROJECT B YEAR CFAT PV FACTOR @15% PV OF CFAT YEAR CFAT PV FACTOR @15% PV OF CFAT 0 -16 -16 -26 17 0.8696 6.09 0.8696 12.17 0.7561 6.81 0.7561 15.12 74 10 0.6575 6.58 0.6575 7.23 75 NPV = 3.47 NPV = 8.53 76 77 (b) PROJECT A PROJECT B 78 YEAR CFAT YEAR CFAT 79 80 7 81 20 10 IRR = 26.89% (=IRR(BT80:BT83)] IRR = 34.46% (=IRR(BX80:BX83)] 84 N IRRnpvbeta RATION PBP ARR invest, EAA MI-np-ir REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN id < 0 Rea ferences: SM219 BO! 120% 2. B 19 . * 10 ENG 30-11-2019 73 Nm -26 14 82 83 I

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Calibri 11 A = = V General A A E Copy Paste Format Painter Clipboard = E Wrap Text Merge & Center B I U D 8. Insert Delete Format $ - % Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & Clear Filter Editing Find & Select Font Alignment Cells BT BU B V BX BY BZ CA BX96 1 BR 77 (b) 78 79 80 BS PROJECT A YEAR BW PROJECT B YEAR CFAT -16 7 CFAT -26 14 81 9 20 N w 10 26.89% [=IRR(BT80:BT83)] IRR = IRR = 34.46% (=IRR(BX80:BX83)] 82 83 84 85 86 87 88 89 90 91 AT WACC = 5%, IRR = IRR = 26.89% PROJECT A IRR = 34.46% PROJECT B IRR DOES NOT CHANGE WITH CHANGE IN WACC AT WACC = 10% IRR = 26.89% PROJECT A IRR = 34.46% PROJECT B AT WACC =15% IRR = 26.89% PROJECT A IRR = 34.46% PROJECT B 92 93 94 95 96 I N invest, EAA MI-np-ir REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND IRRnpvbeta RATION PBP ARR ferences: SM219 OPTION TO WAITSTEIN id < BO! 120% 0 Rea - 2. B 19 . * 10 ENG 30-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins - 2x = = = V General File Home Insert Page Layout Formulas % Cut Calibri 11 A A Ea Copy Paste Format Painter B I U B- A Clipboard Font Wrap Text FMerce Merge & Center - Center Σ AutoSum : A Fill 2 m Sort & Find & E E E s $ -% % 4.0 .00 . Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Filter Editing Select Alignment Number Cells BV100 BQ BR BS BT BU B V BW BX BY 100 101 102 103 (c) INCREMENTAL CFAT А в YEAR CFA CFAT 0 -16 1 7 29 10 104 -7 -11 10 105 106 107 108 CROSSOVER RATE 48.57% [=IRR(BV103:BV106)] 109 IF WACC=5% PROJECT B SELECT 110 111 112 SELECT THE PROJECT WITH HIGHEST POSITIVE NPV WACC < CROSSOVER RATE 113 IF WACC=10% PROJECT B SELECT SELECT THE PROJECT WITH HIGHEST POSITIVE NPV WACC < CROSSOVER RATE 114 115 116 117 118 119 IF WACC=15% PROJECT B SELECT THE PROJECT WITH HIGHEST POSITIVE NPV WACC < CROSSOVER RATE SELECT H I RRnpvbeta RATION PBP ARR ferences: SM219 invest, EAA MI-np-ir REPLACEMENT S HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED Rea REPLACEMENT BOND OPTION TO WAITSTEIN III BOJ 120% - O 6 . * ENG 05:25 30-11-2019