Question

For mutually exclusive projects, explain why picking one project over another because it has a larger IRR can lead to mistakes.

QUESTION 2 ABC Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars: Items Year 1 Revenues 112 Costs of Good soles and operating expenses 47.7 Depreciation 25.9 Increase in net working capital 3. 1 7 Capital expenditures 29.1 Marginal corporate tax rate 30% Unlevered Net Income 19.7 Year 2 160 59.9 35.5 ,6 43.8 30% 38.9 a. What are the free cash flows for this project for the first years and the second year? b. If ABC has a debt of 5 thousand dollars and its number of shares outstanding is 2 thousand shares, what is the price of its stock

Answer 1

Date I calculation of free cash flow for the first yeay calculation of NC investment Capital Spending - Depreciation + A Woking Capital 43.8 - 3'5.5 + 7.6 15.9 Amount o in miklion $ Pauricular Revenue o cast of Good sales & operating expense free cash flow (477) 64.3 25.9) 38.4 (11. ) 26.88. Depreciation EBIT Tax @ 30°/ NOPATH. Met Operating Profit after tax Ź NOPAT- Net Investment = 45.22 - 15-9 = 29.32 e calculation of net investment capital spending - Depreciation + A working capital, 29.1 -25.9 + 3.1 free cash flow = NOPAT - Ner Investment = 26.88 - 6.3 = 20.58 o calculation of free cash flow for the second yease: Particular Amount (in million $) Revenues 160 cost of Good salut operating expense (59.9) 100. Depreciation (35.5) EBIT 64.6 Tax @ 30% (19.38) NOPAT 45.22 ( e