CORPORATE FINANCE

Corporate Finance

Question 1

On the basis of the calculation above, 2nd proposal seems to be more attractive from the point of view of NPV. However, ARR of first proposal is higher than this one. (calculation below)

On the basis of the IRR, once again 2nd proposal is preferred as it is producing 22% return on the project against the required rate of return of 11%.

Proposal 1

Initial Outlay

Year 1

Year 2

Year 3

Year 4

Year 5

1

2

3

4

5

Revenue

15

15

15

15

15

Expenses

5

5

5

5

5

Gross

10

10

10

10

10

Depreciation

6

6

6

6

6

4

4

4

4

4

Tax

1.2

1.2

1.2

1.2

1.2

Net Income

2.8

2.8

2.8

2.8

2.8

Dep

 

6

6

6

6

6

NET Cash Flows

-30

8.8

8.8

8.8

8.8

8.8

Discounted CF

-30

7.70

6.77

5.94

5.21

4.57

Required Rate of Return

14%

 

 

 

 

 

NPV

0.191362962

 

IRR

14%

 

MIRR

14%

 

 

 

 

 

Average Capex

6

6

6

6

6

Working Capital

4.5

4.5

4.5

4.5

4.5

Total

10.5

10.5

10.5

10.5

10.5

Average Profit

2.8

Average Investment

6

ARR

47%

Proposal 2

Initial Outlay

Year

0

1

2

3

4

5

Revenue

30

24

18

12

6

Expenses

8

8

8

8

8

Gross

22

16

10

4

-2

Depreciation

6

6

6

6

6

16

10

4

-2

-8

Taxes

4.8

3

1.2

-0.6

-2.4

Net Profit

11.2

7

2.8

-1.4

-5.6

 

6

6

6

6

6

NET Cash Flows

-30

17.2

13

8.8

4.6

0.4

Discounted CF

-30

15.36

10.36

6.26

2.92

0.23

Required Rate of Return

12%

 

 

 

 

 

NPV

5.134683349

 

IRR

22%

 

MIRR

16%

 

 

 

 

 

6

6

6

6

6

Working Capital

9

7.2

5.4

3.6

1.8

15

13.2

11.4

9.6

7.8

Average Profit

2.8

Average Investment

11.4

ARR

25%

Question 2

Solution

Year 1 2 3 4 5 Demand 20,000 20,000 20,000 20,000 20,000

Market Share

20%

40%

25%

28%

28%

4,000 8,000 5,000 5,600 5,600 Rate Price 2,800 2,800 2,800 2,500 2,500 Sales 11,200,000 22,400,000 14,000,000 14,000,000 14,000,000 VC 1,000 4,000,000 8,000,000 5,000,000 5,600,000 5,600,000 FC 3,800,000 3,800,000 3,800,000 3,800,000 3,800,000 Net 3,400,000 10,600,000 5,200,000 4,600,000 4,600,000 Depreciation 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 Net 1,900,000 9,100,000 3,700,000 3,100,000 3,100,000 Tax 0 570,000 2,730,000 1,110,000 930,000 930,000 Profit 1,330,000 6,370,000 2,590,000 2,170,000 2,170,000 Depreciation 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 Changes in WC (2,800,000)

(5,600,000)

(3,500,000)

(3,500,000)

(3,500,000)

Disposal 6,000,000 Releaese of WC (18,900,000)

FCF 5,630,000 13,470,000 7,590,000 7,170,000 32,070,000 Initial Outlay 1 2 3 4 5 Cash Flows (15,000,000)

5,630,000 13,470,000 7,590,000 7,170,000 32,070,000 DCF (15,000,000)

4,771,186 11,415,254 6,432,203 6,076,271 27,177,966

Required Rate

18%

NPV 40,872,881 Initial Outlay 15,000,000 Depreciation Straight Line Disposal Value 6,000,000 Year 1 2 3 4 5 Demand 20,000 20,000 20,000 20,000 20,000

Market Share

20%

40%

25%

25%

25%

4,000 8,000 5,000 5,000 5,000 Rate Price 2,800 2,800 2,800 2,800 2,800 Sales 11,200,000 22,400,000 14,000,000 14,000,000 14,000,000 VC 1,000 4,000,000 8,000,000 5,000,000 5,000,000 5,000,000 FC 3,800,000 3,800,000 3,800,000 3,800,000 3,800,000 Net 3,400,000 10,600,000 5,200,000 5,200,000 5,200,000 Depreciation 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 Net 1,900,000 9,100,000 3,700,000 3,700,000 3,700,000 Tax 0 570,000 2,730,000 1,110,000 1,110,000 1,110,000 Profit 1,330,000 6,370,000 2,590,000 2,590,000 2,590,000 Depreciation 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 Changes in WC (2,800,000)

(5,600,000)

(3,500,000)

(3,500,000)

(3,500,000)

Disposal 6,000,000 Releaese of WC (18,900,000)

FCF 5,630,000 13,470,000 7,590,000 7,590,000 32,490,000 Initial Outlay 1 2 3 4 5 Cash Flows (15,000,000)

5,630,000 13,470,000 7,590,000 7,590,000 32,490,000 DCF (15,000,000)

4,771,186 11,415,254 6,432,203 6,432,203 27,533,898

Required Rate

18%

NPV 41,584,746 Initial Outlay 15,000,000 Depreciation Straight Line Disposal Value 6,000,000 Year 1 2 3 4 5 Demand 20,000 20,000 20,000 20,000 20,000

Market Share

20%

40%

25%

25%

25%

4,000 8,000 5,000 5,000 5,000 Rate Price 2,800 2,800 2,800 2,800 2,800 Sales 11,200,000 22,400,000 14,000,000 14,000,000 14,000,000 VC 1,000 4,000,000 8,000,000 5,000,000 5,000,000 5,000,000 FC 3,800,000 3,800,000 3,800,000 3,800,000 3,800,000 Net 3,400,000 10,600,000 5,200,000 5,200,000 5,200,000 Depreciation - - - - - Net 3,400,000 10,600,000 5,200,000 5,200,000 5,200,000 Tax 0 1,020,000 3,180,000 1,560,000 1,560,000 1,560,000 Profit 2,380,000 7,420,000 3,640,000 3,640,000 3,640,000 Depreciation 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000 Changes in WC (1,680,000)

(3,360,000)

(2,100,000)

(2,100,000)

(2,100,000)

Disposal 6,000,000 Releaese of WC (11,340,000)

FCF 5,560,000 12,280,000 7,240,000 7,240,000 24,580,000 1 2 3 4 5 Cash Flows (15,000,000)

5,560,000 12,280,000 7,240,000 7,240,000 24,580,000 DCF (15,000,000)

4,711,864 8,819,305 4,406,488 3,734,311

10,744,145

Required Rate

18%

NPV

17,416,113

Question ...