Solution-Calculate the net present values of the project

Calculate the net present values of the project using fcf

Reference no: EM13504198

Question 1. Mini-Case – Capital Budgeting and WACC

CCC, Inc. is a Telecom company, which has the following financial information and forecasts for capital budgeting decision:

Year 0 (present)

Year 1

Year 2

Year 3

Year 4

Growth Rate of EBIT

15%

EBIT

270

EBITYear1*(1+15%)

EBITYear2*(1+15%)

EBITYear3*(1+15%)

Tax

(as % of EBIT)

35% of EBIT

Depreciation

12% of EBIT

Investments (= Capital Expenditure +

NWC Change)

850

Note:

FCF of the project (for each year) = Operating Cash Flows - Investments

Operating Cash Flows = EBIT * (1 – Tax) + Depreciations

Assume that this firm has Debt = 100 and Equity = 400. Assume that the firm has the following information of their cost of capital (from year 0 to year 4):

Riskfree rate (Rf)

Expected market return (Rm)

10%

Beta

1.55

Cost of Debt/YTM (Rd)

Corporate Tax Rate (t)

35%

Based on the above information, calculate the NPV of this investment project. Your answers should be organized with the following steps:

Step (1) Calculate the FCF of the investment project for each year 0 to year 4;

Step (2) Calculate the discount rate of the firm/project (hint: apply WACC);

Step (3) Calculate the Net Present Values of the project using FCF and discount rate from Steps (1) and (2) above.

Step (4) Based on your estimated NPV, discuss whether you should accept or reject the project. Provide explanation of your choice.

Step (5) Sensitivity Analysis (to analyze Capital Structure Decision): The company is considering a new Capital Structure policy, which will increase the Debt from 100 to 300. In order words, the new capital structure will have Debt = 300 and Equity = 400.

Perform sensitivity analysis using the new capital structure of Debt = 300 and Equity = 400. Using the new capital structure decision, perform sensitivity analysis by re-computing the NPV in Step (3) above (except for Debt and Equity, other information/assumptions remain the same). Based on your new estimates of NPV, discuss whether you should accept or reject the project. Provide interpretations of the results of the sensitivity analysis: will you recommend the new capital structure decision? Why or why not.

Reference no: EM13504198

Questions Cloud

Estimate the force on the window : Consider an airplane window (area 0.34 m2). If the pressure inside the plane is atmospheric pressure and the pressure outside is 18% of Patm, what is the force on the window

Analysis the following set of ionization energy values : Examine the following set of ionization energy values for a certain element. How many valence electrons does an atom of the neutral element possess

Explain how many of the isomers will have a parent name : Determine how many of the isomers will have a parent name of heptane. (I know the answer is 3, but is there a formula to easily figure it out or how do you go about knowing when you've drawn enough molecules to determine

Social structure and structural inequalities : Considering what you have learned about social structure and structural inequalities

Calculate the net present values of the project using fcf : Based on your estimated NPV, discuss whether you should accept or reject the project. Provide explanation of your choice.

Explain how many kilograms of sulfuric acid h2so4 : If the pH of a 1.00 in. rainfall over 1800 miles2 is 3.20, how many kilograms of sulfuric acid, H2SO4, are present, assuming that it is the only acid contributing to the pH

The opportunity to apply ethical theories : The purpose of this discussion is to give you the opportunity to apply ethical theories to the complex issue of ageism in the workplace, particularly in the area of employment

How to improve persistency of accrual component of eearnings : Dale Pacioretty: Pear Inc. launched its jPhone 6 this afternoon, and I saw a lot of reactions in the stock market. See, dBay's stock fell about 6.7% shortly after Pear's presentation started.

Explain gas mixture contains helium and oxygen : Gas mixture contains helium and oxygen @ partial pressures of 255 torr and 0.450 atm. what is the total pressure in mmHg of the mixture after it is placed in a container 1/2 the volume of the original

User Account

All Pages

Calculate the net present values of the project using fcf

Reference no: EM13504198

Reference no: EM13504198

Questions Cloud

Reviews

Write a Review

Finance Basics Questions & Answers

What is the stock current price per share

Find your net profit on option if ibms stock price

The risk-free rate is 4 per annum what is the price of a

Discount rate for these computations

Describe possible result of treasury stock transactions

Determine the required rate of return

What is the premium over the formula value for the warrants

Finding money to finance small business can be real

What is the difference between portfolio risk and

What is the number of payments per year

What was dollar amount of retained earnings after transfer

Operating a consulting service

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT