FIN 422 MATHS

1.)    Here the initial investment is $65,000 at the beginning of this year, according to the investment opportunity faced by Enrique Rodrigues, the cash inflow at the ending of this year would be $32,000 and at the end of the next year would be $52,000.

a)      The market interest rate calculated as the IRR of the investment opportunity is 18.2841%.

b)      Using the discount rate calculated in part (a), the PV of investment at point D, point F, point A and point C are $65,398.59; $65,128.77; $64,601.41 and $64,463.44. As the investment in point D produces the higher present value, Enrique must invest $65,000 in productive assets today if he follows an optimum strategy.

c)      The NPV of his investment in nonfinancial assets at point D is = ($65,398.59 - $65,000) = $398.59.

2.)    Initial outlay for the capital investment project is $55,000, the expected growth rate until year 6 is ‘g’.

After tax net cash flow in year 1 = $7,500;

After tax net cash flow in year 2 = $7,500*(1+g);

After tax net cash flow in year 3 = $7,500*(1+g)^2;

After tax net cash flow in year 4 = $7,500*(1+g)^3;

After tax net cash flow in year 5 = $7,500*(1+g)^4;

After tax net cash flow in year 6 = $7,500*(1+g)^5;

After tax net cash flow in year 7 = {$7,500*(1+g)^5} * (1+0.015)

Terminal value at the end of year 6, [{$7,500*(1+g)^5} * (1+0.015)] / (0.21-0.015) = $53,486.08. So, g is = 2.1213%.

Using the discounting rate of 21%, the present value of all cash flows throughout the 6 year period is = $43,790.21. Thus, the NPV of the project is = -$11,209.79.

3.)    WestJet Airlines Ltd. is going to take a new project. Using the relevant information from the financial statement of the firm the NPV and IRR of the proposed regional airline is calculated in the excel worksheet. The revenue of the proposed project is measured based on the revenue of the firm multiplying with the growth rate as instructed. The gross profit of the project is assumed to be 39.5537% of the total sales revenue based on the gross profit of the firm. The depreciation is measured using straight line method for 10 years based on the amount of capital expenditure. The tax rate is measured from the tax expense of the year 2011. Then the capital expenditure of the firm is calculated as the specified percentage of net fixed assets of the firm then the increase in capital expenditure is calculated. The change in net working capital is calculated as the difference of current assets and current liabilities. Then the increase in NWC is calculated.

a)      The Free cash flow from the project is calculated using the formula mentioned in the instruction. Then the present value of the cash flows is determined at 12% discount rate which is $359.1 million. The initial investment is assumed to be 9% of the net fixed assets of the firm which is -$172.01 million. Thus the NPV of the project is $187.09 million. The IRR of the project is calculated to be 42.35%.

b)      Using an 8% initial investment rather than 9%, the present value of the free cash flows from the project become $359.51 million. The Initial investment is -$152.9 million. Thus the NPV of the project is $206.61 million. The IRR of the project is 48.52%.