Corporate Finance Case Study
Tuleenhb
sampleanswer.pptx
14,4
Cash Flows in a Typical Project
Purchase Equipment (Capex)
Initial development cost
Increase in net working capital.
Incremental revenues
Incremental cost
Taxes
Changes in net working capital.
Terminal cash flows
Sales of equipment, net of taxes
Shut down cost
Decrease in net working capital.
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Initial
Investment
On going
Cash Flows
Terminal Cash Flows
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An Example
Please refer to the attached example!!!
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Initial Investment: Capex
New Investment in Fixed Assets attributed to the Project:
Capex and depreciation implications:
Capex: New fixed assets related to the project (i.e. building, equipment, vehicles, etc.)
The capex will impact the income statement due to the depreciation expenses attributed to the asset.
1. Methods of depreciation calculation: Straight-Line Depreciation.
Annual Depreciation Expense = Total value
Useful Life
CAPEX
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Forecasting Incremental Income
Revenue & Cost Assumptions:
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Forecasting Incremental Income
Pro Forma Statement:
Note: Depreciation calculation based on the straight method.
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Working Capital
Net Working Capital (NWK):
Any increases in net working capital represent an investment that reduces the cash available to the firm and so reduces free cash flow.
NWK = Current Assets – Current Liabilities = Cash + Inventory – Payables
At the end of the period, we are assuming the liquidation of the company, we will collect all the A/R, sell the remaining inventory and pay all our account payables.
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Terminal Cash Flow
Assuming a straight line depreciation method, the terminal value of the Capex would be:
In case the market value is lower than the book value, then we would have a loss.
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Incremental Free Cash Flow
Free cash flow:
The incremental effect of a project on a firm’s available cash.
Considering also the impact of the Capital Expenditures and Depreciation expenses.
The depreciation expense is not a cash outflow, therefore we adjust the incremental Income to reflect the fact that the depreciation expense by adding back the depreciation expense.
The incremental free cash flows would then be:
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Calculating the Net Present Value (NPV) of the Project
Discount Factor = FCFn___
(1+r)n
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Analyzing the Project
Sensitivity Analysis:
A capital budgeting tool that determines how the NPV varies as a single underlying assumption is changed.
In our example, what would happen if we assume the volumes of sales remain flat along the horizon period, assuming all the other variables remain unchanged:
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Sensitivity Analysis
If sales volumes remain flat, NPV would be negative, then the project should be rejected.
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Analyzing the Project
Scenario Analysis:
A capital budgeting tool that determines how the NPV varies as a number of the underlying assumptions are changed simultaneously.
DATA INPUT CHANGES
Investment increment: 50% to Building; 50% to Equipment.
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Scenario Analysis
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Scenario Analysis
Based on the Worst case scenario assumptions, the NPV of the project would be negative, then the project should be rejected.
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Year 12345
Deprec Exp Building 200,000 200,000 200,000 200,000 200,000
Deprec Exp Equip1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
Deprec Exp Vehicles 750,000 750,000 750,000 750,000
Total Deprec Expense 2,150,000 2,150,000 2,150,000 2,150,000 1,400,000
InvestmentTotal
Useful Life
(Years)
Building 5,000,000 25
Equipment 12,000,000 10
Vehicles 3,000,000 4
Total Investment 20,000,000
Year 012345
Unitary Price 150150150150150
Sales (Units) 100,000 110,000 170,500 230,175 218,666
% of sales increase 10%55%35%-5%
Gross Revenue 15,000,000 16,500,000 25,575,000 34,526,250 32,799,938
Production cost per Unit30%45 45 45 45 45
Cost of Goods Sold 4,500,000 4,950,000 7,672,500 10,357,875 9,839,981
Admin Cost per Unit 15%22.522.522.522.522.5
Administration Cost 2,250,000 2,475,000 3,836,250 5,178,938 4,919,991
Revenue & Cost Assumptions
Year 12345
Gross Revenue 15,000,000 16,500,000 25,575,000 34,526,250 32,799,938
Cost of Good Sold (4,500,000) (4,950,000) (7,672,500) (10,357,875) (9,839,981)
Gross Income 10,500,000 11,550,000 17,902,500 24,168,375 22,959,956
Admin Cost (2,250,000) (2,475,000) (3,836,250) (5,178,938) (4,919,991)
Depreciation (2,150,000) (2,150,000) (2,150,000) (2,150,000) (1,400,000)
EBIT 6,100,000 6,925,000 11,916,250 16,839,438 16,639,966
Taxes (Income @ 40%)(2,440,000) (2,770,000) (4,766,500) (6,735,775) (6,655,986)
Net Income 3,660,000 4,155,000 7,149,750 10,103,663 9,983,979
Income Statement - Pro Forma
Year 12345
A/R as 30% of Revenues(4,500,000) (4,950,000) (7,672,500) (10,357,875) (9,839,981)
Inventory as 25% of COGS (1,125,000) (1,237,500) (1,918,125) (2,589,469) (2,459,995)
A/P as 15% of COGS 675,000 742,500 1,150,875 1,553,681 1,475,997
Working Capital (4,950,000) (5,445,000) (8,439,750) (11,393,663) (10,823,979)
Working Capital, variation (4,950,000) (495,000) (2,994,750) (2,953,913) 10,823,979
Working Capital
Year 12345
Deprec Exp Building 200,000 200,000 200,000 200,000 200,000
Deprec Exp Equip1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
Deprec Exp Vehicles 750,000 750,000 750,000 750,000
Total Deprec Expense 2,150,000 2,150,000 2,150,000 2,150,000 1,400,000
Depreciation Expense - Straight Method
Accumm
Deprec
Book Value
Market
Value
Capital Gain
1,000,000 4,000,000 7,000,000 3,000,000
6,000,000 6,000,000 4,000,000 (2,000,000)
3,000,000 - - -
10,000,000 10,000,000 11,000,000 1,000,000
(400,000)
10,600,000 Net Salvage Value
Taxes @ 40%:
Year
0
12345
Net Income 3,660,000 4,155,000 7,149,750 10,103,663 9,983,979
Add Depreciation 2,150,000 2,150,000 2,150,000 2,150,000 1,400,000
Operating Cash Flow 5,810,000 6,305,000 9,299,750 12,253,663 11,383,979
Working Capital, variation (4,950,000) (495,000) (2,994,750) (2,953,913) 10,823,979
Investment(20,000,000) 10,600,000
Free Cash Flow (FCF)(20,000,000) 860,000 5,810,000 6,305,000 9,299,750 32,807,959
Discounted FCF (20,000,000) 716,667 4,034,722 3,648,727 4,484,833 13,184,783
Discount Factor 1.201.441.732.072.49
Discount rate 20%
Net Present Value (NPV)6,069,732
Incremental Free Cash Flows
Year 012345
Unitary Price 150150150150150
Sales (Units) 100,000 100,000 100,000 100,000 100,000
% of sales increase 0%0%0%0%
Gross Revenue 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000
Production cost per Unit30%45 45 45 45 45
Cost of Goods Sold 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000
Admin Cost per Unit 15%22.522.522.522.522.5
Administration Cost 2,250,000 2,250,000 2,250,000 2,250,000 2,250,000
Revenue & Cost Assumptions
Year 012345
Gross Revenue 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000
Cost of Good Sold (4,500,000) (4,500,000) (4,500,000) (4,500,000) (4,500,000)
Gross Income 10,500,000 10,500,000 10,500,000 10,500,000 10,500,000
Admin Cost (2,250,000) (2,250,000) (2,250,000) (2,250,000) (2,250,000)
Depreciation (2,150,000) (2,150,000) (2,150,000) (2,150,000) (1,400,000)
EBIT 6,100,000 6,100,000 6,100,000 6,100,000 6,850,000
Taxes (Income @ 40%)(2,440,000) (2,440,000) (2,440,000) (2,440,000) (2,740,000)
Net Income 3,660,000 3,660,000 3,660,000 3,660,000 4,110,000
Year 012345
A/R 30%(4,500,000) (4,500,000) (4,500,000) (4,500,000) (4,500,000)
Inventory as % of COGS 25%(1,125,000) (1,125,000) (1,125,000) (1,125,000) (1,125,000)
A/P as % of COGS 15%675,000 675,000 675,000 675,000 675,000
Working Capital (4,950,000) (4,950,000) (4,950,000) (4,950,000) (4,950,000)
Working Capital, variation (4,950,000) - - - 4,950,000
Year 012345
Net Income 3,660,000 3,660,000 3,660,000 3,660,000 4,110,000
Add Depreciation 2,150,000 2,150,000 2,150,000 2,150,000 1,400,000
Operating Cash Flow 5,810,000 5,810,000 5,810,000 5,810,000 5,510,000
Working Capital, variation (4,950,000) - - - 4,950,000
Investment(20,000,000) 10,600,000
Free Cash Flow (FCF)(20,000,000) 860,000 5,810,000 5,810,000 5,810,000 21,060,000
Discounted FCF (20,000,000) 716,667 4,034,722 3,362,269 2,801,890 8,463,542
Discount Factor 1.201.441.732.072.49
Discount rate 20%
Net Present Value (NPV)(620,910)
Income Statement - Pro Forma
Working Capital
Incremental Free Cash Flows
Year 012345
Unitary Price 150150150150150
Sales (Units) 100,000 110,000 121,000 133,100 146,410
% of sales increase 10%10%10%10%
Gross Revenue 15,000,000 16,500,000 18,150,000 19,965,000 21,961,500
Production cost per Unit33%50 50 50 50 50
Cost of Goods Sold 4,950,000 5,445,000 5,989,500 6,588,450 7,247,295
Admin Cost per Unit 18%2727272727
Administration Cost 2,700,000 2,970,000 3,267,000 3,593,700 3,953,070
Revenue & Cost Assumptions
Discount rate increase by 2%
Annual growth in sales is only 10%
Initial Investment higher by SR 5,000,000
A/R & Inventory increased to35%
Production & Admin cost up by 3%
Worst case Scenario Assumptions
Accumm
Deprec
Book Value
Market
Value
Salvage
Value
1,500,000 6,000,000 7,000,000 1,000,000
7,250,000 7,250,000 4,000,000 (3,250,000)
3,000,000 - - -
11,750,000 13,250,000 11,000,000 (2,250,000)
(900,000)
11,900,000
Net Salvage Value
Year 012345
Deprec Exp Building 300,000 300,000 300,000 300,000 300,000
Deprec Exp Equip1,450,000 1,450,000 1,450,000 1,450,000 1,450,000
Deprec Exp Vehicles 750,000 750,000 750,000 750,000
Total Deprec Exp 2,500,000 2,500,000 2,500,000 2,500,000 1,750,000
Depreciation Expense - Straight Method
Year 012345
Gross Revenue 15,000,000 16,500,000 18,150,000 19,965,000 21,961,500
Cost of Good Sold (4,950,000) (5,445,000) (5,989,500) (6,588,450) (7,247,295)
Gross Income 10,050,000 11,055,000 12,160,500 13,376,550 14,714,205
Admin Cost (2,700,000) (2,970,000) (3,267,000) (3,593,700) (3,953,070)
Depreciation (2,500,000) (2,500,000) (2,500,000) (2,500,000) (1,750,000)
EBIT 4,850,000 5,585,000 6,393,500 7,282,850 9,011,135
Taxes (Income @ 40%)(1,940,000) (2,234,000) (2,557,400) (2,913,140) (3,604,454)
Net Income 2,910,000 3,351,000 3,836,100 4,369,710 5,406,681
Year 012345
A/R 35%(5,250,000) (5,775,000) (6,352,500) (6,987,750) (7,686,525)
Inventory as % of COGS 35%(1,732,500) (1,905,750) (2,096,325) (2,305,958) (2,536,553)
A/P as % of COGS 15%742,500 816,750 898,425 988,268 1,087,094
Working Capital (6,240,000) (6,864,000) (7,550,400) (8,305,440) (9,135,984)
Working Capital, variation (6,240,000) (624,000) (686,400) (755,040) 9,135,984
Year
0
12345
Net Income 2,910,000 3,351,000 3,836,100 4,369,710 5,406,681
Add Depreciation 2,500,000 2,500,000 2,500,000 2,500,000 1,750,000
Operating Cash Flow 5,410,000 5,851,000 6,336,100 6,869,710 7,156,681
Working Capital, variation (6,240,000) (624,000) (686,400) (755,040) 9,135,984
Investment(25,000,000) 11,900,000
Free Cash Flow (FCF)(25,000,000) (830,000) 5,227,000 5,649,700 6,114,670 28,192,665
Discounted FCF (25,000,000) (680,328) 3,511,825 3,111,329 2,760,156 10,431,265
Discount Factor 1.2 1.5 1.8 2.2 2.7
Discount rate 22%
Net Present Value (NPV)(5,865,753)
Incremental Free Cash Flows
Income Statement - Pro Forma
Working Capital
