Questions

_problem_02-3_2-7.xls

Problem 2-3


PROBLEM 2-3
Given							Solution Legend
Growth rate for years 1-5	5%							= Value given in problem
EBIT (1)	$ 100,000							= Formula/Calculation/Analysis required
CAPEX for year 0	$ 400,000							= Qualitative analysis or Short answer required
CAPEX for years 1-5	- 0	per year over and above annual depreciation expense						= Goal Seek or Solver cell
Depreciation Expense								= Crystal Ball Input
Tax rate	30%							= Crystal Ball Output
Debt Retirements for years 1-5	$ 15,000	per year
New working capital for years 1-5	20%	of new EBIT
Solution
	Year
	0	1	2	3	4	5
EBIT
Taxes
NOPAT
Plus: Depreciation
Less: CAPEX
Less: New working capital needs (Note 1)	-
Plus: Salvage value of the fixed assets in year 5 (assumed to equal its book value) (Note 2)							Note 1: At the end of year 5 the total investment in working capital is returned to the firm in an amount equal to its book value.
Firm Free Cash Flow (FFCF)
Net Fixed Assets (beginning of the year)	$ -						Note 2: We define the terminal value of the project's fixed assets as the net fixed asset balance at the end of year 5.
Plus: CAPEX
Less: Depreciation Expense for the Year
Net Fixed Assets (end of the year)

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PROBLEM 2-7
Given				Solution Legend
Investment (CAPEX in year 0)	$ (600,000)				= Value given in problem
Depreciable life	5	years			= Formula/Calculation/Analysis required
Initial units for year 1	100,000				= Qualitative analysis or Short answer required
Revenue per unit	1.50				= Goal Seek or Solver cell
Growth Rate per year in units recycled	25%				= Crystal Ball Input
Tax Rate	30%				= Crystal Ball Output
Disposal cost per unit	$ 0.20
Required Return	15%
Solution: Part a
	Year
	0	1	2	3	4	5
Units recycled
Revenues
Depreciation Expense
EBIT
Less: Taxes
NOPAT
Plus: Depreciation expense
Less: CAPEX		- 0	- 0	- 0	- 0	- 0
Project Free Cash Flows
Solution: Part b
NPV
IRR
Solution: Part c
	Year
	0	1	2	3	4	5
Units recycled		75,000
Revenues
Depreciation Expense
EBIT
Less: Taxes
NOPAT
Plus: Depreciation expense
Less: CAPEX	(600,000)	-	-	-	-	-
Project Free Cash Flows	$ (600,000)
NPV
IRR
Solution: Part d
	Year
	0	1	2	3	4	5
Units recycled
Revenues
Disposal cost
Depreciation Expense
EBIT
Less: Taxes
NOPAT
Plus: Depreciation expense
Less: CAPEX		- 0	- 0	- 0	- 0	- 0
Project Free Cash Flows
NPV
IRR