Finance Class - 419
ramrogAll questions must be completed in one Excel document.
Redbird Capital Budgeting Project
First identify or calculate the capital spending, the operating cash flow, the change in net working capital, and finally the free cash flow to the firm of the project. It is these free cash flows that you find that are discounted at the weighted average cost of capital to calculate the net present value and the internal rate of return.
You will assess whether to make the investment or not. Use your accept-reject rules for the net present value and the internal rate of return.
Redbird, Inc. is considering an addition to its current operations. The figures are below.
Cost of the new project |
$1,700,000 |
Installation costs |
$100,000 |
Estimated unit sales in year 1 |
40,000 |
Estimated unit sales in year 2 |
65,000 |
Estimated unit sales in year 3 |
35,000 |
Estimated sales price in year 1 |
$200 |
Estimated sales price in year 2 |
$200 |
Estimated sales price in year 3 |
$150 |
Variable cost per unit |
$130 |
Annual fixed cost |
$40,000 |
Initial working capital needed |
$60,000 |
Depreciation method |
3 years straight-line method, no salvage value |
Redbird’s tax rate |
40% |
Redbird’s cost of capital |
10% |
1. Calculate Operating Cash Flow and Free Cash Flow. Show your calculations in an Excel spreadsheet.
2. Determine the NPV and IRR of the project. Show your calculations in a Word document or an Excel spreadsheet.