6 simple finance questions. No need for references.

AFIN102-VALUATION ASSIGNMENT

SPRING2020

Grade Weight: 20%

Submission Deadline: 3rd of May 2020

You are currently hired to appraise a certain project and come up with an investment recommendation. The project entails the initial outlay of €500,000 for the construction of a new plant facility. The plant is expected to operate for 5 years after which it is anticipated to be sold at €250,000, even though it will have a scrap value of €200,000. The plant is to be depreciated with the straight line method over a period of 5 years.

Sales from the new plant are expected at €250,000 in year 1 and expected to grow annually at 5% thereafter. Manufacturing costs for year 1 will be €40,000 and expected to grow at 3% thereafter. To initiate operations the project involves the following schedule of working capital:

Year 1 Year 2 Year 3 Year 4 Year 5

Debtors - 150,000 120,000 100,000 10,000

Inventory 200,000 120,000 150,000 110,000 -

Payables - 50,000 120,000 60,000 -

The project’s cost of capital is determined to 15% while the applicable tax rate is equal to 30%.

Requirements:

1. Construct a simplified income statement and show the net profit for the 5 years. (20 marks)

2. Make the necessary adjustment to net income and calculate to the Free Cash Flow (FCF) of the project. (20 marks)

3. Find the Net Present Value and state your recommendation. (10 marks)

4. Find the Internal Rate of Return. What is the maximum cost of capital for which you recommend the project? (10 marks)

Your client asks you to assess an alternative scenario: instead of closing down the plant at the end of year 5 the client anticipates that if it is left to operate indefinitely it can generate FCF of €30,000 every year thereafter. Furthermore, this FCF is anticipated to grow at the economy growth rate of 4%.

5. Find the NPV under the new scenario. Compare and construct the result with the initial scenario of re-selling the plant at the end of year 5. Which scenario is preferable? (20 marks)

6. Provide a basic sensitivity analysis for the new scenario’s NPV by using different assumptions for the opportunity cost of capital and the growth rate (20 marks)

AFIN102-VALUATION ASSIGNMENT

SPRING2020

Grade Weight: 20%

Submission Deadline: 3rd of May 2020

You are currently hired to appraise a certain project and come up with an investment recommendation. The project entails the initial outlay of €500,000 for the construction of a new plant facility. The plant is expected to operate for 5 years after which it is anticipated to be sold at €250,000, even though it will have a scrap value of €200,000. The plant is to be depreciated with the straight line method over a period of 5 years.

Sales from the new plant are expected at €250,000 in year 1 and expected to grow annually at 5% thereafter. Manufacturing costs for year 1 will be €40,000 and expected to grow at 3% thereafter. To initiate operations the project involves the following schedule of working capital:

Year 1 Year 2 Year 3 Year 4 Year 5

Debtors - 150,000 120,000 100,000 10,000

Inventory 200,000 120,000 150,000 110,000 -

Payables - 50,000 120,000 60,000 -

The project’s cost of capital is determined to 15% while the applicable tax rate is equal to 30%.

Requirements:

1. Construct a simplified income statement and show the net profit for the 5 years. (20 marks)

2. Make the necessary adjustment to net income and calculate to the Free Cash Flow (FCF) of the project. (20 marks)

3. Find the Net Present Value and state your recommendation. (10 marks)

4. Find the Internal Rate of Return. What is the maximum cost of capital for which you recommend the project? (10 marks)

Your client asks you to assess an alternative scenario: instead of closing down the plant at the end of year 5 the client anticipates that if it is left to operate indefinitely it can generate FCF of €30,000 every year thereafter. Furthermore, this FCF is anticipated to grow at the economy growth rate of 4%.

5. Find the NPV under the new scenario. Compare and construct the result with the initial scenario of re-selling the plant at the end of year 5. Which scenario is preferable? (20 marks)

6. Provide a basic sensitivity analysis for the new scenario’s NPV by using different assumptions for the opportunity cost of capital and the growth rate (20 marks)

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