FR
Part C 1 2
EBIT W1 20,000 22,000
Investment in assets W2
- 1
N 100,000 10,000
Opearting cost - 1
50,000 5,000
Depreciation W3 1000
Working capital W4 0 1
40000 8000
growth rate 6.50%
Ke 13%
Free cash flows
1
EBIT W1 20,000
Les tax 30% (6,000)
EAT 14,000
Add back depW3 1,000
les capital inve W2 (10,000)
Less work K W4 (8,000)
Free cash flows (3,000)
DF 13% 0.885
PV (2,655)
Value =
PV of TV (474,367*0.543)
Total value
Valuue of debt
Value equity
Terminal value = 28,952 (1+0.065)
0.13 -0.065
474,367
3 4 5
24,200 31,460 40,898
2 3 4 5
11,000 12,100 13,310 14,641.0
2 3 4 5
5,500 6,050 6,655 7,320.50
1100 1210 1331 1464.1
2 3 4 5
9600 12000 15000 (13,500)
2 3 4 5
22,000 24,200 31,460 40,898
(6,600) (7,260) (9,438) (12,269)
15,400 16,940 22,022 28,629
1,100 1,210 1,331 1,464
(11,000) (12,100) (13,310) (14,641)
(9,600) (12,000) (15,000) 13,500
(4,100) (5,950) (4,957) 28,952
0.783 0.693 0.613 0.543
(3,211) (4,124) (3,040) 15,714
2,684
257467.61131
260,152
-100,000
160,152
1+0.065)
Mango Juice
0 (300,000)
1 80,000
2 100,000
3 58,000
4 120,000
5 78,000
Bitoki Wine
0 (150,000)
1 80,000
2 50,000
3 40,000
4 65,000
5 100,000
Orange Wine
0 (200,000)
1 50,000
2 40,000
3 70,000
4 30,000
5 20,000
Apple Juice
0 (400,000)
1 150,000
2 100,000
3 90,000
4 120,000
5 80,000
Mineral Water
0 (100,000)
1 60,000
2 50,000
3 35,000
4 70,000
5 60,000
Lion Gin
0 (250,000)
1 100,000
2 120,000
3 80,000
4 50,000
5 90,000
projects IO
mango juice 300,000
Bitoki wine 150,000
Mineral water 100,000
Lion gin 250,000
800,000
Allocation of resources
projects Required Amt
Mineral water 100,000
Bitoki wine 150,000
Lion gin 250,000
mango juice 300,000
800,000
If project are not Divisable
Mi + Bi +Li +Ma
Sensitivity of the projects
Mineral Water project
NPV
PV of initial investment
PV of cash in flows
Sensitivity of Initial investment = NPV/PV of initial investment
Sensitivity of cash in flows (NPV/PV of cash inflows)
The risk of this project is very since the initial investment has to
increase by 97% in order for NPV to change while cash in flows
will have toreduce by 49.2% in order for NPV to change
b. using APV to evaluate the replacement decision
Old Machine
cost
Useful life
residual value
Depreciation (100m-20m)/15
Current market value
Current book value (100m _(5.3m*5)
New machine
Cost
Residual value
Useful life
Depreciation (250m-50m)/10
W1 Incremental investment cost
Cost of new machine
less market value of old mach
tax saving W2
Incremental investment cost
W2 Gain/loss on old machine
Market value
book value
Loss
Taxsaving
W3 Incremental Depreciation
Dep of new machine
dep of old machine
Incremental dep
W4 Incremental Residual value
Residual value of new machine
Residual value of old machine
Incremental Residual value
W5 Incremental other cash flows
Sales revenue
decreasein operating cost
Decreasein maintenance cost
Incremental revenue
Less depreciation
Less tax @30%
Add back depreciation
Less Working capital (8m-3m)
Net cash flows
APV = NPVu + DTS
Other data
Ke
Ve
Vd
kd
Ke = Ku + (Ku - kd)(1-T)D/E
0.14 = Ku + (ku -0.09)(1-0.3)*60/40
Ku = 11.4%
Item Period
Inc investment -
Cash flows 1to 10
Residual value 10
Present value of debt tax shield
Investment cost
Issue cost is 4%
gross loan
40% Subsidised @7%
60% Market loan @12%
W7 Debt shield on market loan
Interest (116.25m*12%)
DTS @30%
Annuity @12% in year 10
PVDTS market loan
W8 Debt Shield on subsidized loan
Interest on subsidized loan (77.5m*7%)
DTS @30%
Annuity of 12@ year 10
PVDTS Subsidised loan
W9 Interest saving on subsidised loan
Interest saved (12%-7%)*77.5m)
Annuity at year 10
Pvof interest saving
W10 tax fogone on interest saving
Interest saved
Tax @30%
Annuity
PV of tax foregone
Issue cost
Tax on issue cost @30%
PV 12% year one
Pv of tax benefit
APV
Net present of ungeared business
PVDTS of market loan
PVDTS of subsidised loan
PV of interest saved
Tax benefit on issue cost
PV. Of tax foregone on interest saved
PV. Issue cost
APV
The old machine should be replaced by the new machine
c. Advise on acquisition
DF 12% PV
1.000 (300,000)
0.893 71,429
0.797 79,719
0.712 41,283
0.636 76,262
0.567 44,259
NPV 12,953
1 (150,000)
0.89285714286 71,429
0.79719387755 39,860
0.71178024781 28,471
0.6355180784 41,309
0.56742685572 56,743
NPV 87,811
1 (200,000)
0.89285714286 44,643
0.79719387755 31,888
0.71178024781 49,825
0.6355180784 19,066
0.56742685572 11,349
NPV (43,231)
Reject the project
1 (400,000)
0.89285714286 133,929
0.79719387755 79,719
0.71178024781 64,060
0.6355180784 76,262
0.56742685572 45,394
-636
reject the project
1 (100,000)
0.89285714286 53,571
0.79719387755 39,860
0.71178024781 24,912
0.6355180784 44,486
0.56742685572 34,046
NPV 96,875
1 (250,000)
0.89285714286 89,286
0.79719387755 95,663
0.71178024781 56,942
0.6355180784 31,776
0.56742685572 51,068
NPV 74,736
NPV PI Rank
12,953 1.043175592372 4
87,811 1.585405572579 2
96,875 1.968753079539 1
74,736 1.298942881407 3
Allocated Amt NPV
100,000 96,875
150,000 87,811
250,000 74,736
300,000 12,953
800,000 272,375
96,875
100,000
196,875
PV/PV of initial investment
97%
of cash inflows)
49.2%
the initial investment has to
change while cash in flows
er for NPV to change
cement decision
100,000,000
15
20,000,000
5,333,333
60,000,000
73,333,333
250,000,000
50,000,000
10
20,000,000
250,000,000
(60,000,000)
190,000,000
(4,000,000)
186,000,000
60,000,000
73,333,333
(13,333,333)
(4,000,000)
20,000,000
(5,333,333)
14,666,667
50,000,000
20,000,000
30,000,000
25,000,000
7,000,000
4,000,000
36,000,000
(14,666,667)
21,333,333
(6,400,000)
14,933,333
14,666,667
29,600,000
(5,000,000)
24,600,000
14%
40
60
9%
Cash flows D/f = 11.4% PV
(186,000,000) 1 (186,000,000)
24,600,000 5.792 142,483,200
30,000,000 0.33974110237 10,192,233
NPVu (33,324,567)
186,000,000
7,750,000
193,750,000
77,500,000
116,250,000
13,950,000
4,185,000
5.65
23,645,250
5,425,000
1,627,500
5.65
9,195,375
3,875,000
5.65
21,893,750
3,875,000
1,162,500
5.65
6,568,125
7,750,000
2,325,000
0.893
2,076,225
(33,324,567)
23,645,250
9,195,375
21,893,750
2,076,225
(6,568,125)
(7,750,000)
9,167,908
d by the new machine
