Apprising corporate strategic decisions

Real cash flow and monitory cash flow Real cash flows are the cash flows which are not adjusted for the current inflation. Monitory cash flows are adjusted for the current inflation in the market

Inflated cash flows Example 1: Inflation adjustment using nominal cash flows M2 SWF is considering a project that is expected to generate $10 million at the end of each year for 5 years. The initial outlay required is $25 million. A discount rate of 9.2% is appropriate for the risk level. Inflation is 5%. You are the company’s financial analyst. The company’s CFO has asked you to calculate NPV using a schedule of future nominal cash flows.

Student Activity Ashanti plc., are considering an investment of USD 1.9 m to enter in to the north east region of Sri Lanka. The capital investment is expected to have equal lives of 3 years and the cash flows for each year is given below: Any capital expenditure project is evaluated at corporate WACC as a hurdle rate. First year of the project is exempted from tax and 10% is applied after that. Year 0 Year 01 Year 02 Year 03 Investment 1,900,000 Revenue 1,000,000 1,400,000 2,000,000 Operational cost 300,000 Revenue is inflated by 10% and operational cost is inflated by 6%. Ashanti plc has 10 million equity and 5 million debt. Treasury bills are trading per annum 7%. Return in market 11%. Beta is 1. It has 10% pa interest payment commitment in its debt. The corporation tax rate is 28%.

You are required Weighted average cost of capital discount the project Inflated cash flows from Year 01-03 C. Net operating cash flow after tax D. NPV, IRR and payback of the project

New product development and analyzing the financial feasibility Suppose a company has the opportunity to bring out a new product, the Vitamin Burger. The initial cost of the assets is $100 million, and the company’s working capital Capital investment is $ 10. The new product is estimated to have a useful life of four years, at which time the assets would be sold for $5 million. Management expects company sales to increase by $120 million the first year, $160 million the second year, $140 million the third year, and then trailing to $50 million by the fourth year because competitors have fully launched competitive products. Operating expenses are expected to be 70% of sales. If the required rate of return based on the WACC. Equity is funded by 10 m and debt is funded by 5m. Cost of equity is 15% and cost of debt is before tax 8% and the company’s tax rate is 35%, should the company invest in this new product? Why or why not? 1. Calculate the after tax net operating cash flow, and WACC 2. Calculate the net present value of the project, Equity IRR and the payback period.