1. Apprising corporate strategic decisions

2. 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

3. 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.

4. 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%.

5. 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

6. 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.