Finance: Free Cash Flow

inance sustain FINANCE Miss Afifa Assignment 4 UMAIR ASIF11 March 2013 You submitted this Assignment on Sun 10 Mar 2013 721 PM PDT. You got a score of 85. 00 out of 100. 00. You can attempt again, if youd like. Top of Form cheer read whole heads and instructions cargonfully. Note that you only need to count on answers in terms of numbers and without any symbols (including $, %, commas, etc. ). Enter only dollars without decimals and all interest ordinates in percentage with up to two decimals. Read the syllabus for examples.The points for all(prenominal) question be listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100. You are powerfully encourage to use spreadsheets. Refer to Note on Sample hard immediate payment Flow Template. Question 1 (5 points) The project with the highest IRR is always the project with the highest NPV. Your be construct shit accounting True False ? 5. 00 Correct. Try presentl y to tell apart this out in different contexts, Total 5. 00 / 5. 00 Question raw(a)s report This is all about the fundamental difference between IRR and NPV. Question 2 10 points) Ann Arbor is considering offering public bus service for free. Setting up the service allow embody the city $0. 6M (where M stands for million). The useful keep of the buses is 25 yrs. social classly maintenance of the buses would comprise $50,000 per year and they would need a major overhaul in year 15 that willing exist a total of $350,000. This overhaul is in addition to the annual maintenance. Annual operating costs will begin at $90,000 in year 1 and grow at 2% per year thereafter. By employ the buses as advertisement space, the city will generate a evaluate income of $75,000 in year 1 and it will grow at 4% per year thereafter.Reduced parking requirements and other benefits generated by the project will uphold the city $100,000/year. The salvage entertain (price city can get in th e future after maintenance) of the used buses in year 25 is expect to be $150,000. What is the NPV of the bus proposal? Ann Arbor does not pay taxes and the fire rate is 5%. (Again, all cash combines except initial investments receive at the give the sack of the year. ) (You are strongly encouraged to use a spreadsheet. ) Your arrange Score write up -10223 29847 ? 10. 00 Correct. You apparently harbor thought through issues. 31222 19323 Total 10. 00 / 10. 00 Question Explanation A real world difficulty with some simplifications in cash flows. Question 3 (5 points) Alpha Inc. has the pursual two projects that it is considering, and it wants to contract one. pouch A has an investment outlay/ write down today of $1,000, and its cash flows over the next three years are $500, $600, $700. come across B has an outlay of $2,000, and cash flows of $1,000, $1,200, and $1,400. Which project should Alpha submit? (You can assume no taxes. ) Your closure Score Explana tion ensure A Does not matter both are essentially the equivalent Cannot make a choice based on development ? 5. 00 Correct. What information is missing? Project B Total 5. 00 / 5. 00 Question Explanation This question is probing your comfort level and understanding of decision fashioning and the to the highest degree common pitfall we confront all the time. Question 4 (10 points) mango Technology has the following three projects that it is considering it can choose only one. Project A has an investment outlay/expense today of $100M, and its cash flows over the next three years are $20M, $40M, $70M.Project B has an outlay of $110M, and cash flows of $40M, $80M, $20M Project C has an outlay of $120M and cash flows of $0M, $20M, and $142M. Which project should the company choose if the cost of crownwork for similar projects is 6%? Your Answer Score Explanation Project B Project C Do not have enough information ? 0. 00 You do have enough information. Try again . Project A Total 0. 00 / 10. 00 Question Explanation This is an exercise in scrutiny your copeledge pitted against our tendency to choose the incorrect criterion for making decisions.Question 5 (5 points) To get from net operating internet after tax (NOPAT) to free cash flows (FCF), you need to ADD back depreciation, SUBTRACT capital expenditures and ADD net working(a) capital (i. e. , live operating assets current operating liabilities). (Free cash flow is another name for cash flows. ) Your Answer Score Explanation False. ? 5. 00 Correct. You understand the nature of capital. True. Total 5. 00 / 5. 00 Question Explanation This is an important issue that makes you focus on differences between stocks and flows. Question 6 5 points) Last year your firm had r steadyue enhancement of $20 million, cost of goods interchange (COGS) of $12 million, Selling, General, Administration costs (SGA) of $2 million, Account Receivables (AR) of $6 million, Account Payables (AP) of $4 million and Inventory of $4 million. What will be the free cash flow next/this year if you boost revenue 6% and AR 12%, while holding COGS growth to 3% and everything else remains the same as last year? (Assume no taxes and no raw(a) capital expenditures. ) (You are encouraged to use a spreadsheet even for this specific type of question. ) Your Answer Score Explanation 4170000 ? 0. 00 Review the fundamental principle see template and references. 6120000 7240000 5250000 Total 0. 00 / 5. 00 Question Explanation Cash flow estimation for a specific year. Question 7 (15 points) Rain in Spain (RiS) is a manufacturer of high quality raincoats. Currently, the retail price of each raincoat is $70 and is produced at a cost of $45. This past year, they sold 50,000 raincoats and they expect this number to grow each year by 6% each year for the next 10 years. The operations team at RiS recently brought to your attention a new technology that could lower the cost of prod uction.This technology requires an upfront fixed investment of $2,000,000 and has the capacity to produce up to 90,000 raincoats per year at a 12% lower cost per unit. in that location is no increased working capital need due to this new technology, and no evaluate of the machine/technology after 10 years. What is the NPV of expend in the new technology? Ignore taxes and assume a synthesis rate of 14%. (Hint Think incrementally the difference between the world without and with this new technology Also, ignoring taxes will be a big help if you speak up right. ) (Enter just the number without the $ sign or a comma labialise off decimals. (You are strongly encouraged to use a spreadsheet. ) Answer for Question 7 You entered Your Answer Score Explanation -150683 ? 15. 00 Correct. You exhibit a clear understanding of how to conduct incremental analysis. Total 15. 00 / 15. 00 Question Explanation A probing question that is all about the creation of value incremental value. Ques tion 8 (15 points) Fresh off the excitement of the 2012 capital of the United Kingdom Olympic Games, you decide that you want your firm to take advantage of the profits to be made for the 2016 games in Rio de Jeneiro. To do so you plan to informal a factory in Brazil.After examining the idea, your CFO projects revenues next year (2013) to be $15 million and costs to be $9 million. Both of these are expected to grow at a rate of 25% per year as the excitement for the games habituss. Your firms faces a 35% tax rate, a 14% discount rate and you can depreciate your new investment use the straight line method over the four years leading(a) up to the games, at which point the value of the venture moving advancing will be $5 million. (This $5 million is the terminal value that is in year 4 (that is, 2016) dollars and is the PV of all cash flows year 5 and beyond. The capital expenditure of this project is $12M. What is the NPV of the project? Assume that you have no significant workin g capital costs. (Enter just the number without the $ sign or a comma round off decimals. ) (You are strongly encouraged to use a spreadsheet. ) Answer for Question 8 You entered Your Answer Score Explanation 9815100 ? 15. 00 Correct. You know how to set up and execute a military rating exercise, albeit a simplified one. Total 15. 00 / 15. 00 Question Explanation A military rank exercise that includes most of the elements of a real world situation. Question 9 15 points) Starbucks is considering opening another storehouse in Chicago. A store is expected to have a long economic life, but the evaluation horizon is 7 years. The store in Chicago is expected to wee revenues of $3M in the first year and they are likely to grow at 2% per year thereafter. The cost of goods sold are $1. 2M in year 1 and they are also expected to grow at 2% per year thereafter. Selling and administration costs are likely to be $0. 5M in the first year and then grow at 5%. The tax rate is 35%. Starbuck s is so good at managing its stores that working capital increases can be assumed to be negligible.But Starbucks will have to invest $3. 5M in purchasing a store (with land). The good watchword is that this outlay can be depreciated straight line over 7 years. Also, Starbucks has estimated that the terminal value in year 7 dollars will be $10M. This value is the value of all cash flows in year 8 and beyond. What is the NPV of opening this new store if the appropriate discount rate is 7. 75%? (Again, all cash flows except initial investments happen at the end of the year. Enter just the number without the $ sign or a comma round off decimals. )(You are strongly encouraged to use a spreadsheet. ) Answer for Question 9You entered Your Answer Score Explanation 7879584 ? 15. 00 Correct. You are now building spreadsheet models. Total 15. 00 / 15. 00 Question Explanation It is time to do a more complete project analysis. Strongly encourage use of spreadsheets to build cashflows, thou gh remember that you can do it spirit by step as well. Question 10 (15 points) Big Blue Granite (BBG) needs to get a new truism for creating their top quality countertops. Saw A costs $250,000 with $4,000 of annual maintenance costs for the first year that will increase by 5% each year for the 7-year life of the saw.Saw B costs $150,000 with $10,000 of annual maintenance costs for the first year that will increase by 15% each year for the 4-year life of the saw. Which saw should BBG choose? What is the annualized cost of this choice? Assume a discount rate of 12%, and ignore all taxes. Your Answer Score Explanation (B, 46794) (B, 49983) (A, 59331) ? 15. 00 Correct. You know how to figure out the true annualized cost. (A, 40367) (A, 38682) (B, 61624) Total 15. 00 / 15. 00