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1060 F2022 Week 9 Tutorial 7 - SOLUTION

Tutorial 7

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22 views2 pages

1060 F2022 Week 9 Tutorial 7 - SOLUTION

Tutorial 7

Uploaded by

xtremewhiz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MMI1060 FINANCE

Tutorial #7: DCF


SOLUTION

Solution:

NPV:

Initial cost (22,000,000)


PV of operating cash flows (1) 18,568,566
CCATS (2) 3,389,248
PV of Salvage value (22,000,000 x 20% / 1.185) 1,923,281
PV of working capital (3) (955,489)
NPV 925,606

Workings:

1. PV of operating cash flows:

0 1 2 3 4 5
Unit sales 88,000 96,000 109,000 118,000 95,000
Selling price ($340 per unit) 29,920,000 32,640,000 37,060,000 40,120,000 32,300,000
VS ($240 per unit) (21,120,000) (23,040,000) (26,160,000) (28,320,000) (22,800,000)
FC ($850,000 per year) (850,000) (850,000) (850,000) (850,000) (850,000)
Operating cash flow before tax 7,950,000 8,750,000 10,050,000 10,950,000 8,650,000
Tax @ 35% (2,782,500) (3,062,500) (3,517,500) (3,832,500) (3,027,500)
Operating cash flow after tax 5,167,500 5,687,500 6,532,500 7,117,500 5,622,500
PV factor (18%) 1.180 1.3924 1.6430 1.9388 2.2878
PV 4,379,237 4,084,674 3,975,881 3,671,127 2,457,647

Total PV of operating cash flows: 18,568,566

2. CCA tax shield:

Cost: 22,000,000 Salvage value = 20% of cost = 20% x 22,000,000 = $4,400,000


T = 35%
N = 5 yrs
CCA rate = 20%
K = 18%

 CdTc  1 + 0.5r   SdTc   1 


 r + d   1 + r  −  r + d   (1 + r ) t 
     

[(22,000,000 x 0.2 x 0.35)/(0.18+0.2)][(1 + 0.09)/(1.18)] – [(4,400,000 x 0.2 x 0.35)/(0.18+0.2)][1/(1.185)]


= (4,052,632 x 0.92373) – 354,289
= 3,743,537 – 354,289
= 3,389,248
3. PV of working capital needs:

0 1 2 3 4 5
$ Sales 0 29,920,000 32,640,000 37,060,000 40,120,000 32,300,000
Wkg Cap at end of yr 1,496,000 1,632,000 1,853,000 2,006,000 1,615,000 -
Wkg Cap at beg of yr 0 1,496,000 1,632,000 1,853,000 2,006,000 1,615,000
Wkg Cap movement for the year (1,496,000) (136,000) (221,000) (153,000) 391,000 1,615,000
PV factor (18%) 1 1.180 1.3924 1.6430 1.9388 2.2878
PV (1,496,000) (115,254) (158,719) (93,121) 201,673 705,931

Total PV of working capital (955,489)

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