Calculate the NPV of the cash flows expected in 2006-2010 using only the 2005 Cost of Capital (don't worry about increasing costs of capital).
Calculate the NPV of the cash flows using the CASH FLOW figures at the bottom of the spreadsheet, these are the future values cash inflows.
Is the NPV positive or negative? Should the project be accepted? Why or why not based on NPV?
Show your calculations
What would be some of questions you may ask regarding the economic assumptions made during your calculations of NPV and regarding the expansion effort?
Year 2005 2006 2007 2008 2009 2010
T= 0 1 2 3 4 5
Risk Free Rate 2.25% 2.50% 2.75% 3.00% 3.25% 3.25%
Cost of Capital 6.00% 7.00% 8.00% 9.00% 10.00% 11.00%
(US$ millions, incremental)
Net Sales 30 35 40 45 50
Selling, General & Admin -20 -18 -15 -12 -12
Depreciation -10 -10 -10 -10 -10
Interest Expense -2 -2 -2 -2 -2
Income before Taxes -2 5 13 21 26
Income Taxes 1 -2 -5 -8 -10
Net Income -1 3 8 13 16
capital Investment -50
Addback Noncash 10 10 10 10 10
Cash Flow -50 8.76 13.10 18.06 23.02 26.12