Question

A firm has projected free cash flows of $575,000 for Year 1, $625,000 for Year 2, and 750,000 for Year 3. The projected terminal value at the end of Year 3 is $8,000,000. The firm's Weighted Average cost of Capital (WACC) is 12.5%.

Please post the answer in an Excel Document

• Determine the Discounted Cash Flow (DCF) value of the firm.
• Recommend acceptance of this project using net present value criteria.
• Display your calculations.

Answer 1

Discount rate	12.500%
Year	0	1	2	3
Cash flow stream	0	575000	625000	8750000
Discounting factor	1.000	1.125	1.266	1.424
Discounted cash flows project	0.000	511111.111	493827.160	6145404.664
NPV = Sum of discounted cash flows
NPV Project =	7150342.94
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Accept project as NPV is positive

Year 3 amount = year 3 FCF+terminal value

Please find below algebraic form of above cashflow discounting table to calculate NPV

NPV = 575000/(1+0.125)^1+625000/(1+0.125)^2+(8000000+750000)/(1+0.125)^3

=7150342.94

any project that has a positive NPV generates postive cash flow for the company increasing company value thus all projects with positive NPVs are accepted