Question

You are the CFO of a beer and wine distribution company, B&W Company, which is planning to expand into Florida. The Board has asked you to do an analysis of the expected return on a new warehouse and related equipment required for the expansion. The new warehouse would be more efficient and could handle the volume anticipated in the new territory. The project would require an initial investment of $20 million with an add-on investment of $5 million at the end of Year 2. The expected after-tax returns for the next 5 years are: $4 million, $5 million, $8 million,          $9 million, and $9 million respectively.

You assume the project’s returns are received at the end of each year and have determined the WACC is 8%.

1. Calculate the FV of Returns.

Answer 1

Future Value
Last period=	5
Compounding rate	8.000%
Year	0	1	2	3	4	5
Cash flow stream	-20	4	0	8	9	9
Compounding factor	1.469	1.360	1.260	1.166	1.080	1.000
Compounded cash flows	-29.387	5.442	0.000	9.331	9.720	9.000
FV = Sum of compounded cash flows
FV=	4.11
Where
Compunding factor =	(1 + rate)^(Last period-Corresponding period in years)
Compounded Cashflow=	Cash flow stream*compounding factor