Question

Fresh off the excitement of the 2012 London Olympic Games, you decide that you want your...

Fresh off the excitement of the 2012 London 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 open a factory in Brazil. After examining the idea, your CFO projects revenues next year (2013) to be $15 million and costs to be $8 million. Both of these are expected to grow at a rate of 29.0% per year as the excitement for the games builds. Your firm faces a 35% tax rate, a 12.0% discount rate and you can depreciate your new investment using the straight line method over the four years leading up to the games, at which point the value of the venture moving forward will be $5 million. This $5 million is the after-tax 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 $12 million. What is the NPV of the project? Assume that you have no significant working capital costs.

Homework Answers

Answer #1

Year

0

1

2

3

4

Initial Investment

-12

revenue = current revenue*(1+growth rate)^n growth rate = 29%

15

19.35

24.9615

32.200335

less cost = current cost*(1+growth rate)^n growth rate =29%

8

10.32

13.3128

17.173512

less depreciation = 12/4

3

3

3

3

EBIT

4

6.03

8.6487

12.026823

less tax -35%

1.4

2.1105

3.027045

4.20938805

EAT

2.6

3.9195

5.621655

7.81743495

add depreciation

3

3

3

3

operating cash flow

5.6

6.9195

8.621655

10.81743495

after tax terminal value

0

0

0

5

net operating cash flow

-12

5.6

6.9195

8.621655

15.81743495

present value of net operating cash flow = net operating cash flow/(1+r)^n r =12%

-12

5

5.516183036

6.136723732

10.05226586

Net present value = sum of present value of cash flow

14.71

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