Professional Documents
Culture Documents
Flotation costs
Debt-equity ratio
Flotation cost of equity
Flotation cost of debt
$5,000,000
$1,000,000
1.00%
$16
$11
500,000
4.00%
$700,000
$250,000
40%
Value
Equity-Value ratio
Debt-Value ratio
Value
Equity-Value ratio
Debt-Value ratio
WACC
Accum'd Depreciation
Book Value
6.25%
$6,400,000
Equipment
$250,000
669,500
$417,800
Salvage Value
Book Value
SVNOT
1.6
0.6
0.4
11.25%
1.6
0.6
0.4
flotation costs %
Amount raised
WACC
Debt-equity ratio
Cost of equity
After-tax cost of debt
0.600
8.50%
2.50%
Years
1
14.29%
$714,500
2
24.49%
$1,224,500
3
17.49%
$874,500
4
12.49%
$624,500
5
8.93%
$446,500
$714,500
$4,285,500
$1,224,500
$3,061,000
$874,500
$2,186,500
$624,500
$1,562,000
$446,500
$1,115,500
Cash Flow
2008
2009
2010
2011
2012
1,000,000
500,000
$16.00
$1,010,000
520,000
$16.00
$1,020,100
540,800
$16.00
$1,030,301
562,432
$16.00
$1,040,604
Sales revenue
Variable costs
Fixed operating costs
Depreciation (equipment)
Oper. income before taxes (EBIT)
Taxes on operating income (40%)
Net Operating Profit After Taxes
$8,000,000
5,500,000
700,000
714,500
1,085,500
434,200
$651,300
$8,320,000
5,720,000
700,000
1,224,500
675,500
270,200
$405,300
$8,652,800
5,948,800
700,000
874,500
1,129,500
451,800
$677,700
$8,998,912
6,186,752
700,000
624,500
1,487,660
595,064
$892,596
714,500
$1,365,800
1,224,500
$1,629,800
874,500
$1,552,200
624,500
$1,517,096
$10,000.00
$0
$10,100.00
$0
$10,201.00
$0
$10,303.01
$0
$1,355,800
$1,619,700
$1,541,999
$1,506,793
Units sold
Sales price
Net working capital
2008
($6,400,000)
($6,400,000)
Cash Flows
2011
2009
2010
2012
$1,355,800
$1,619,700
$1,541,999
$1,506,793
$1,355,800
$1,619,700
$1,541,999
$1,506,793
$690,437.10
14.57%
13.17%
1.11
NPV Profile
0%
$5,000,000.00
1.00%
2.00%
3.00%
$4,000,000.00
4.00%
NPV
5.00%
$3,000,000.00
6.00%
7.00%
8.00%
IRR = 14.93%
$2,000,000.00
9.00%
10.00%
$1,000,000.00
11.00%
12.00%
$0.00
0%
($1,000,000.00)
($2,000,000.00)
13.00%
5%
10%
15%
WACC
20%
25%
14.00%
15.00%
16.00%
17.00%
18.00%
19.00%
20.00%
The NPV Profile of Harris Inc.'s potiential new project states that the project should be accepted at a weighted
average cost of capital rate below 14.93%. A rate below that point will result in a profitable NPV and rate above
that point will result in a loss of money per the NPV for the project.
The NPV Profile of Harris Inc.'s potiential new project states that the project should be accepted at a weighted
average cost of capital rate below 14.93%. A rate below that point will result in a profitable NPV and rate above
that point will result in a loss of money per the NPV for the project.
6
8.92%
$446,000
$446,000
$669,500
7+8
13.39%
$669,500
$669,500
Cash Flows
2013
2014
584,929
$16.00
$1,051,010
608,326
$16.00
$1,061,520
$9,358,868
6,434,222
700,000
446,500
1,778,146
711,259
$1,066,888
$9,733,223
6,691,591
700,000
446,000
1,895,632
758,253
$1,137,379
446,500
$1,513,388
446,000
$1,583,379
$10,406.04
$0
$10,510.10
$0
$1,502,982
$1,572,869
2013
2014
$1,502,982
$1,572,869
$1,000,000
$417,800
$1,502,982
$2,990,669
PV Profile Data
NPV
$4,117,943.04
$3,722,190.56
$3,348,050.30
$2,994,070.57
$2,658,912.84
$2,341,341.79
$2,040,216.36
$1,754,481.63
$1,483,161.49
$1,225,352.00
$980,215.33
$746,974.34
$524,907.61
$313,344.87
$111,662.95
($80,717.99)
($264,337.87)
($439,699.81)
($607,272.96)
($767,495.13)
($920,775.14)
Annual growth
NPV
IRR
MIRR
PI
Base Case
Best Case
Worst case
4%
$757,104
14.93%
13.36%
1.12
6%
$1,069,591
16.32%
14.18%
1.17
2%
$459,623
13.53%
12.56%
1.07
Scenario
Probability
Base Case
Best Case
Worst Case
50%
25%
25%
NPV
$757,104
$1,069,591
$459,623
Probability
7,037,963.29
23,829,432,748.98
22,685,197,239.57
46,521,667,951.83
Expected NPV
Standard Deviation of NPV
$760,855.55
$215,689
Scenario
Probability
IRR
Probability
Base Case
Best Case
Worst Case
50%
25%
25%
14.93%
16.32%
13.53%
0.0000000001
0.0000487569
0.0000485682
0.0000973252
Expected IRR
Standard Deviation of IRR
14.926706564706300%
0.99%
Scenario
Probability
MIRR
Probability
Base Case
Best Case
Worst Case
50%
25%
25%
13.36%
14.18%
12.56%
0.0000000004
0.0000166088
0.0000163879
0.0000329970
Expected MIRR
Standard Deviation of MIRR
13.366275427562300%
0.57%
Scenario
Probability
PI
Probability
Base Case
Best Case
Worst Case
50%
25%
25%
1.12
1.17
1.07
0.0000001755
0.0005940856
0.0005655589
0.0011598200
Expected IRR
Standard Deviation of IRR
1.12
0.03
Part C: The best and worst case for the NPV still yields the same result as the base
case of accepting the project. Each of the situations produces positive results. The
case of the IRR and MIRR is the same because they are all over 11.25%. All senerios
would be accepted in the PI test as well.
The expected NPV in growth is still a positive number so should be accepted. Broken
down even the worst case scenario would be accepted showing the stength of the
project.
The IRR in growth exceeds the WACC in all scenarios this would result in the
acceptance of the project.
Similar to the IRR the MIRR in growth exceeds the WACC in all scenarios this would
result in the acceptance of the project.
The expected profibility index in growth exceeds 1 so the project should be accepted.
Even upon a low end deviation the worst case scenario holds above 1.
be accepted. Broken
the stength of the
result in the
should be accepted.
ove 1.
Base Case:
Key Input Data
Equipment cost
NWC- start-up costs
Annual growth in WC
Sales price per unit
Variable cost per unit
First year sales (in units)
Annual growth in Unit Sales
Fixed costs
Salvage Value
Tax rate
Flotation costs
Debt-equity ratio
Flotation cost of equity
Flotation cost of debt
$5,000,000
$1,000,000
1.00%
$16
$11
449,830
4.00%
$700,000
$250,000
40%
Value
Equity-Value ratio
Debt-Value ratio
Value
Equity-Value ratio
Debt-Value ratio
WACC
Accum'd Depreciation
Book Value
6.25%
$6,400,000
Equipment
$250,000
669,500
$417,800
Salvage Value
Book Value
SVNOT
1.6
0.6
0.4
11.25%
1.6
0.6
0.4
flotation costs %
Amount raised
WACC
Debt-equity ratio
Cost of equity
After-tax cost of debt
0.6
8.50%
2.50%
Years
1
14.29%
$714,500
2
24.49%
$1,224,500
3
17.49%
$874,500
4
12.49%
$624,500
5
8.93%
$446,500
$714,500
$4,285,500
$1,224,500
$3,061,000
$874,500
$2,186,500
$624,500
$1,562,000
$446,500
$1,115,500
Cash Flow
2008
2009
2010
2011
2012
1,000,000
449,830
$16.00
$1,010,000
467,823
$16.00
$1,020,100
486,536
$16.00
$1,030,301
505,997
$16.00
$1,040,604
Sales revenue
Variable costs
Fixed operating costs
Depreciation (equipment)
Oper. income before taxes (EBIT)
Taxes on operating income (40%)
Net Operating Profit After Taxes
$7,197,276
4,948,127
700,000
714,500
834,649
333,860
$500,789
$7,485,167
5,146,052
700,000
1,224,500
414,615
165,846
$248,769
$7,784,574
5,351,895
700,000
874,500
858,179
343,272
$514,908
$8,095,957
5,565,970
700,000
624,500
1,205,487
482,195
$723,292
714,500
$1,215,289
1,224,500
$1,473,269
874,500
$1,389,408
624,500
$1,347,792
$10,000.00
$0
$10,100.00
$0
$10,201.00
$0
$10,303.01
$0
$1,205,289
$1,463,169
$1,379,207
$1,337,489
Units sold
Sales price
Net working capital
2008
($6,400,000)
($6,400,000)
Cash Flows
2011
2009
2010
2012
$1,205,289
$1,463,169
$1,379,207
$1,337,489
$1,205,289
$1,463,169
$1,379,207
$1,337,489
$0.00
11.25%
11.25%
1.00
6
8.92%
$446,000
$446,000
$669,500
7+8
13.39%
$669,500
$669,500
Cash Flows
2013
2014
526,237
$16.00
$1,051,010
547,287
$16.00
$1,061,520
$8,419,795
5,788,609
700,000
446,500
1,484,686
593,874
$890,812
$8,756,587
6,020,154
700,000
446,000
1,590,433
636,173
$954,260
446,500
$1,337,312
446,000
$1,400,260
$10,406.04
$0
$10,510.10
$0
$1,326,906
$1,389,750
2013
2014
$1,326,906
$1,389,750
$1,000,000
$417,800
$1,326,906
$2,807,550
Base Case:
Key Input Data
Equipment cost
NWC- start-up costs
Annual growth in WC
Sales price per unit
Variable cost per unit
First year sales (in units)
Annual growth in Unit Sales
Fixed costs
Salvage Value
Tax rate
Flotation costs
Debt-equity ratio
Flotation cost of equity
Flotation cost of debt
$5,000,000
$1,000,000
1.00%
$15.50
$11
500,000
4.00%
$700,000
$250,000
40%
Value
Equity-Value ratio
Debt-Value ratio
Value
Equity-Value ratio
Debt-Value ratio
WACC
Accum'd Depreciation
Book Value
6.25%
$6,400,000
Equipment
$250,000
669,500
$417,800
Salvage Value
Book Value
SVNOT
1.6
0.6
0.4
11.25%
1.6
0.6
0.4
flotation costs %
Amount raised
WACC
Debt-equity ratio
Cost of equity
After-tax cost of debt
0.6
8.50%
2.50%
Years
1
14.29%
$714,500
2
24.49%
$1,224,500
3
17.49%
$874,500
4
12.49%
$624,500
5
8.93%
$446,500
$714,500
$4,285,500
$1,224,500
$3,061,000
$874,500
$2,186,500
$624,500
$1,562,000
$446,500
$1,115,500
Cash Flow
2008
2009
2010
2011
2012
1,000,000
500,000
$15.50
$1,010,000
520,000
$15.50
$1,020,100
540,800
$15.50
$1,030,301
562,432
$15.50
$1,040,604
Sales revenue
Variable costs
Fixed operating costs
Depreciation (equipment)
Oper. income before taxes (EBIT)
Taxes on operating income (40%)
Net Operating Profit After Taxes
$7,749,149
5,500,000
700,000
714,500
834,649
333,860
$500,789
$8,059,115
5,720,000
700,000
1,224,500
414,615
165,846
$248,769
$8,381,479
5,948,800
700,000
874,500
858,179
343,272
$514,908
$8,716,739
6,186,752
700,000
624,500
1,205,487
482,195
$723,292
714,500
$1,215,289
1,224,500
$1,473,269
874,500
$1,389,408
624,500
$1,347,792
$10,000.00
$0
$10,100.00
$0
$10,201.00
$0
$10,303.01
$0
$1,205,289
$1,463,169
$1,379,207
$1,337,489
Units sold
Sales price
Net working capital
2008
($6,400,000)
($6,400,000)
Cash Flows
2011
2009
2010
2012
$1,205,289
$1,463,169
$1,379,207
$1,337,489
$1,205,289
$1,463,169
$1,379,207
$1,337,489
$0.00
11.25%
11.25%
1.00
6
8.92%
$446,000
$446,000
$669,500
7+8
13.39%
$669,500
$669,500
Cash Flows
2013
2014
584,929
$15.50
$1,051,010
608,326
$15.50
$1,061,520
$9,065,408
6,434,222
700,000
446,500
1,484,686
593,874
$890,812
$9,428,024
6,691,591
700,000
446,000
1,590,433
636,173
$954,260
446,500
$1,337,312
446,000
$1,400,260
$10,406.04
$0
$10,510.10
$0
$1,326,906
$1,389,750
2013
2014
$1,326,906
$1,389,750
$1,000,000
$417,800
$1,326,906
$2,807,550
Base Case:
Key Input Data
Equipment cost
NWC- start-up costs
Annual growth in WC
Sales price per unit
Variable cost per unit
First year sales (in units)
Annual growth in Unit Sales
Fixed costs
Salvage Value
Tax rate
Flotation costs
Debt-equity ratio
Flotation cost of equity
Flotation cost of debt
$5,000,000
$1,000,000
1.00%
$16
$11
500,000
4.00%
$700,000
$250,000
40%
Value
Equity-Value ratio
Debt-Value ratio
Value
Equity-Value ratio
Debt-Value ratio
WACC
Accum'd Depreciation
Book Value
7.79%
$6,506,961
Equipment
$250,000
669,500
$417,800
Salvage Value
Book Value
SVNOT
1.3
0.8
0.5
14.02%
1.3
0.8
0.5
flotation costs %
Amount raised
WACC
Debt-equity ratio
Cost of equity
After-tax cost of debt
0.284
8.50%
2.50%
Years
1
14.29%
$714,500
2
24.49%
$1,224,500
3
17.49%
$874,500
4
12.49%
$624,500
5
8.93%
$446,500
$714,500
$4,285,500
$1,224,500
$3,061,000
$874,500
$2,186,500
$624,500
$1,562,000
$446,500
$1,115,500
Cash Flow
2008
2009
2010
2011
2012
1,000,000
500,000
$16.00
$1,010,000
520,000
$16.00
$1,020,100
540,800
$16.00
$1,030,301
562,432
$16.00
$1,040,604
Sales revenue
Variable costs
Fixed operating costs
Depreciation (equipment)
Oper. income before taxes (EBIT)
Taxes on operating income (40%)
Net Operating Profit After Taxes
$8,000,000
5,500,000
700,000
714,500
1,085,500
434,200
$651,300
$8,320,000
5,720,000
700,000
1,224,500
675,500
270,200
$405,300
$8,652,800
5,948,800
700,000
874,500
1,129,500
451,800
$677,700
$8,998,912
6,186,752
700,000
624,500
1,487,660
595,064
$892,596
714,500
$1,365,800
1,224,500
$1,629,800
874,500
$1,552,200
624,500
$1,517,096
$10,000.00
$0
$10,100.00
$0
$10,201.00
$0
$10,303.01
$0
$1,355,800
$1,619,700
$1,541,999
$1,506,793
Units sold
Sales price
Net working capital
2008
($6,506,961)
($6,506,961)
Cash Flows
2011
2009
2010
2012
$1,355,800
$1,619,700
$1,541,999
$1,506,793
$1,355,800
$1,619,700
$1,541,999
$1,506,793
$0.00
14.02%
14.02%
1.00
6
8.92%
$446,000
$446,000
$669,500
7+8
13.39%
$669,500
$669,500
Cash Flows
2013
2014
584,929
$16.00
$1,051,010
608,326
$16.00
$1,061,520
$9,358,868
6,434,222
700,000
446,500
1,778,146
711,259
$1,066,888
$9,733,223
6,691,591
700,000
446,000
1,895,632
758,253
$1,137,379
446,500
$1,513,388
446,000
$1,583,379
$10,406.04
$0
$10,510.10
$0
$1,502,982
$1,572,869
2013
2014
$1,502,982
$1,572,869
$1,000,000
$417,800
$1,502,982
$2,990,669
The analysis of the different breakevens is important because it shows specific points in which
project would start loosing money. If first year sales dip below 449,830 the project begins to lo
money and sould be scrapped. If the product is not selling and price is reduced to below $15.5
project will be loosing oney so again the porject should be scrapped. If the company restructu
and changes its debt to quity ration to .284 the NPV will then result in z oif all else is held cons
with the project.
Company A
Company B
Company C
Company D
Company E
New Project
Tax Rate
RFR
MRP
PSDR
Equity Beta
2.25
2.00
1.60
1.30
2.50
2.29
Debt
0.25
0.4
0.5
0.15
0.45
0.5
Equity
0.75
0.6
0.5
0.85
0.55
0.5
40%
2.5%
6.24%
16.79%
Base Case:
Key Input Data
Equipment cost
NWC- start-up costs
Annual growth in WC
Sales price per unit
Variable cost per unit
First year sales (in units)
Annual growth in Unit Sales
Fixed costs
Salvage Value
Tax rate
Flotation costs
Debt-equity ratio
Flotation cost of equity
Flotation cost of debt
$5,000,000
$1,000,000
1.00%
$16
$11
500,000
4.00%
$700,000
$250,000
40%
Value
Equity-Value ratio
Debt-Value ratio
Value
Equity-Value ratio
Debt-Value ratio
WACC
Accum'd Depreciation
Book Value
6.25%
$6,400,000
Equipment
$250,000
669,500
$417,800
Salvage Value
Book Value
SVNOT
1.6
0.6
0.4
16.79%
1.6
0.6
0.4
flotation costs %
Amount raised
WACC
Debt-equity ratio
Cost of equity
After-tax cost of debt
0.600
8.50%
2.50%
Years
1
14.29%
$714,500
2
24.49%
$1,224,500
3
17.49%
$874,500
4
12.49%
$624,500
5
8.93%
$446,500
$714,500
$4,285,500
$1,224,500
$3,061,000
$874,500
$2,186,500
$624,500
$1,562,000
$446,500
$1,115,500
Cash Flow
2008
2009
2010
2011
2012
1,000,000
500,000
$16.00
$1,010,000
520,000
$16.00
$1,020,100
540,800
$16.00
$1,030,301
562,432
$16.00
$1,040,604
Sales revenue
Variable costs
Fixed operating costs
Depreciation (equipment)
Oper. income before taxes (EBIT)
Taxes on operating income (40%)
Net Operating Profit After Taxes
$8,000,000
5,500,000
700,000
714,500
1,085,500
434,200
$651,300
$8,320,000
5,720,000
700,000
1,224,500
675,500
270,200
$405,300
$8,652,800
5,948,800
700,000
874,500
1,129,500
451,800
$677,700
$8,998,912
6,186,752
700,000
624,500
1,487,660
595,064
$892,596
714,500
$1,365,800
1,224,500
$1,629,800
874,500
$1,552,200
624,500
$1,517,096
$10,000.00
$0
$10,100.00
$0
$10,201.00
$0
$10,303.01
$0
$1,355,800
$1,619,700
$1,541,999
$1,506,793
Units sold
Sales price
Net working capital
2008
($6,400,000)
($6,400,000)
Cash Flows
2011
2009
2010
2012
$1,355,800
$1,619,700
$1,541,999
$1,506,793
$1,355,800
$1,619,700
$1,541,999
$1,506,793
($403,356.21)
14.57%
15.53%
0.94
6
8.92%
$446,000
$446,000
$669,500
7+8
13.39%
$669,500
$669,500
Cash Flows
2013
2014
584,929
$16.00
$1,051,010
608,326
$16.00
$1,061,520
$9,358,868
6,434,222
700,000
446,500
1,778,146
711,259
$1,066,888
$9,733,223
6,691,591
700,000
446,000
1,895,632
758,253
$1,137,379
446,500
$1,513,388
446,000
$1,583,379
$10,406.04
$0
$10,510.10
$0
$1,502,982
$1,572,869
2013
2014
$1,502,982
$1,572,869
$1,000,000
$417,800
$1,502,982
$2,990,669
The importance of using the project specific discount rate is to show how the proposed projec
the riskiness of the firm. In this particular when using the project specific discount rate the ne
showed that the project in fact should not be acceped due to an unporfitable NPV. With out th
for the project specific discount rate a wrong decision would have been made and the firm wo
lost money.