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• EBIT (1-t)
• Add: Depreciation
• Less: Change in NWC
• Less: Capital expenditure
• = Free Cash Flow
Discount rate
• New Heritage assigned discount rates to projects
according to a subjective assessment of each project’s
risk.
• In 2010, “low” risk project is assessed at 7.7%
• “medium” risk project is assessed at 8.4%
• “high” risk project is assessed at 9%
Terminal value (TV)
MMDC DYOD
NPV $7.15 million $7.06 million
IRR 24.0% 17.9%
Payback 7.4 years >10 years
Profitability Index 2.37 1.32
5-year cum. EBITDA $6.52 million $8.78 million
Which project should be selected?
• Similar NPV for the two projects: $7.15 million and $7.06 for MMDC
and DYOD, respectively.
• This is not a large difference.
• Moreover, as mentioned earlier, a going concern terminal value
for MMDC may overstate its value at the end of 2020. To
illustrate, note that lowering the perpetual growth rate to 2% for
MMDC and leaving DYOD’s growth rate at 3% makes MMDC’s NPV
lower than DYOD’s (See Table 2).
Table 2: NPV Sensitivity Analyses
NPV of Match My Doll Clothing Line Extension
TV growth rate
Discount 0% 1% 2% 3% NPV if
rate TV=BV
of
NWC +
PPE