10 marks

Fox Pty Ltd (Fox) is a listed company on ASX and is aiming to invest $500,000 into a new product line. The residual value of this investment at the end of 5 years would be $50,000, which is depreciated using Straight Line Method.

This investment brings additional net operating income of $80,000 which would be increased by 7% each year till year 5. Also, for this investment, Fox is required to invest 3% of the new net operating income each year. Having tax rate of 30%, calculate:

1. Investment Free Cash Flows for years 0 to 5?

1.5 Marks

2. NPV if discount rate (WACC) is 9%?

0.5 Marks

3. NPV if the growth rate of net operating income is change by +2% and -2% (from 7%, it is changed to 9% and 5% respectively), discount rate is still 9%.

3 Marks

Discuss and analyze if this investment is risky or not and advise what other methods would you recommend evaluating investment cash flow risk?

10 marks

Fox Pty Ltd (Fox) is a listed company on ASX and is aiming to invest $500,000 into a new product line. The residual value of this investment at the end of 5 years would be $50,000, which is depreciated using Straight Line Method.

This investment brings additional net operating income of $80,000 which would be increased by 7% each year till year 5. Also, for this investment, Fox is required to invest 3% of the new net operating income each year. Having tax rate of 30%, calculate:

1. Investment Free Cash Flows for years 0 to 5?

1.5 Marks

2. NPV if discount rate (WACC) is 9%?

0.5 Marks

3. NPV if the growth rate of net operating income is change by +2% and -2% (from 7%, it is changed to 9% and 5% respectively), discount rate is still 9%.

3 Marks

Discuss and analyze if this investment is risky or not and advise what other methods would you recommend evaluating investment cash flow risk?