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2. Financial appraisal of investment projects The NextGen project is an example of how the financial appraisal of an investment project is conducted at Cengage Learning. The NextGen project passed through several stages of the capital investment process, which required the finance team to evaluate if and to what extent the project would drive incremental revenue or contribute toward revenue preservation. Instructions: Review the following stages of the financial appraisal process for this project and complete missing information as needed. Project Overview The innovation team proposed a digital learning platform that will create a personalized learning experience for each student. The platform consists of a set of flexible tools that will allow students to customize the technology to suit their personal learning needs. The executive team believes that the value proposition offered by the NextGen project will be one of a kind in the digital learning space and give the company a first-mover advantage. The finance team conducted the financial appraisal of the project to evaluate if and to what extent the project would drive incremental revenue or contribute toward revenue preservation. Relevant Cash Flows The finance team scheduled a series of meetings to discuss the different aspects of the project analysis. Sanford Tassel, Senior Vice President, Finance and Operations, Dikran Yapoujian, Vice President, Finance and other members of the finance-decision support team held a series of discussions. Some excerpts from their discussions follow: Relevant Cash Flows The finance team scheduled a series of meetings to discuss the different aspects of the project analysis. Sanford Tassel, Senior Vice President, Finance and Operations, Dikran Yapoujian, Vice President, Finance and other members of the finance-decision support team held a series of discussions. Some excerpts from their discussions follow: From: Yapoujian, Dikran To: Tassel, Sanford Cc: Buzzard, Chris; Muhleman, Purlen Subject: Relevant cash flows Attached: Data.xls Hey Sanford, I've been working with the team to evaluate the NextGen product in the capital approval pipeline. I've crafted the valuation model Complete the following cash flow analysis based on the information provided. (Note: Express all values in millions of dollars and round all values to three decimal places. Use a minus (-) sign to indicate any negative amount.) Year o Year 1 Year 2 Year 3 Year 4 Year 5 Revenues 0 Less: Operating expenses Less: Depreciation & Amortization Operating Income Less: Tax Plus: Non-cash expenses Operating Cash Flow Less: Capitalized expenses 7.300 6.600 6.600 Total Cash Flow Financing Costs The finance team got together to discuss the financing costs of the project. The following is an excerpt of their discussion. Read the dialogue and fill in the missing word or words. DIKRAN: Should we use the company's WACC or use the beta of a comparable project when applying a cost of capital to this project? SANFORD: We calculate our WACC on an annual basis based on the company's capital structure for the fiscal year. All of our investments are treated as cash investments so that we can fairly compare all initiatives based on their value proposition. This is a one-of-a-kind project in the ed tech space, and we believe that it will drive incremental revenues and contribute to the preservation of revenue for Cengage's existing products. The project also seems to align with the reinvestment objectives of our private equity owners. DIKRAN: Sounds good. We also calculate our applicable tax rates annually, and considering the digital landscape of this project, we necessarily need to use different tax rates based on the different states in which we operate. I guess it is fair to apply a standard tax rate in the valuation of the project cash flows. SANFORD: Let's use our standard WACC of 12%. I'll see you soon to discuss the valuation of the project. Project Evaluation The analysts in the team run the numbers and hand over the evaluation to Sanford. Complete the data in the report. (Note: Round your input values to three decimal places and your output values to two decimal places. Use a minus (-) sign to indicate any negative amount.) Project Evaluation The analysts in the team run the numbers and hand over the evaluation to Sanford. Complete the data in the report. (Note: Round your input values to three decimal places and your output values to two decimal places. Use a minus (-) sign to indicate any negative amount.) Year o Year 1 Year 2 Year 3 Year 4 Year 5 PV of cash flows $ $ $ NPV of the project $ % IRR of the project Payback period 3.30 years The Accept/Reject Recommendation The project proposal with supporting data was presented to the CFO and the board. After discussion and scrutiny of the assumptions in the report, the board is most likely to the project because of which of the following reasons? Check all that apply. The project generates an IRR greater than the company's WACC (hurdle rate). Management is not confident about the digital innovation team's track record. Management believes that the project will help in increasing market share and protect existing penetration. Management feels positive about the project, and their instincts say to go for it." 2. Financial appraisal of investment projects The NextGen project is an example of how the financial appraisal of an investment project is conducted at Cengage Learning. The NextGen project passed through several stages of the capital investment process, which required the finance team to evaluate if and to what extent the project would drive incremental revenue or contribute toward revenue preservation. Instructions: Review the following stages of the financial appraisal process for this project and complete missing information as needed. Project Overview The innovation team proposed a digital learning platform that will create a personalized learning experience for each student. The platform consists of a set of flexible tools that will allow students to customize the technology to suit their personal learning needs. The executive team believes that the value proposition offered by the NextGen project will be one of a kind in the digital learning space and give the company a first-mover advantage. The finance team conducted the financial appraisal of the project to evaluate if and to what extent the project would drive incremental revenue or contribute toward revenue preservation. Relevant Cash Flows The finance team scheduled a series of meetings to discuss the different aspects of the project analysis. Sanford Tassel, Senior Vice President, Finance and Operations, Dikran Yapoujian, Vice President, Finance and other members of the finance-decision support team held a series of discussions. Some excerpts from their discussions follow: Relevant Cash Flows The finance team scheduled a series of meetings to discuss the different aspects of the project analysis. Sanford Tassel, Senior Vice President, Finance and Operations, Dikran Yapoujian, Vice President, Finance and other members of the finance-decision support team held a series of discussions. Some excerpts from their discussions follow: From: Yapoujian, Dikran To: Tassel, Sanford Cc: Buzzard, Chris; Muhleman, Purlen Subject: Relevant cash flows Attached: Data.xls Hey Sanford, I've been working with the team to evaluate the NextGen product in the capital approval pipeline. I've crafted the valuation model Complete the following cash flow analysis based on the information provided. (Note: Express all values in millions of dollars and round all values to three decimal places. Use a minus (-) sign to indicate any negative amount.) Year o Year 1 Year 2 Year 3 Year 4 Year 5 Revenues 0 Less: Operating expenses Less: Depreciation & Amortization Operating Income Less: Tax Plus: Non-cash expenses Operating Cash Flow Less: Capitalized expenses 7.300 6.600 6.600 Total Cash Flow Financing Costs The finance team got together to discuss the financing costs of the project. The following is an excerpt of their discussion. Read the dialogue and fill in the missing word or words. DIKRAN: Should we use the company's WACC or use the beta of a comparable project when applying a cost of capital to this project? SANFORD: We calculate our WACC on an annual basis based on the company's capital structure for the fiscal year. All of our investments are treated as cash investments so that we can fairly compare all initiatives based on their value proposition. This is a one-of-a-kind project in the ed tech space, and we believe that it will drive incremental revenues and contribute to the preservation of revenue for Cengage's existing products. The project also seems to align with the reinvestment objectives of our private equity owners. DIKRAN: Sounds good. We also calculate our applicable tax rates annually, and considering the digital landscape of this project, we necessarily need to use different tax rates based on the different states in which we operate. I guess it is fair to apply a standard tax rate in the valuation of the project cash flows. SANFORD: Let's use our standard WACC of 12%. I'll see you soon to discuss the valuation of the project. Project Evaluation The analysts in the team run the numbers and hand over the evaluation to Sanford. Complete the data in the report. (Note: Round your input values to three decimal places and your output values to two decimal places. Use a minus (-) sign to indicate any negative amount.) Project Evaluation The analysts in the team run the numbers and hand over the evaluation to Sanford. Complete the data in the report. (Note: Round your input values to three decimal places and your output values to two decimal places. Use a minus (-) sign to indicate any negative amount.) Year o Year 1 Year 2 Year 3 Year 4 Year 5 PV of cash flows $ $ $ NPV of the project $ % IRR of the project Payback period 3.30 years The Accept/Reject Recommendation The project proposal with supporting data was presented to the CFO and the board. After discussion and scrutiny of the assumptions in the report, the board is most likely to the project because of which of the following reasons? Check all that apply. The project generates an IRR greater than the company's WACC (hurdle rate). Management is not confident about the digital innovation team's track record. Management believes that the project will help in increasing market share and protect existing penetration. Management feels positive about the project, and their instincts say to go for it