Exercise #1. Company has an investment project costing $250,000 with the expected incremental cash flows of $100,000 for the first year, $110,000 for the second year, $150,000 for the third year, and $200,000 for the fourth year. Calculate projects payback period, discounted payback period, NPV, IRR, MIRR, and the profitability index. Should the project be accepted if companys WACC is 12%?

Exercise #2. You have been asked to evaluate a proposed investment in a new equipment to produce toys with the cost of $ 400,000, shipping costs of $ 10,000 and installation costs of $10,000 for the new equipment. The equipment has life of 5 years and may be sold for $ 50,000 in the sixth year. The new business will generate annual revenue of $ 500,000, material costs will be 40% of revenues, other costs without depreciation will be $ 50,000 in the first year and they will increase by 3% p.a. afterwards. There will be additional investment in the working capital (Accounts Receivable with DSO Ratio of 30 days, calculated using Sales; and Inventory with DII of 30 days, calculate using the Materials Expense) that will be recovered in the sixth year. Calculate projects NPV. Should the project be accepted if companys WACC is 12%? Assume 5-year asset class, 20% income tax; Accounts Receivable shows up in Year 1 cash flow, but Inventory in Year 0!

Exercise #3. For the Exercise #2, you have been asked to evaluate projects standalone risk. You have decided to calculate incremental cash flows for the optimistic and pessimistic scenarios and calculate the expected NPV for the three sets of cash flows. What is the expected NPV if you assume additional annual revenue of $ 600,000 (rather than $500,000) for the optimistic scenario and $300,000 for the pessimistic scenario and the probabilities both optimistic and pessimistic scenarios are 20%.

Exercise #4. An Engineering building materials company TNX is looking for a bank loan to finance an investment project to purchase new extrusion equipment for

$7,000,000. The new equipment will provide revenue increase of $12,000,000 per year with additional salaries for new employees of $1,400,000 and additional other expenses of $1,400,000 in Y1 (both of which will continue beyond Y1). All existing and new fixed assets are in 5-year depreciation asset class, corporate income tax rate is 20%. See companys financial statements below:

Historical financial statments
Income Statement Y0, th. $
Sales	28 000
Materials expenses	16 800
Salaries expenses	2 000
Other expenses	6 000
EBITDA	3 200
Depreciation expense	1 000
EBIT	2 200
Income tax 20%	440
Net Income	1 760
Balance Sheet, end of Y0, th. $
Cash	400
Accounts Receivable	4 000
Inventory	4 000
Fixed Assets, net	9 000
Total Assets	17 400
Accounts Payable	2 000
Common Stock	2 200
Retained Earnings	13 200
Total Liabilities and Equity	17 400

Calculate companys forecasted financial statements for 7-year period, including the Balance Sheet. Determine if company TNX can repay the 7-year loan of

$5,000,000 with 5% interest which is taken to finance the investment (DSCR >2 for the time of the loan). Assume that:

• DSO, DII, Materials/Sales, and DPO ratios will remain constant, same depreciation for financial and tax accounting;
• Wages will increase by 2% p.a. because of the increase in average wage for existing and new workers, wages do not depend on sales volume; Other Expenses will remain constant.
• Existing company sales will not increase; the new equipment will be used after year 7 and will not be liquidated.

Exercise #5. For Exercise #4, assume that company will finance the equipment purchase by obtaining $7 million investment from an equity investor, rather than by taking a bank loan. Create 7-year forecast to value the company after receiving investment and implementing the investment project (post-money valuation). What percentage of company an investor would require if his/her investment is $7,000,000? Use the total beta approach (unlevered total beta of 2.15) when evaluating the cost of equity for valuing company. Assume: long-term growth rate of 2%, risk-free rate of 1%, market risk premium of 8%.