Question
Hi, Could you please explain: 1) Why do I need the free cash flows?? The task seems to require calculations for NPV, IRR and a
Hi,
Could you please explain:
1) Why do I need the free cash flows?? The task seems to require calculations for NPV, IRR and a sensitivity analysis.
2) How are operating expenses and net working capital requirements related to this task?
3) Why do I need depreciation if it does not come under NPV or IRR?
4) Would we even depreciate a product development opportunity?
5) How am I to present these cashflows? Just write them down for each year?
Detail summary below:
New investment opportunity - product development and sales.
Life of the new product = 5 years.
Initial investment required = 11% of the PPE at the end of firm's accounting year 2017.
The project will require furthersubsequent investments in all five years of its life.
The initial investment will increase by 12%, 5%, 2% and 1% in years 1, 2, 3 and 4 respectively.
Investments are made at year end so no investment in the final year.
Revenues in Y1 = 2.8% of the total revenues of firm in 2017 accounting year.
The revenues will increase by 15% in year 2 and 15%, 5% and 5% in years 3, 4 and 5 respectively.
All cashflows occur at year end.
Operating costs and net working capital requirements are similar to the rest of the company and depreciation is in straight-line for capital budgeting purposes.
(This is not a requirement, just casually mentioned in text) Calculate the estimated Free Cash Flow for the new project using:
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