I need work checked and/or help getting formulas for cells B52 (NPV, question 4) and B54 (PV discounted to year 0, question 3C) Details: Business Corp. has developed a new construction chemical that greatly improves the durability and weatherability of cement-based materials. After spending $500,000 on the research of the potential market for the new chemical, Business Corp. is considering a project that requires an initial investment of $9,000,000 in manufacturing equipment.

The equipment must be purchased before the chemical production can begin. For tax purposes, the equipment is subject to a 5-year straight-line depreciation schedule, with a projected zero salvage value. For simplicity, however, we will continue to assume that the asset can actually be used out into the indefinite future (i.e., the actual useful life is effectively infinite). Business Corp anticipates that the sales will be $30,000,000 in the first year (Year 1). They expect that sales will initially grow at an annual rate of 6% until the end of sixth year (E.g., Year 6 sales = (1+6%)*Year 5 sales). After that, the sales will grow at the estimated 2% annual rate of inflation in perpetuity (E.g., Year 7 sales = (1+2%)*Year 6 sales).

The cost of goods sold is estimated to be 72% of sales for each year.

The accounting department also estimates that at the introduction in Year 0, the new product's required initial net working capital will be $6,000,000. In future years (E.g., Year 1 and beyond) accounts receivable are expected to be 15% of the next year sales, inventory is expected to be 20% of the next year's cost of goods sold and accounts payable are expected to be 15% of the next year's cost of goods sold.

The selling, general and administrative expense is estimated to be $6,000,000 per year, but $1 million of this amount is the overhead expense that will be incurred even if the project is not accepted.

The market research to support the product was completed last month at a cost of $500,000 to be paid by the end of next year.

The annual interest expense tied to the project is $1,000,000.

Business Corp has a cost of capital of 20% and faces a marginal tax rate of 30% and an average tax rate is 20%.

Instructions You need to figure out how to construct the pro forma income statements and calculate the incremental unlevered net income on the provided template. You should include ONLY the factors that will affect your capital budgeting decision. Revise the template if necessary.

Note that your analysis should be set up so the assumptions that impact the cash flow estimates can be easily changed to identify the sensitivity of your calculations to these assumptions.

Never hardcode in excel. (always refer to cells with formulas, do not type out the data from another cell)

Use cell reference so that I can trace your work.

Questions 1. Use Excel to construct six-year pro forma income statements and calculate the incremental unlevered net income for the first six years.

When calculating incremental unlevered net income, should we include all the expenses mentioned in the case? If not, what expenses should we exclude and why? Clearly and concisely state your reasons in the cell E9 of the excel template (at most 2 sentences for each expense you exclude). If you just forecast the unlevered net income but don't given any explanations on why you exclude certain expenses, a penalty of 30 points will deducted from your grade for the case study.

2. Calculate six-year projections for free cash flows. Remember to include cash flows from the income statement and depreciation, changes in net working capital, and capital expenditures.

Hint: You need to calculate the level of net working capital (NWC) and changes in NWC. Pay attention to the timing of NWC.

3. Business Corp expects that free cash flow will increase at a constant rate of 2%/year starting from Year 7 into the indefinite future (e.g., Year 7 FCF=(1+2%)*Year 6 FCF, Year 8 FCF= (1+2%)*Year 7 FCF, etc., but NOT Year 6 FCF=(1+2%)*Year 5 FCF). Calculate PV(terminal value that captures the value of future free cash flows in Year 6 and beyond) (Yes, Year 6 and beyond, NO typo here). That is, calculate the terminal value first, then find its value in Year 0 (today).

The project will generate FCFs in Year 6 and beyond. Such FCFs are part of the benefits or costs attributed to the project (other than the benefits produced and costs incurred in Years 0 - 5). Thus, we should also value these FCFs. PV(terminal value) asks what the present value (Year 0 value) of the FCFs in Year 6 and beyond. Hint: a. Assuming the cash flows grow at a constant rate g after Year N+1, then Year N TV = (Year N+1 CF)/(rg) (from growing perpetuity formula). where r is discount rate For example, if {FCF6, FCF7, FCF8, ...} is a growing perpetuity, then Year 5 TV = Year 6 FCF/(r-g). Similarly, if {FCF7, FCF8, FCF9, ...} is a growing perpetuity, then Year 6 TV = Year 7 FCF/(r-g).

b. If you get a Year N TV, then you should put it at Year N. E.g., if you get a Year 5 TV, then you should put it at Year 5, not Year 6 or Year 4, because of the time value of money.

c. We should discount this Terminal Value back to Year 0.

d. I used two methods to solve the problem in the slide 23 (also posted in the case study folder). This should help you identify the growing perpetuity and correctly apply the growing perpetuity formula to calculate the PV(terminal value) for our case study.

4. Determine the NPV of the project. Remember to net out any initial cash outflows (e.g., Year 0 FCFs).

Excel screenshots: first is data, second is formula used to get it

J K L M A B D E F G H I 1 Case - NPV Calculation 2 3 Assumptions (Amounts in $ Thousands Unless otherwise Indicated) 4 Initial Capital Expenditure (Ye: $ 9,000 5 Useful Life of Equipment 5 6 Annual Depreciation $1,800 7 Sales in Year 1 $ 30,000 8 Sales Growth Rate per Yearth 6% 9 Sales Growth Rate in Year 7 al 2% 10 Free Cash Flow Growth Rate il 2% 11 Cost of Goods Sold (% of sales) 72% 12 Incremental SG&A Expense $ 5,000 13 SG&A overhead expense $ 1,000