MBA Level Course - Valuation

Problem 1:

Breakeven Sensitivity Analysis. The Clayton Maufactuirng Company is considering an investment in a new automated inventory system for its warehouse that will provide cash savings to the firm over the next five years. The firm's CFO anticipates additional earnings before interest, taxes,depreciation, and amortization (EBITDA) from cost savings equal to $200,000 for the first year of operation of the center; over the next four years, the firm estimates that this amount will grow at a rate of 5% per year. The system will require an initial investment of $800,000 that will be depreciated over a five year period using straight line depreciation of $160,000 per year and a zero estimated salvage value.

A. Calculate the projects annual free cash flow (FCF) for each of the next five years, where the firm's tax rate is 35%.

B. If the cost of capital for the project is 12%, what is the projected NPV (Net Present Value) for the investment?

C. What is the minimum Year 1 dollar savings (i.e. EBITDA) required to produce a breakeven NPV=0 ?

Problem 2:

Nestle Enterprises is estimating its cost of capital for the first time and has made the following estimates: The firm's debt carries a AAA rating, which is currently yielding 6%; the firm pays taxes at a rate of 30%; the cost of equity is estimated to be 14%; and the firm's debt is equal to 20% of its enterprise value. What is Nestle's WACC (Weighted Average Cost of Capital) ?