Please fill out Part 1-4 yellow cells and please put equations and cell numbers
AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share 0 Comments X Times New Roman . AI Insert 10 = = ab Wrap Text Number 48- 0 DX Delete Paste B I U MA Merge & Center $ %) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format Find & Select Sensitivity A57 fx Net Operating Profit After Taxes (NOPAT) A B D E F G H J K L 4 5 Toefield Inc. has developed a powerful efficient snow remover that is significantly less polluting than existing snow removers currently on the 8 market. The company spent $2,000,000 developing this product and the marketing department spent another $300,000 to assess the market 9 demand. It would cost $20 million at Year 0 to buy the equipment necessary to manufacture the efficient snow blower. The project would 10 require net working capital at the beginning of each year equal to 20% of sales (NOWCO = 20%(Sales1), NOWC1 = 20%(Sales2), etc.). The 11 efficient snow blowers would sell for $3,000 per unit, and Toefield believes that variable costs would amount to $790 per unit. The company 12 expects that the sales price and variable costs would increase at the inflation rate of 2% after year 1. The company's non-variable costs would be $800,000 in Year 1 and are expected to increase with inflation. The efficient snow blower project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm believes it could sell 3,500 units per year. The equipment would be depreciated using a CCA rate of 30%. The estimated market value of the equipment at the end of the project's 4-year life is its undepreciated capital cost (i.e. book value) at the end of year 4. Toefield has other assets in this asset class. Toefield Inc.'s federal-plus- provincial tax rate is 30%. Its cost of capital is 9% for average risk projects. Low-risk projects are evaluated with a WACC of 6%, and high- 13 risk projects at 12%. Assume that the half-year rule applies to the CCA. 14 15 16 17 a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. 18 19 20 21 Part 1. Input Data (in thousands of dollars except for unit amount) 22 23 Equipment cost 24 Net Operating WC/sales 25 Yearly sales in units) Tax rate 26 Sales price per unit WACC Solution + @ 178% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share O Comments X 10 Times New Roman . AI = = ab Wrap Text Insert v Number WE 48- 0 DX Delete Paste B IU MA Merge & Center $ %) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format v Find & Select Sensitivity A57 fx Net Operating Profit After Taxes (NOPAT) A B D E F G H 1 J K L 20 21 Part 1. Input Data (in thousands of dollars except for unit amount) 22 23 Equipment cost 24 Net Operating WC/sales 25 Yearly sales (in units) 26 Sales price per unit 27 Variable cost per unit 28 Non-variable costs 29 30 31 Part 2. CCA Schedule Tax rate WACC Inflation CCA rate year 1 year 2 year 3 year 4 32 33 Beg. UCC 34 CCA 35 End UCC 36 37 38 39 40 Part 3. Projected Net Cash Flows (Time line of annual cash flows) 41 42 Years 43 Investment Outlays at Time Zero: 44 Equipment 45 0 1 2 3 4 Solution + @ u 178% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share 0 Comments X 10 Times New Roman . AI = = ab Wrap Text Insert v Number WE 48- 0 DX Delete Paste B I U MA Merge & Center $ %) . Ideas & Conditional Format Formatting as Table Cell Styles Sort & Filter Sensitivity Format Find & Select A57 fx Net Operating Profit After Taxes (NOPAT) A B D E F G H 1 J K. L 0 1 2 3 4 40 Part 3. Projected Net Cash Flows (Time line of annual cash flows) 41 42 Years 43 Investment Outlays at Time Zero: 44 Equipment 45 46 Operating Cash Flows over the Project's Life: 47 Units sold 48 Sales price 49 Variable costs 50 51 Sales revenue 52 Variable costs 53 Non-variable operating costs 54 Depreciation (equipment) 55 Oper. income before taxes (EBIT) 56 Taxes on operating income 57 Net Operating Profit After Taxes (NOPAT) 58 Add back depreciation 59 Operating cash flow 60 61 Working Capital: 62 Required level of net operating working capital 63 Required investment in NOWC 64 65 Terminal Year Cash Flows: 66 Net salvage value C7 Solution + 178% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share 0 Comments X Times New Roman . AI Insert 10 = = ab Wrap Text Number WE 48- 0 DX Delete Paste B I U MA Merge & Center $ %) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format Find & Select Sensitivity A57 fx Net Operating Profit After Taxes (NOPAT) A B D E F G H 1 J K. L UJ 70 Part 4. Key Output: Appraisal of the Proposed Project 71 72 Net Present Value (at 9%) 73 IRR 74 MIRR 75 76 Payback (See calculation below) 77 78 Data for Payback Years 79 Net cash flow 80 Cumulative CF 81 Part of year required for payback: 0.00 0.00 0.00 0.00 82 83 84 85 b. Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of 86 units sold. Set these variables' values at 10% and 25% above and below their base case values. Include a graph in your analysis. 87 88 Evaluating Risk: Sensitivity Analysis 89 90 I. Sensitivity of NPV to Changes in Inputs. Here we use an Excel "Data Table" to find NPV for different unit sales, variable costs, WACC, 91 and sales prices, holding other thing constant. 92 93 % Deviation 1st YEAR UNIT SALES % Deviation WACC 94 from Units NPV from NPV 95 Base Case Sold SO Base Case WACC 0 96 -25% 2,625 $0 -25% 6.75% $0 Solution 0 A 178% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share 0 Comments X Times New Roman . AI Insert 10 = = ab Wrap Text Number 48- O 5 DX Delete Paste B I U MA Merge & Center $ %) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format Find & Select Sensitivity A57 fx Net Operating Profit After Taxes (NOPAT) J K L A B D E F G H 1 90 I. Sensitivity of NPV to Changes in Inputs. Here we use an Excel "Data Table" to find NPV for different unit sales, variable costs, WACC, 91 and sales prices, holding other thing constant. 92 93 % Deviation 1st YEAR UNIT SALES % Deviation WACC 94 from Units NPV from NPV 95 Base Case Sold $0 Base Case WACC 0 96 -25% 2,625 $0 -25% 6.75% $0 97 -10% 3,150 $0 -10% 8.10% $0 98 0% 3,500 $0 0% 9.00% $0 99 10% 3,850 $0 10% 9.90% SO 100 25% 4,375 $0 25% 11.25% $0 101 102 % Deviation VARIABLE COSTS % Deviation SALES PRICE 103 from Variable NPV from Sales NPV 104 Base Case Costs $0 Base Case Price $0 105 -25% 0.59 $0 -25% 2.25 SO 106 -10% 0.71 $0 -10% 2.70 SO 0% $0.79 $0 0% $3.00 $0 108 10% 0.87 $0 10% 3.30 $0 109 25% 0.99 $0 25% 3.75 SO 110 111 % Deviation NON-VARIABLE COSTS 112 from Fixed NPV Note about data tables. The data in the column input should NOT be input 113 Base Case Costs $0 using a cell reference to the column input cell. For example the base case 114 -25% 600 $0 number of units sold in cell B100 should be the number 1000; you should NOT -10% 720 $0 have the formula =D29 in that cell. This is because you'll use D29 as the column 0% $800 $0 input cell in the data table and if Excel tries to iteratively replace cell D29 with 117 10% 880 $0 the formula =D29 rather than a series of numbers, Excel will calculate the wrong Solution 107 115 116 + 178% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share 0 Comments X 10 Times New Roman . AI = = ab Wrap Text Insert v Number WE 48- O 5 DX Delete Paste B IU MA == Merge & Center $ % ) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format Find & Select Sensitivity A57 fe Net Operating Profit After Taxes (NOPAT) A B D E F G H J L M % Deviation NON-VARIABLE COSTS from Fixed NPV Base Case Costs SO -25% 600 SO -10% 720 sol 0% 9800 SO 10% 880 SO 25% 1,000 SOL Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example the base case number of units sold in cell B100 should be the number 1000; you should NOT have the formula =D29 in that cell. This is because you'll use D29 as the column input cell in the data table and if Excel tries to iteratively replace cell D29 with the formula =D29 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won't tell you that there is a problem, so you'll just get the wrong values for the data table! Sensitivity Analysis 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 Vertical (Value) Axis Major Gridlines --Sales price -.VC NPV Units $11,000 $9,000 $7,000 $5,000 $3,000 $1,000 -$1,000 -$3,000 -$5,000 -$7,000 -20% Non-var. cost WACC -10% 0% 10% 20% Solution + @ A 163% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share O Comments X 10 Times New Roman . AI = = ab Wrap Text Insert v Number PA WE 49" ou 3 DX Delete Paste B IU A Merge & Center $ %) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format v Find & Select Sensitivity A57 fe Net Operating Profit After Taxes (NOPAT) A B D E F G H J K L M WACC SO SO SO $0 SO $ 141 142 Deviation NPV at Different Deviations from Base 143 from Sales Price Variable Non-variable 144 Base Case Cost Units Sold Cost 145 -25% SO SO SO SO 146 -10% SO SO So SO 147 0% So SO So SO 148 10% SO $0 SO SO 149 25% SO SO SO SO 150 151 Range $ $ 0 $ 152 153 154 155 c. Would you recommend that the project be accepted? Explain. 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 Solution + + 163% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share 0 Comments X Times New Roman . AI Insert 10 = = ab Wrap Text Number 48- 0 DX Delete Paste B I U MA Merge & Center $ %) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format Find & Select Sensitivity A57 fx Net Operating Profit After Taxes (NOPAT) A B D E F G H J K L 4 5 Toefield Inc. has developed a powerful efficient snow remover that is significantly less polluting than existing snow removers currently on the 8 market. The company spent $2,000,000 developing this product and the marketing department spent another $300,000 to assess the market 9 demand. It would cost $20 million at Year 0 to buy the equipment necessary to manufacture the efficient snow blower. The project would 10 require net working capital at the beginning of each year equal to 20% of sales (NOWCO = 20%(Sales1), NOWC1 = 20%(Sales2), etc.). The 11 efficient snow blowers would sell for $3,000 per unit, and Toefield believes that variable costs would amount to $790 per unit. The company 12 expects that the sales price and variable costs would increase at the inflation rate of 2% after year 1. The company's non-variable costs would be $800,000 in Year 1 and are expected to increase with inflation. The efficient snow blower project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm believes it could sell 3,500 units per year. The equipment would be depreciated using a CCA rate of 30%. The estimated market value of the equipment at the end of the project's 4-year life is its undepreciated capital cost (i.e. book value) at the end of year 4. Toefield has other assets in this asset class. Toefield Inc.'s federal-plus- provincial tax rate is 30%. Its cost of capital is 9% for average risk projects. Low-risk projects are evaluated with a WACC of 6%, and high- 13 risk projects at 12%. Assume that the half-year rule applies to the CCA. 14 15 16 17 a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. 18 19 20 21 Part 1. Input Data (in thousands of dollars except for unit amount) 22 23 Equipment cost 24 Net Operating WC/sales 25 Yearly sales in units) Tax rate 26 Sales price per unit WACC Solution + @ 178% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share O Comments X 10 Times New Roman . AI = = ab Wrap Text Insert v Number WE 48- 0 DX Delete Paste B IU MA Merge & Center $ %) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format v Find & Select Sensitivity A57 fx Net Operating Profit After Taxes (NOPAT) A B D E F G H 1 J K L 20 21 Part 1. Input Data (in thousands of dollars except for unit amount) 22 23 Equipment cost 24 Net Operating WC/sales 25 Yearly sales (in units) 26 Sales price per unit 27 Variable cost per unit 28 Non-variable costs 29 30 31 Part 2. CCA Schedule Tax rate WACC Inflation CCA rate year 1 year 2 year 3 year 4 32 33 Beg. UCC 34 CCA 35 End UCC 36 37 38 39 40 Part 3. Projected Net Cash Flows (Time line of annual cash flows) 41 42 Years 43 Investment Outlays at Time Zero: 44 Equipment 45 0 1 2 3 4 Solution + @ u 178% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share 0 Comments X 10 Times New Roman . AI = = ab Wrap Text Insert v Number WE 48- 0 DX Delete Paste B I U MA Merge & Center $ %) . Ideas & Conditional Format Formatting as Table Cell Styles Sort & Filter Sensitivity Format Find & Select A57 fx Net Operating Profit After Taxes (NOPAT) A B D E F G H 1 J K. L 0 1 2 3 4 40 Part 3. Projected Net Cash Flows (Time line of annual cash flows) 41 42 Years 43 Investment Outlays at Time Zero: 44 Equipment 45 46 Operating Cash Flows over the Project's Life: 47 Units sold 48 Sales price 49 Variable costs 50 51 Sales revenue 52 Variable costs 53 Non-variable operating costs 54 Depreciation (equipment) 55 Oper. income before taxes (EBIT) 56 Taxes on operating income 57 Net Operating Profit After Taxes (NOPAT) 58 Add back depreciation 59 Operating cash flow 60 61 Working Capital: 62 Required level of net operating working capital 63 Required investment in NOWC 64 65 Terminal Year Cash Flows: 66 Net salvage value C7 Solution + 178% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share 0 Comments X Times New Roman . AI Insert 10 = = ab Wrap Text Number WE 48- 0 DX Delete Paste B I U MA Merge & Center $ %) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format Find & Select Sensitivity A57 fx Net Operating Profit After Taxes (NOPAT) A B D E F G H 1 J K. L UJ 70 Part 4. Key Output: Appraisal of the Proposed Project 71 72 Net Present Value (at 9%) 73 IRR 74 MIRR 75 76 Payback (See calculation below) 77 78 Data for Payback Years 79 Net cash flow 80 Cumulative CF 81 Part of year required for payback: 0.00 0.00 0.00 0.00 82 83 84 85 b. Now conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of 86 units sold. Set these variables' values at 10% and 25% above and below their base case values. Include a graph in your analysis. 87 88 Evaluating Risk: Sensitivity Analysis 89 90 I. Sensitivity of NPV to Changes in Inputs. Here we use an Excel "Data Table" to find NPV for different unit sales, variable costs, WACC, 91 and sales prices, holding other thing constant. 92 93 % Deviation 1st YEAR UNIT SALES % Deviation WACC 94 from Units NPV from NPV 95 Base Case Sold SO Base Case WACC 0 96 -25% 2,625 $0 -25% 6.75% $0 Solution 0 A 178% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share 0 Comments X Times New Roman . AI Insert 10 = = ab Wrap Text Number 48- O 5 DX Delete Paste B I U MA Merge & Center $ %) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format Find & Select Sensitivity A57 fx Net Operating Profit After Taxes (NOPAT) J K L A B D E F G H 1 90 I. Sensitivity of NPV to Changes in Inputs. Here we use an Excel "Data Table" to find NPV for different unit sales, variable costs, WACC, 91 and sales prices, holding other thing constant. 92 93 % Deviation 1st YEAR UNIT SALES % Deviation WACC 94 from Units NPV from NPV 95 Base Case Sold $0 Base Case WACC 0 96 -25% 2,625 $0 -25% 6.75% $0 97 -10% 3,150 $0 -10% 8.10% $0 98 0% 3,500 $0 0% 9.00% $0 99 10% 3,850 $0 10% 9.90% SO 100 25% 4,375 $0 25% 11.25% $0 101 102 % Deviation VARIABLE COSTS % Deviation SALES PRICE 103 from Variable NPV from Sales NPV 104 Base Case Costs $0 Base Case Price $0 105 -25% 0.59 $0 -25% 2.25 SO 106 -10% 0.71 $0 -10% 2.70 SO 0% $0.79 $0 0% $3.00 $0 108 10% 0.87 $0 10% 3.30 $0 109 25% 0.99 $0 25% 3.75 SO 110 111 % Deviation NON-VARIABLE COSTS 112 from Fixed NPV Note about data tables. The data in the column input should NOT be input 113 Base Case Costs $0 using a cell reference to the column input cell. For example the base case 114 -25% 600 $0 number of units sold in cell B100 should be the number 1000; you should NOT -10% 720 $0 have the formula =D29 in that cell. This is because you'll use D29 as the column 0% $800 $0 input cell in the data table and if Excel tries to iteratively replace cell D29 with 117 10% 880 $0 the formula =D29 rather than a series of numbers, Excel will calculate the wrong Solution 107 115 116 + 178% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share 0 Comments X 10 Times New Roman . AI = = ab Wrap Text Insert v Number WE 48- O 5 DX Delete Paste B IU MA == Merge & Center $ % ) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format Find & Select Sensitivity A57 fe Net Operating Profit After Taxes (NOPAT) A B D E F G H J L M % Deviation NON-VARIABLE COSTS from Fixed NPV Base Case Costs SO -25% 600 SO -10% 720 sol 0% 9800 SO 10% 880 SO 25% 1,000 SOL Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example the base case number of units sold in cell B100 should be the number 1000; you should NOT have the formula =D29 in that cell. This is because you'll use D29 as the column input cell in the data table and if Excel tries to iteratively replace cell D29 with the formula =D29 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won't tell you that there is a problem, so you'll just get the wrong values for the data table! Sensitivity Analysis 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 Vertical (Value) Axis Major Gridlines --Sales price -.VC NPV Units $11,000 $9,000 $7,000 $5,000 $3,000 $1,000 -$1,000 -$3,000 -$5,000 -$7,000 -20% Non-var. cost WACC -10% 0% 10% 20% Solution + @ A 163% AutoSave OFF BESU- Uoft Finance - Saved to my Mac Home Insert Draw Page Layout Formulas Data Review View Tell me Share O Comments X 10 Times New Roman . AI = = ab Wrap Text Insert v Number PA WE 49" ou 3 DX Delete Paste B IU A Merge & Center $ %) Ideas Conditional Format Formatting as Table Cell Styles Sort & Filter Format v Find & Select Sensitivity A57 fe Net Operating Profit After Taxes (NOPAT) A B D E F G H J K L M WACC SO SO SO $0 SO $ 141 142 Deviation NPV at Different Deviations from Base 143 from Sales Price Variable Non-variable 144 Base Case Cost Units Sold Cost 145 -25% SO SO SO SO 146 -10% SO SO So SO 147 0% So SO So SO 148 10% SO $0 SO SO 149 25% SO SO SO SO 150 151 Range $ $ 0 $ 152 153 154 155 c. Would you recommend that the project be accepted? Explain. 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 Solution + + 163%
