The company you work for, Cowl Communications is investing into new start-up companies in an effort to diversify their portfolio. As the finance manager, you have sourced the following information for two investments your company can make:

Project A Project B

CAPEX / Initial Outlay $1,200,000 $1,600,000

Revenue (per year) $900,000 $1,500,000

Variable costs $150,000 $500,000

Fixed Expenses $200,000 $300,000

Investment in Net Working Capital (Year 0) $100,000 $250,000

Both projects have a life of 4 years.

The companys tax rate is 25% and uses a straight-line depreciation method. You assume that there will be no salvage value associated with these projects at the end of their project life. Cowl Communications has a required rate of return of 12% per annum.

1. Determine the Free Cash Flows (FCFs), for each year, to the firm for both projects.

(7 marks)

2. Based on your calculated FCFs, calculate the Net Present Value of the project and identify which of the projects you would recommend if the projects are mutually exclusive. (3 marks)

3. Identify and discuss the major disadvantage of the NPV criterion for choosing projects. Within your discussion provide a brief explanation as to how the disadvantage may affect the valuation of the project. (3 marks)

Discuss the concept of net working capital (NWC) and identify its use within a business.