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Would you invest in this company? (given the figures below) Why or why not? Base Case 1)Cash flows from fixed assets Year 0 1 2

Would you invest in this company? (given the figures below) Why or why not?

Base Case

1)Cash flows from fixed assets
Year 0 1 2 3 4 5
Equipment Cost -2E+06
Equipment Set-up cost -300000
Equipment Salvage Value 600000
Cash flow from assets -2E+06 0 0 0 0 600000
2)Cash flows from changes to operating capital
NOWC 10%*Sales Value -250000 -270375 -292411 -316242 -342016
3) Cash flows from operations Year 0 1 2 3 4 5
Unit Sales/Year 25000 26250 27563 28941 30388
Projected price/Year 100 103 106 109 113
Projected Total sales value---1 2500000 2703750 2924106 3162420 3420157
Less: Variable cost/unit 60 63 66.15 69.458 72.93
Total Variable cost ---------2 -2E+06 -2E+06 -2E+06 -2E+06 -2E+06
Less: Fixed cost-------------3 -500000 -530000 -561800 -595508 -631238
Less: MACRS Depn.---------4 -328670 -563270 -402270 -287270 -205390 -205160 -205390 -102580
EBIT --------1+2+3+4 171330 -43270 136776 269499 367346
Tax at 35% *EBIT -59966 0 -47872 -94325 -128571
EAT 111365 -43270 88905 175174 238775
Add Back Depreciation 328670 563270 402270 287270 205390
Operating cash flow 440035 520000 491175 462444 444165
Base Case NPV
Year 0 1 2 3 4 5
Cash flow from assets -2E+06 0 0 0 0
After tax salvage600000*(1-35%) 390000
NOWC 10%*Sales Value -250000 -270375 -292411 -316242 -342016
Recovery of NOWC 1471043
Operating cash flow 440035 520000 491175 462444 444165
Net annual cash flows -2E+06 190035 249625 198764 146202 1963192
PV F at WACC 10% 1 0.90909 0.82645 0.75131 0.68301 0.62092
PV at WACC at 10% -2E+06 172759 206302 149334 99858 1218988
NPV (Base Case) -452759
WORST Case Scenario
2)Cash flows from changes to operating capital
NOWC 10%*Sales Value -250000 -252500 -255025 -257575 -260151
3) Cash flows from operations Year 0 1 2 3 4 5
Unit Sales/Year 25000 25000 25000 25000 25000
Projected price/Year 100 101 102 103 104
Projected Total sales value---1 2500000 2525000 2550250 2575753 2601510
Less: Variable cost/unit 60 63 66.15 69.458 72.93
Total Variable cost ---------2 -2E+06 -2E+06 -2E+06 -2E+06 -2E+06
Less: Fixed cost-------------3 -500000 -530000 -561800 -595508 -631238
Less: MACRS Depn.---------4 -328670 -563270 -402270 -287270 -205390
EBIT --------1+2+3+4 171330 -143270 -67570 -43463 -58378
Tax at 35% *EBIT -59966 0 0 0 0
EAT 111365 -143270 -67570 -43463 -58378
Add Back Depreciation 328670 563270 402270 287270 205390
Operating cash flow 440035 420000 334700 243807 147012
Worst Case NPV
Year 0 1 2 3 4 5
Cash flow from assets -2E+06 0 0 0 0
After tax salvage600000*(1-35%) 390000
NOWC 10%*Sales Value -250000 -252500 -255025 -257575 -260151
Recovery of NOWC 1275251
Operating cash flow 440035 420000 334700 243807 147012
Net annual cash flows -2E+06 190035 167500 79675 -13768 1552112
PV F at WACC 10% 1 0.90909 0.82645 0.75131 0.68301 0.62092
PV at WACC at 10% -2E+06 172759 138430 59861 -9404 963740
NPV (Worst Case) -974615
BEST Case Scenario
2)Cash flows from changes to operating capital
NOWC 10%*Sales Value -250000 -315000 -396900 -500094 -630118
3) Cash flows from operations Year 0 1 2 3 4 5
Unit Sales/Year 25000 30000 36000 43200 51840
Projected price/Year 100 105 110.25 115.76 121.55
Projected Total sales value---1 2500000 3150000 3969000 5000940 6301184
Less: Variable cost/unit 60 63 66.15 69.458 72.93
Total Variable cost ---------2 -2E+06 -2E+06 -2E+06 -3E+06 -4E+06
Less: Fixed cost-------------3 -500000 -530000 -561800 -595508 -631238
Less: MACRS Depn.---------4 -328670 -563270 -402270 -287270 -205390
EBIT --------1+2+3+4 171330 166730 623530 1117598 1683845
Tax at 35% *EBIT -59966 -58356 -218236 -391159 -589346
EAT 111365 108375 405295 726439 1094499
Add Back Depreciation 328670 563270 402270 287270 205390
Operating cash flow 440035 671645 807565 1013709 1299889
Best Case NPV
Year 0 1 2 3 4 5
Cash flow from assets -2E+06 0 0 0 0
After tax salvage600000*(1-35%) 390000
NOWC 10%*Sales Value -250000 -315000 -396900 -500094 -630118
Recovery of NOWC 2092112
Operating cash flow 440035 671645 807565 1013709 1299889
Net annual cash flows -2E+06 190035 356645 410665 513615 3151883
PV F at WACC 10% 1 0.90909 0.82645 0.75131 0.68301 0.62092
PV at WACC at 10% -2E+06 172759 294748 308538 350806 1957072
NPV (Best Case) 783922
PV of depn. Tax shield lost Net NPV Prob.
NPV (Base Case) -452759 269059 -721819 50% -360909
NPV (Worst Case) -974615 269059 -1E+06 25% -310919
NPV (Best Case) 783922 269059 514863 25% 128716
Net Present Value -543112
Note:
PV of Depn. Tax -shield lost=
(205160/1.1^6)+(205390/1.1^7)+(102580/1.1^8)
269059

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