Your company has $440,000 to invest in one of the following:

 

Company 1: You are determining whether to purchase another company or firm for $440,000. The firm has projected free cash flows of $30,000 for Year 1, $50,000 for Year 2, and 80,000 for Year 3, $110,000 for Year 4, and 130,000 for Year 5. The projected terminal value at the end of Year 5 is $303,000. The firm's Weighted Average cost of Capital (WACC) is 12.0%.

 

Company 2: You are determining whether to purchase another company or firm for $440,000. The firm has projected free cash flows of $40,000 for Year 1, $60,000 for Year 2, and 80,000 for Year 3, $100,000 for Year 4, and 120,000 for Year 5. The projected terminal value at the end of Year 5 is $297,000. The firm's Weighted Average cost of Capital (WACC) is 12.0%.

 

1.   Determine the Discounted Cash Flow (DCF) value under each scenario for the information provided above. Show calculations.

 
2.   Display your calculations.
 
3.   Based only on your calculation of DCF and the $500,000 investment which company would you prefer to invest in.

 
4.   In addition, explain what is the highest level of initial investment, instead of the $500,000, you would make to purchase each company? Why? Give a complete explanation of the highest dollar amount you would be willing to invest for these returns.

5.   Provide your explanation using at least 350 words.