Find below the forecasts on sales and costs of a particular investment project you are considering

The new project requires some initial investments (in the amount of 20 million), which can then be sold at the end of six years fo
Depreciation will be computed linearly, assuming a residual value of 2 million.
All profits are taxed at 25%.
The project has similar risk to the operations of a company called ABC. ABC's equity has a beta of 1.5, and it is financed at 50/
equity and debt. The debt of ABC is risk-free and yields 5%.
The expected return of the market portfolio is 18%.

Period
0 1.00 2.0 3 4 5 6
Capital investment 20,000
Resale value 1,000
Working capital 0 1,100.00 2,578.0 6,522 9,780 7,166 4,004
Sales 0 1,046.00 25,774.0 65,220 97,802 71,668 39,434
COGS 0 1,674.00 15,458.0 39,104 58,690 42,984 23,660
Other costs 8,000 4,400.00 2,420.0 2,662 2,928 3,222 3,544

Period
0 1 2 3 4 5 6
Capital investment 20,000
Resale value 1,000
Gross value of capital 20,000 20,000 20,000 20,000 20,000 20,000 20,000
Cumulative depreciati 0 3,000 6,000 9,000 12,000 15,000 18,000
Net value of capital a 20,000 17,000 14,000 11,000 8,000 5,000 2,000
Working capital 0 1,100 2,578 6,522 9,780 7,166 0
Sales 0 1,046 25,774 65,220 97,802 71,668 39,434
COGS 0 1,674 15,458 39,104 58,690 42,984 23,660
Other costs 8,000 4,400 2,420 2,662 2,928 3,222 3,544
Depreciation 3,000 3,000 3,000 3,000 3,000 3,000
EBIT -8,000 -8,028 4,896 20,454 33,184 22,462 9,230
Taxes (25%) -2,000 -2,007 1,224 5,114 8,296 5,616 2,308
NOPAT -6,000 -6,021 3,672 15,341 24,888 16,847 6,923

Period
0 1 2 3 4 5 6
Sales 0 1,046 25,774 65,220 97,802 71,668 39,434
COGS 0 1,674 15,458 39,104 58,690 42,984 23,660
Other costs 8,000 4,400 2,420 2,662 2,928 3,222 3,544
Depreciation 3,000 3,000 3,000 3,000 3,000 3,000
EBIT -8,000 -8,028 4,896 20,454 33,184 22,462 9,230
Taxes (25%) -2,000 -2,007 1,224 5,114 8,296 5,616 2,308
NOPAT -6,000 -6,021 3,672 15,341 24,888 16,847 6,923
OCF -6,000 -3,021 6,672 18,341 27,888 19,847 9,923
CF WC 0 -1,100 -1,478 -3,944 -3,258 2,614 7,166
Capex -20,000 1,250
FCF -26,000 -4,121 5,194 14,397 24,630 22,461 18,339
NPV 17,408
IRR 28.77%
Cost of capital =0.05+0.75 14.75%
Project's beta =0.5*1.5+0 0.75
e sold at the end of six years for 1 million

of 1.5, and it is financed at 50/50 by

WC is canceled in year 6
Add Depreciation

Tax Advantages from loss in profits

 Period
0 1
FIXED ASSETS
Capital investment 15,000
Final sale of fixed assets
Annual depreciation 3,000
WORKING CAPITAL
Working capital 6,500.00 16,250.00
SALES AND COSTS
Sales 52,000.00
Setup costs 10,000.00

SOLUTION:
R&D SHOULD NOT BE INCLUDED (IT'S SUNK)
FINANCIAL COSTS SHOULD NOT BE INCLUDED (REGARDLESS OF WHAT THE ACCOUNTANT SAYS): THEY ARE FIN
Period
0 1
1.a Capital investment 15,000
1.b Resale value of capital assets
1.c Gross value of capital assets 0 0
1.d Cumulative depreciation -3,000
1.e BOOK VALUE OF CAPITAL ASSETS 0 -3,000
2 WORKING CAPITAL 6,500 16,250

4 Revenue (Sales) 52,000.00

5a Production costs -41,600.00
5b Setup costs -10,000
6a Depreciation -3,000.00
7 EBT/EBIT -10,000.00 7,400.00
8 Taxes (25%) 2,500.00 -1,850.00
9 NOPAT -7,500.00 5,550.00
6b + Depreciation 0.00 3,000.00
10.a Operating cash flow -7,500.00 8,550.00
10.b Changes in working capital -6,500 -9,750
10.c Capex 0
10 Free cash flow (10.a+10.b+10.c) -14,000 -1,200
r 20.00%
NPV -2024.21 --> project has negative NPV: we should no
Capex Calculation = (Resale value - (Resale Value -
Book Value)*tax)
 Period
2 3 4

1,000
3,000 3,000 3,000

11,050.00 5,150.00 2,000.00

57,200.00 62,920.00 69,212.00 --> already includes the 10% growth rate

HE ACCOUNTANT SAYS): THEY ARE FINANCIAL AND THEY ARE NOT INCREMENTAL!
Period
2 3 4

1,000
0 0 0
-6,000 -9,000 -12,000
-6,000 -9,000 -12,000
11,050 5,150 0 --> so that cancelation of WC is done in year 4

57,200.00 62,920.00 69,212.00

-45,760.00 -50,336.00 -55,369.60 --> 80% of Sales

-3,000.00 -3,000.00 -3,000.00

8,440.00 9,584.00 10,842.40
-2,110.00 -2,396.00 -2,710.60
6,330.00 7,188.00 8,131.80
3,000.00 3,000.00 3,000.00
9,330.00 10,188.00 11,131.80
5,200 5,900 5,150
1500 --> Sale of fixed assets+tax savings for selling with a loss
14,530 16,088 17,782

oject has negative NPV: we should not do it

ling with a loss