Explore BrainMass
Share

Free Cash Flows, Net Present Value, Rate of Return and Sensitivity

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

A company wants to invest 40,000,000 in equipment. The investment is projected to generate 23,000,000 the first year, 26,000,000 the second year and 30,000,000 the 3rd year. After the first 3 years, sales are projected to increase 10%/yr for the remaining 2 years.

The equipment will be disposed of after year 5 and has a residual value of 10,000,000. The equipment is in the 3 yr recovery period class for depreciation - MACRS.

Cost of goods sold is forecast to be 8,000,000 in the 1st year, 14,000,000 in the 2nd year, and increase at a rate of 9%/yr for the remaining 3 years.

Fixed operating expenses are 1,000,000 per year. Assume a 40% tax rate. Year-end net working capital is shown below:

Net Working Capital: 0 -$500,000; 1-$700,000; 2-$800,000; 3-$800,000; 4-$500,000; 5-$0

1) Calculate the free cash flows for periods 0 - 5
2) Calculate the net present value for a 12% cost of capital
3) Calculate the internal rate of return
4) Calculate the sensitivity of the investment to a change in the cost of capital (as low as 8% or as high as 16%)

Should the $40,000,000 investment be made? Why or why not?

© BrainMass Inc. brainmass.com March 22, 2019, 12:39 am ad1c9bdddf
https://brainmass.com/business/capital-budgeting/free-cash-flows-net-present-value-rate-return-sensitivity-508452

Solution Summary

Free Cash Flows, Net Present Value, Rate of Return and Sensitivity are examined for an equipment company.

$2.19