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Explain NPV and Certainty equivalent cash flows

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Look at spreadsheet and use present value analysis to discount the cash flows. Determine if the project has a net positive or negative impact on the firm, Calculate the certainty equivalent cash flows and NPV. What kind of questions would you ask the CEO about economomic assumptions? Articulate the economic and political risk with the strategy and list options to overcome. Should this approach to expansion be adopted. ( Answer using CE cash flows and non CE cash flows. Data from flow sheet:
Year 2005 2006 2007 2008 2009 2009
T = 0 1 2 3 4 5
Risk Free Rate 2.25% 2.50% 2.75% 3.00% 3.25% 3.25%
Cost of Capital 6.00% 7.00% 8.00% 9.00% 10.00% 11.00%
(US$ millions, incremental)
Net Sales 30 35 40 45 50
Selling, General & Admin. (20) (18) (15) (12) (12)
Depreciation (10) (10) (10) (10) (10)
Interest Expense (2) (2) (2) (2) (2)
Income Before Taxes (2) 5 13 21 26
Income Taxes 1 (2) (5) (8) (10)
Net Income (1) 3 8 13 16
Capital Investment (50)
Addback Noncash 10 10 10 10 10
Cash Flow (50) 8.76 13.10 18.06 23.02 26.12
Last column is supp0osed to read 2010

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Solution Summary

NPV and Certainty equivalent cash flows are explicated.

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Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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