EXERCISES
2-1 CALCULATING PRESENT VALUES Calculate the present value of each of the following cash flow streams. Use a discount rate of 10%.
a. $500 received at the end of five years
b. $500 received annually for each of the next five years
c. $500 received annually for each of the next fifty years
d. $500 received annually for 100 years
2-2 CALCULATING THE INTERNAL RATE OF RETURN Singular Construction is evaluating whether to build a new distribution facility.The proposed investment will cost Singular $4 million to construct and provide cash savings of $500,000 pet year over the next ten years.
a. What rate of return does the investment offer?
b. If Singular were to invest another $200,000 in the facility at the end of five years, it would extend the life of the project by four years, during which time it would con¬tinue receiving cash savings of $500,000. What is the internal rate of return for this investment?
2-3 CALCULATING PROJECT FCF In the spring of 2015, Jemison Electric was consider-ing an investment in a new distribution center. Jemison's CFO anticipates additional earnings before interest and taxes (EBIT) of $100,000 for the first year of operation of the center, and, over the next five years, the firm estimates that this amount will grow at a rate of 5% per year. The distribution center will require an initial investment of $400,000 that will be depreciated over a five-year period toward a zero salvage value using straight-line depreciation of $80,000 per year. Jemison's CFO estimates that the distribution center will need operating net working capital equal to 20% of EBIT to support operation.
Assuming the firm faces a 30% tax rate, calculate the project's annual project free cash flows (FCFs) for each of the next five years where the salvage value of operating network¬ing capital and fixed assets is assumed to equal their book values, respectively.
2-4 PRO FORMA FINANCIAL STATEMENTS In the JC Crawford example, capital expendi¬tures (CAPEX) are estimated using projected balances for net property, plant, and equip¬ment (net PPE), which is determined by the firm's projected sales. In 2016, the estimated ending balance for net PPE is projected to be $440,000, which represents an increase of $40,000 over the ending balance for 2015. However, CAPEX for 2016 is estimated to be $80,000. Why is the change in net WE not equal to CAPEX? (Hint• Consider the effect of annual depreciation expense on net PPE.)
2-5 COMPUTING FREE CASH FLOW The free cash flow estimated for 2008 in the Lecion example was equal to $1,383,436,000. Verify this computation using the assumptions un-derlying the model. Compute the free cash flow for 2008 if the revenues for the year were 10% higher than those forecast in Table 2-1.