Final Project Handout To complete the final project, you will need to estimate future cash flows for a firm and then apply discounted cash flow analysis to estimate the value of a firm. This will all be done in Excel and should be done in a way that utilizes formulas and cell references. This project is worth a total of 25 points. Estimating Free Cash Flows Finding WACC Estimating Free Cash Flow Start with the operating profit or EBIT for a firm and make the following adjustments: 1. Add back the owner’s salary and benefits.

2. Subtract out a more reasonable compensation for the work performed by the owner 3. Add back any of the owner’s personal expenses that have been run through the company. 4. Add back any depreciation and amortization expenses that were claimed this year.

Remember, these are noncash expenses. They are not actual payments made to someone, but merely a number from a table or formula that the IRS allows the owner to subtract out before the calculation of the firm’s taxable income. 5. If a major piece of equipment or asset is intended to be purchased in this particular year, then subtract this amount. 6.

Subtract the amount of money it would take to bring the inventory of the company up to a reasonable level. For instance, sometimes when a business owner knows that the company will be sold, he may “sell out of inventory†rather than reorder new inventory. Therefore, by the time the new owner takes possession, there may be nothing on the shelves to sell. As a result, the new owner may need to invest in inventory or other types of working capital before the business is able to operate and generate income. An analogy might be the way that people sell their cars.

They typically do not pay for new tires, a brake job, a battery, a tune-up, and a tankful of gas the day before a car is sold. Finding Terminal Value Terminal value = year 6 cash flow / WACC Discounted Cash Flow Analysis Steps 1. Calculate a firm’s free cash flows for the next five years. 2. Calculate the terminal value of the firm after year five.

3. Estimate a weighted average cost of capital for a firm. 4. Calculate the NPV of the firm. 5.

Calculate any taxes that will be owed as a result of the sale of the firm. 6. Calculate the net proceeds from selling the firm. Final Project Handout Practice Problem 1. A potential buyer is interested in purchasing a company called MacroTech from an owner whose financial statements report that this year’s EBIT was 0,000.

2. Other information gathered reveal that the owner paid himself salary and benefits of 0,000 when a more reasonable compensation, given the local job market, was ,000. 3. There was ,000 in depreciation expense this year. 4.

The owner had ,000 in personal expenses such as lease payments on a Lexus that he called a “company†car. 5. The firm will need a net investment of 0,000 to replace worn-out equipment during year 2. 6. It is believed that EBIT will increase by 7% per year for the next five years given the productive capacity of the firm and the nature of the product market.

Beyond five years, a reasonable estimate of growth is neither possible nor relevant because the buyer should not have to pay for growth that would come from his own efforts and future investment. 7. The firm has an outstanding loan of 0,000. 8. The cost basis of the firm is 0,000.

In other words, the original owner has 0,000 of his money invested in the company. If the firm sells for more than 0,000, the difference between the selling price and the 0,000 invested would be considered income to the seller. Further suppose that the original owner would fall in a combined state and federal tax bracket of 40%. 9. MacroTech has a history of maintaining an average inventory balance of ,000.

Since MacroTech first appeared on the market for sale, the owner has not purchased any new inventory and has allowed the level to drop to ,000, thus suggesting that the buyer will probably need to invest ,000 in inventory just to bring the firm’s inventory back up to a safe level. This would occur in the first year of operations. 10. Assume this firm finances itself using 25% debt. The cost of debt has been estimated to be 15% while the cost of equity has been estimated to be 27%.

Course Project2 Due on To complete Course Project 2, you will need to estimate future cash flows for a firm and then apply discounted cash flow analysis to estimate the value of a firm. You will then need to decide if you would sell the firm at a specific price. This project must be submitted as an Excel file. You have until midnight on the due date to turn in the project by Blackboard. Any late project will be accepted at my discretion depending on the degree of lateness.

Your work must be submitted as a readable Excel file. The project is worth a total of 25 points. To receive all 25 points, you should make sure to fully complete the Excel file while following all directions. You should only hard code (aka type directly) into the grey cells. All of the other cells (blue, green, orange) should only include formulas and cell references.

Failure to follow this will result in a significant or total loss of points.. Project Problem 1. Organic Micros was established 8 years ago by Mary Mendoza. The firm reported EBIT this year of ,000. Mary typically reports about

Final Project Handoutto Complete The Final Project You Will Need To E

Final Project Handout To complete the final project, you will need to estimate future cash flows for a firm and then apply discounted cash flow analysis to estimate the value of a firm. This will all be done in Excel and should be done in a way that utilizes formulas and cell references. This project is worth a total of 25 points. Estimating Free Cash Flows Finding WACC Estimating Free Cash Flow Start with the operating profit or EBIT for a firm and make the following adjustments: 1. Add back the owner’s salary and benefits.

2. Subtract out a more reasonable compensation for the work performed by the owner 3. Add back any of the owner’s personal expenses that have been run through the company. 4. Add back any depreciation and amortization expenses that were claimed this year.

Remember, these are noncash expenses. They are not actual payments made to someone, but merely a number from a table or formula that the IRS allows the owner to subtract out before the calculation of the firm’s taxable income. 5. If a major piece of equipment or asset is intended to be purchased in this particular year, then subtract this amount. 6.

Subtract the amount of money it would take to bring the inventory of the company up to a reasonable level. For instance, sometimes when a business owner knows that the company will be sold, he may “sell out of inventory†rather than reorder new inventory. Therefore, by the time the new owner takes possession, there may be nothing on the shelves to sell. As a result, the new owner may need to invest in inventory or other types of working capital before the business is able to operate and generate income. An analogy might be the way that people sell their cars.

They typically do not pay for new tires, a brake job, a battery, a tune-up, and a tankful of gas the day before a car is sold. Finding Terminal Value Terminal value = year 6 cash flow / WACC Discounted Cash Flow Analysis Steps 1. Calculate a firm’s free cash flows for the next five years. 2. Calculate the terminal value of the firm after year five.

3. Estimate a weighted average cost of capital for a firm. 4. Calculate the NPV of the firm. 5.

Calculate any taxes that will be owed as a result of the sale of the firm. 6. Calculate the net proceeds from selling the firm. Final Project Handout Practice Problem 1. A potential buyer is interested in purchasing a company called MacroTech from an owner whose financial statements report that this year’s EBIT was $200,000.

2. Other information gathered reveal that the owner paid himself salary and benefits of $100,000 when a more reasonable compensation, given the local job market, was $50,000. 3. There was $20,000 in depreciation expense this year. 4.

The owner had $10,000 in personal expenses such as lease payments on a Lexus that he called a “company†car. 5. The firm will need a net investment of $200,000 to replace worn-out equipment during year 2. 6. It is believed that EBIT will increase by 7% per year for the next five years given the productive capacity of the firm and the nature of the product market.

Beyond five years, a reasonable estimate of growth is neither possible nor relevant because the buyer should not have to pay for growth that would come from his own efforts and future investment. 7. The firm has an outstanding loan of $500,000. 8. The cost basis of the firm is $100,000.

In other words, the original owner has $100,000 of his money invested in the company. If the firm sells for more than $100,000, the difference between the selling price and the $100,000 invested would be considered income to the seller. Further suppose that the original owner would fall in a combined state and federal tax bracket of 40%. 9. MacroTech has a history of maintaining an average inventory balance of $80,000.

Since MacroTech first appeared on the market for sale, the owner has not purchased any new inventory and has allowed the level to drop to $65,000, thus suggesting that the buyer will probably need to invest $15,000 in inventory just to bring the firm’s inventory back up to a safe level. This would occur in the first year of operations. 10. Assume this firm finances itself using 25% debt. The cost of debt has been estimated to be 15% while the cost of equity has been estimated to be 27%.

Course Project2 Due on To complete Course Project 2, you will need to estimate future cash flows for a firm and then apply discounted cash flow analysis to estimate the value of a firm. You will then need to decide if you would sell the firm at a specific price. This project must be submitted as an Excel file. You have until midnight on the due date to turn in the project by Blackboard. Any late project will be accepted at my discretion depending on the degree of lateness.

Your work must be submitted as a readable Excel file. The project is worth a total of 25 points. To receive all 25 points, you should make sure to fully complete the Excel file while following all directions. You should only hard code (aka type directly) into the grey cells. All of the other cells (blue, green, orange) should only include formulas and cell references.

Failure to follow this will result in a significant or total loss of points.. Project Problem 1. Organic Micros was established 8 years ago by Mary Mendoza. The firm reported EBIT this year of $80,000. Mary typically reports about $2,000 in personal expenses through the firm each year.

She also pays herself a salary of $60,000 despite the market rate for such a position being closer to $30,000. 2. The firm currently reports $10,000 in depreciation expenses every year. 3. The firm will need $25,000 of inventory replaced in year 1 and will also require the replacement of equipment during year 4 in an amount totaling $50,000.

4. The firm currently has outstanding debt of $400,000. The firm has been historically financed in a way that 30% of funds are a result of debt financing. The cost of this debt financing is estimated to be 12% while the cost of equity financing is estimated at 22%. 5.

Mary originally invested $120,000 of her own funds in the firm which establishes a cost basis for the firm of $120,000. Mary typically falls in a tax bracket that results in a total tax rate of 40%. 6. Based on the firm’s maturity and the state of the industry, it is estimated the EBIT will increase by 9% each year for the next 5 years. Beyond this time frame, a reasonable estimate of growth is neither possible nor relevant.

Point Breakdown Point Deductions Free Cash Flows 10 pts NPV 6 pts Net proceeds 6 pts Sell decisions 2 pts Name 1 pt Missing formula/reference -1 (per) No formulas/references -25 Wrong calculation -2 (per) Wrong sell decision -1 (per) No name -1 No Excel file -25 Late (if accepted) -5 Template NAME Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Official EBIT Owner's Salary Reasonable Salary Depreciation Personal Expenses Estimated EBITDA New Equipment Inventory Investment Free Cash Flow Current EBIT Weight Of Debt Owner's Salary Weight Of Equity Reasonable Salary Cost Of Debt Depreciation Cost Of Equity Personal Expenses WACC New Equipment Inventory Investment Value Of Firm Estimated Growth Rate Basis Of Firm Tax Rate Gain Taxes Owed Terminal Value Value Of Debt CF1 Net Proceeds CF2 Sell For $900k?

CF3 Sell For $700k? CF4 CF5 NPV

,000 in personal expenses through the firm each year.

She also pays herself a salary of ,000 despite the market rate for such a position being closer to ,000. 2. The firm currently reports ,000 in depreciation expenses every year. 3. The firm will need ,000 of inventory replaced in year 1 and will also require the replacement of equipment during year 4 in an amount totaling ,000.

4. The firm currently has outstanding debt of 0,000. The firm has been historically financed in a way that 30% of funds are a result of debt financing. The cost of this debt financing is estimated to be 12% while the cost of equity financing is estimated at 22%. 5.

Mary originally invested 0,000 of her own funds in the firm which establishes a cost basis for the firm of 0,000. Mary typically falls in a tax bracket that results in a total tax rate of 40%. 6. Based on the firm’s maturity and the state of the industry, it is estimated the EBIT will increase by 9% each year for the next 5 years. Beyond this time frame, a reasonable estimate of growth is neither possible nor relevant.

Point Breakdown Point Deductions Free Cash Flows 10 pts NPV 6 pts Net proceeds 6 pts Sell decisions 2 pts Name 1 pt Missing formula/reference -1 (per) No formulas/references -25 Wrong calculation -2 (per) Wrong sell decision -1 (per) No name -1 No Excel file -25 Late (if accepted) -5 Template NAME Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Official EBIT Owner's Salary Reasonable Salary Depreciation Personal Expenses Estimated EBITDA New Equipment Inventory Investment Free Cash Flow Current EBIT Weight Of Debt Owner's Salary Weight Of Equity Reasonable Salary Cost Of Debt Depreciation Cost Of Equity Personal Expenses WACC New Equipment Inventory Investment Value Of Firm Estimated Growth Rate Basis Of Firm Tax Rate Gain Taxes Owed Terminal Value Value Of Debt CF1 Net Proceeds CF2 Sell For 0k?

CF3 Sell For 0k? CF4 CF5 NPV

Paper for above instructions

Introduction

This report focuses on estimating future cash flows for a hypothetical firm, Organic Micros, owned by Mary Mendoza. By applying a discounted cash flow (DCF) analysis, we aim to evaluate the firm's overall worth based on specific operational adjustments, weighted average cost of capital (WACC), and net proceeds from a hypothetical sale. The methodology presented here follows the structured approach provided in the project guidelines.

Estimating Free Cash Flows (FCF)

Step 1: Adjusting EBIT

The starting point for calculating free cash flow is to adjust the firm's Earnings Before Interest and Taxes (EBIT) as follows:
1. Reported EBIT: ,000
2. Owner’s Salary: ,000 (,000 more than a reasonable compensation of ,000).
3. Depreciation Expense: ,000
4. Personal Expenses:

Final Project Handoutto Complete The Final Project You Will Need To E

Final Project Handout To complete the final project, you will need to estimate future cash flows for a firm and then apply discounted cash flow analysis to estimate the value of a firm. This will all be done in Excel and should be done in a way that utilizes formulas and cell references. This project is worth a total of 25 points. Estimating Free Cash Flows Finding WACC Estimating Free Cash Flow Start with the operating profit or EBIT for a firm and make the following adjustments: 1. Add back the owner’s salary and benefits.

2. Subtract out a more reasonable compensation for the work performed by the owner 3. Add back any of the owner’s personal expenses that have been run through the company. 4. Add back any depreciation and amortization expenses that were claimed this year.

Remember, these are noncash expenses. They are not actual payments made to someone, but merely a number from a table or formula that the IRS allows the owner to subtract out before the calculation of the firm’s taxable income. 5. If a major piece of equipment or asset is intended to be purchased in this particular year, then subtract this amount. 6.

Subtract the amount of money it would take to bring the inventory of the company up to a reasonable level. For instance, sometimes when a business owner knows that the company will be sold, he may “sell out of inventory†rather than reorder new inventory. Therefore, by the time the new owner takes possession, there may be nothing on the shelves to sell. As a result, the new owner may need to invest in inventory or other types of working capital before the business is able to operate and generate income. An analogy might be the way that people sell their cars.

They typically do not pay for new tires, a brake job, a battery, a tune-up, and a tankful of gas the day before a car is sold. Finding Terminal Value Terminal value = year 6 cash flow / WACC Discounted Cash Flow Analysis Steps 1. Calculate a firm’s free cash flows for the next five years. 2. Calculate the terminal value of the firm after year five.

3. Estimate a weighted average cost of capital for a firm. 4. Calculate the NPV of the firm. 5.

Calculate any taxes that will be owed as a result of the sale of the firm. 6. Calculate the net proceeds from selling the firm. Final Project Handout Practice Problem 1. A potential buyer is interested in purchasing a company called MacroTech from an owner whose financial statements report that this year’s EBIT was $200,000.

2. Other information gathered reveal that the owner paid himself salary and benefits of $100,000 when a more reasonable compensation, given the local job market, was $50,000. 3. There was $20,000 in depreciation expense this year. 4.

The owner had $10,000 in personal expenses such as lease payments on a Lexus that he called a “company†car. 5. The firm will need a net investment of $200,000 to replace worn-out equipment during year 2. 6. It is believed that EBIT will increase by 7% per year for the next five years given the productive capacity of the firm and the nature of the product market.

Beyond five years, a reasonable estimate of growth is neither possible nor relevant because the buyer should not have to pay for growth that would come from his own efforts and future investment. 7. The firm has an outstanding loan of $500,000. 8. The cost basis of the firm is $100,000.

In other words, the original owner has $100,000 of his money invested in the company. If the firm sells for more than $100,000, the difference between the selling price and the $100,000 invested would be considered income to the seller. Further suppose that the original owner would fall in a combined state and federal tax bracket of 40%. 9. MacroTech has a history of maintaining an average inventory balance of $80,000.

Since MacroTech first appeared on the market for sale, the owner has not purchased any new inventory and has allowed the level to drop to $65,000, thus suggesting that the buyer will probably need to invest $15,000 in inventory just to bring the firm’s inventory back up to a safe level. This would occur in the first year of operations. 10. Assume this firm finances itself using 25% debt. The cost of debt has been estimated to be 15% while the cost of equity has been estimated to be 27%.

Course Project2 Due on To complete Course Project 2, you will need to estimate future cash flows for a firm and then apply discounted cash flow analysis to estimate the value of a firm. You will then need to decide if you would sell the firm at a specific price. This project must be submitted as an Excel file. You have until midnight on the due date to turn in the project by Blackboard. Any late project will be accepted at my discretion depending on the degree of lateness.

Your work must be submitted as a readable Excel file. The project is worth a total of 25 points. To receive all 25 points, you should make sure to fully complete the Excel file while following all directions. You should only hard code (aka type directly) into the grey cells. All of the other cells (blue, green, orange) should only include formulas and cell references.

Failure to follow this will result in a significant or total loss of points.. Project Problem 1. Organic Micros was established 8 years ago by Mary Mendoza. The firm reported EBIT this year of $80,000. Mary typically reports about $2,000 in personal expenses through the firm each year.

She also pays herself a salary of $60,000 despite the market rate for such a position being closer to $30,000. 2. The firm currently reports $10,000 in depreciation expenses every year. 3. The firm will need $25,000 of inventory replaced in year 1 and will also require the replacement of equipment during year 4 in an amount totaling $50,000.

4. The firm currently has outstanding debt of $400,000. The firm has been historically financed in a way that 30% of funds are a result of debt financing. The cost of this debt financing is estimated to be 12% while the cost of equity financing is estimated at 22%. 5.

Mary originally invested $120,000 of her own funds in the firm which establishes a cost basis for the firm of $120,000. Mary typically falls in a tax bracket that results in a total tax rate of 40%. 6. Based on the firm’s maturity and the state of the industry, it is estimated the EBIT will increase by 9% each year for the next 5 years. Beyond this time frame, a reasonable estimate of growth is neither possible nor relevant.

Point Breakdown Point Deductions Free Cash Flows 10 pts NPV 6 pts Net proceeds 6 pts Sell decisions 2 pts Name 1 pt Missing formula/reference -1 (per) No formulas/references -25 Wrong calculation -2 (per) Wrong sell decision -1 (per) No name -1 No Excel file -25 Late (if accepted) -5 Template NAME Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Official EBIT Owner's Salary Reasonable Salary Depreciation Personal Expenses Estimated EBITDA New Equipment Inventory Investment Free Cash Flow Current EBIT Weight Of Debt Owner's Salary Weight Of Equity Reasonable Salary Cost Of Debt Depreciation Cost Of Equity Personal Expenses WACC New Equipment Inventory Investment Value Of Firm Estimated Growth Rate Basis Of Firm Tax Rate Gain Taxes Owed Terminal Value Value Of Debt CF1 Net Proceeds CF2 Sell For $900k?

CF3 Sell For $700k? CF4 CF5 NPV

,000
5. Inventory Replacement: ,000 in Year 1 and ,000 for new equipment in Year 4.

Calculation of Free Cash Flows

FCF Calculation Formula:
FCF = EBIT + Depreciation - Reasonable Owner’s Salary - Personal Expenses - Inventory Investment - New Equipment Investment
Where:
- Year 0 (current year) FCF:
- EBIT: ,000
- + Depreciation: ,000
- - Reasonable Salary: ,000
- - Personal Expenses:

Final Project Handoutto Complete The Final Project You Will Need To E

Final Project Handout To complete the final project, you will need to estimate future cash flows for a firm and then apply discounted cash flow analysis to estimate the value of a firm. This will all be done in Excel and should be done in a way that utilizes formulas and cell references. This project is worth a total of 25 points. Estimating Free Cash Flows Finding WACC Estimating Free Cash Flow Start with the operating profit or EBIT for a firm and make the following adjustments: 1. Add back the owner’s salary and benefits.

2. Subtract out a more reasonable compensation for the work performed by the owner 3. Add back any of the owner’s personal expenses that have been run through the company. 4. Add back any depreciation and amortization expenses that were claimed this year.

Remember, these are noncash expenses. They are not actual payments made to someone, but merely a number from a table or formula that the IRS allows the owner to subtract out before the calculation of the firm’s taxable income. 5. If a major piece of equipment or asset is intended to be purchased in this particular year, then subtract this amount. 6.

Subtract the amount of money it would take to bring the inventory of the company up to a reasonable level. For instance, sometimes when a business owner knows that the company will be sold, he may “sell out of inventory†rather than reorder new inventory. Therefore, by the time the new owner takes possession, there may be nothing on the shelves to sell. As a result, the new owner may need to invest in inventory or other types of working capital before the business is able to operate and generate income. An analogy might be the way that people sell their cars.

They typically do not pay for new tires, a brake job, a battery, a tune-up, and a tankful of gas the day before a car is sold. Finding Terminal Value Terminal value = year 6 cash flow / WACC Discounted Cash Flow Analysis Steps 1. Calculate a firm’s free cash flows for the next five years. 2. Calculate the terminal value of the firm after year five.

3. Estimate a weighted average cost of capital for a firm. 4. Calculate the NPV of the firm. 5.

Calculate any taxes that will be owed as a result of the sale of the firm. 6. Calculate the net proceeds from selling the firm. Final Project Handout Practice Problem 1. A potential buyer is interested in purchasing a company called MacroTech from an owner whose financial statements report that this year’s EBIT was $200,000.

2. Other information gathered reveal that the owner paid himself salary and benefits of $100,000 when a more reasonable compensation, given the local job market, was $50,000. 3. There was $20,000 in depreciation expense this year. 4.

The owner had $10,000 in personal expenses such as lease payments on a Lexus that he called a “company†car. 5. The firm will need a net investment of $200,000 to replace worn-out equipment during year 2. 6. It is believed that EBIT will increase by 7% per year for the next five years given the productive capacity of the firm and the nature of the product market.

Beyond five years, a reasonable estimate of growth is neither possible nor relevant because the buyer should not have to pay for growth that would come from his own efforts and future investment. 7. The firm has an outstanding loan of $500,000. 8. The cost basis of the firm is $100,000.

In other words, the original owner has $100,000 of his money invested in the company. If the firm sells for more than $100,000, the difference between the selling price and the $100,000 invested would be considered income to the seller. Further suppose that the original owner would fall in a combined state and federal tax bracket of 40%. 9. MacroTech has a history of maintaining an average inventory balance of $80,000.

Since MacroTech first appeared on the market for sale, the owner has not purchased any new inventory and has allowed the level to drop to $65,000, thus suggesting that the buyer will probably need to invest $15,000 in inventory just to bring the firm’s inventory back up to a safe level. This would occur in the first year of operations. 10. Assume this firm finances itself using 25% debt. The cost of debt has been estimated to be 15% while the cost of equity has been estimated to be 27%.

Course Project2 Due on To complete Course Project 2, you will need to estimate future cash flows for a firm and then apply discounted cash flow analysis to estimate the value of a firm. You will then need to decide if you would sell the firm at a specific price. This project must be submitted as an Excel file. You have until midnight on the due date to turn in the project by Blackboard. Any late project will be accepted at my discretion depending on the degree of lateness.

Your work must be submitted as a readable Excel file. The project is worth a total of 25 points. To receive all 25 points, you should make sure to fully complete the Excel file while following all directions. You should only hard code (aka type directly) into the grey cells. All of the other cells (blue, green, orange) should only include formulas and cell references.

Failure to follow this will result in a significant or total loss of points.. Project Problem 1. Organic Micros was established 8 years ago by Mary Mendoza. The firm reported EBIT this year of $80,000. Mary typically reports about $2,000 in personal expenses through the firm each year.

She also pays herself a salary of $60,000 despite the market rate for such a position being closer to $30,000. 2. The firm currently reports $10,000 in depreciation expenses every year. 3. The firm will need $25,000 of inventory replaced in year 1 and will also require the replacement of equipment during year 4 in an amount totaling $50,000.

4. The firm currently has outstanding debt of $400,000. The firm has been historically financed in a way that 30% of funds are a result of debt financing. The cost of this debt financing is estimated to be 12% while the cost of equity financing is estimated at 22%. 5.

Mary originally invested $120,000 of her own funds in the firm which establishes a cost basis for the firm of $120,000. Mary typically falls in a tax bracket that results in a total tax rate of 40%. 6. Based on the firm’s maturity and the state of the industry, it is estimated the EBIT will increase by 9% each year for the next 5 years. Beyond this time frame, a reasonable estimate of growth is neither possible nor relevant.

Point Breakdown Point Deductions Free Cash Flows 10 pts NPV 6 pts Net proceeds 6 pts Sell decisions 2 pts Name 1 pt Missing formula/reference -1 (per) No formulas/references -25 Wrong calculation -2 (per) Wrong sell decision -1 (per) No name -1 No Excel file -25 Late (if accepted) -5 Template NAME Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Official EBIT Owner's Salary Reasonable Salary Depreciation Personal Expenses Estimated EBITDA New Equipment Inventory Investment Free Cash Flow Current EBIT Weight Of Debt Owner's Salary Weight Of Equity Reasonable Salary Cost Of Debt Depreciation Cost Of Equity Personal Expenses WACC New Equipment Inventory Investment Value Of Firm Estimated Growth Rate Basis Of Firm Tax Rate Gain Taxes Owed Terminal Value Value Of Debt CF1 Net Proceeds CF2 Sell For $900k?

CF3 Sell For $700k? CF4 CF5 NPV

,000
- - Inventory Investment: ,000
Year 0 FCF Calculation
\[
\text{FCF} = 80,000 + 10,000 - 30,000 - 2,000 - 25,000 = 33,000
\]
Following this, we will calculate the Free Cash Flow for the following years, accounting for 9% growth each year.
- Year 1:
- FCF \[ 33,000 \times (1 + 0.09) = 36,270 \]
- Year 2:
- FCF \[ 36,270 \times (1 + 0.09) = 39,512.30 \]
- Year 3:
- FCF \[ 39,512.30 \times (1 + 0.09) = 43,072.21 \]
- Year 4:
- FCF = \[ 43,072.21 \times (1 + 0.09) - 50,000 \text{ (New Equipment)} = -6,697.34 \]
- Year 5:
- FCF \[ -6,697.34 \times (1 + 0.09) = -7,308.42 \]
Year 4's cash outflow due to equipment replacement significantly impacts free cash flow in Year 5, so we need to consider that in terminal value calculations.

Step 2: Finding Terminal Value

To find the terminal value, we use the last cash flow before Year 5, which, due to structural capital requirements, is negative. It indicates that the firm may need additional capital beyond year 5.
Terminal Value (TV) is calculated as:
\[
TV = \text{Year 5 Cash Flow} \div WACC
\]
To determine WACC, we need both debt and equity cost structures.

Finding WACC

Step 3: Calculating WACC

The WACC formula considers the cost of equity (Ke) and the cost of debt (Kd) in proportion to their respective weight in the capital structure:
Assuming:
- Cost of Debt (Kd) = 12%
- Cost of Equity (Ke) = 22%
- Weight of Debt (Wd) = 30%
- Weight of Equity (We) = 70%

WACC Calculation:

\[ WACC = (Wd \times Kd) + (We \times Ke) \]
Here, calculating:
\[
WACC = (0.3 \times 0.12) + (0.7 \times 0.22) = 0.036 + 0.154 = 0.19 \text{ (or 19%)}
\]

Step 4: Net Present Value (NPV)

Cash Flow Projections

We will calculate NPV using all Free Cash Flows and terminal value:
NPV Formula:
\[
NPV = \sum \frac{FCF_t}{(1 + WACC)^t}
\]
For t = 1 to 5 using the FCF calculated previously.
Discount Factor Calculations:
1. For Year 1: \( \frac{36,270}{(1+0.19)^1} = 30,487.44 \)
2. For Year 2: \( \frac{39,512.30}{(1+0.19)^2} = 28,377.31 \)
3. For Year 3: \( \frac{43,072.21}{(1+0.19)^3} = 26,275.14 \)
4. For Year 4: \( \frac{-6,697.34}{(1+0.19)^4} = -2903.16 \)
5. For Year 5: \( \frac{-7,308.42}{(1+0.19)^5} = -2930.50 \)
Finally, sum all discounted cash flows to obtain NPV.

Terminal Value Impact on NPV:

Given the negative operating FCF in Year 5, the terminal value will be calculated based on the last positive cash flow from Year 4 which introduces a potential correction for analysts examining future performance and potential.

Step 5: Calculating Taxes Owed

Assessing the gain on a sale of a firm:
1. Firm's Cost Basis = 0,000
2. Assume selling price = 0,000
3. Gain on Sale = 0,000 - 0,000 = 0,000
4. Taxes = 40% Gain = 0.40 0,000 = 2,000

Conclusion

Upon evaluating future cash flows and applying a DCF model, Organic Micros demonstrates potential challenges with cash flow sustainability amid necessary capital investments. This detailed analysis serves business valuation practices and assists in decision-making regarding sale potential.

References

1. Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.
2. Koller, G., et al. (2010). Valuation: Measuring and Managing the Value of Companies. Wiley.
3. Brigham, E. F., & Ehrhardt, M. C. (2013). Financial Management: Theory & Practice. Cengage Learning.
4. Penman, S. H. (2017). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.
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This structured approach uses realistic assumptions and demonstrates the complex processes involved in firm valuation, helping in making an informed decision regarding potential sale strategies.