Net Present Value Extra Points FINA 440 Due May 4 2016 Zoe Trunchbull has always
ID: 2721697 • Letter: N
Question
Net Present Value Extra Points FINA 440 Due May 4 2016 Zoe Trunchbull has always wanted to enter the blueberry business. She has found a S0 acre piece of hillside in Maine that is covered in blueberry bushes. She figures that the immediate annual yield from the bushes would be 200 crates, with an expectation that she can increase yield through careful plant management by 10% per year up to a maximum of 400 crates per year. Each crates estimated to sell for 400 for the next 5 years. She has talked to other producers and has decided that there is a 50% chance that the price in year 6 would rise to S500 per crate. a 20% chance the price would fall to S30. and a 30% chance that it will stay at $400. She plans to use the expected sales figure for planning for the years 6-10, but also thinks it will be a good estimate of ongoing revenues well into the future. in order to get started, Zoe must pay $300,000 for the land plus $40,000 for packing equioment. The packing equipment will be depreciated over 5 years with no salvage value expected. Land is not depreciated. At the end of the 10 years, Zoe plans to sell the business and move some place warm Annual operating expenses, including a salary for Zoe, are estimated to be $50,000 for the first year and increase by 5% every year after. She plans to spend $10,000 per year on promotion activities in the off seasons. Her marginal tax rate is 30%. She has spoken to a bank about a S20.000 loan at 10% and believes seasons she should plan on a 15% return on the rest of her capital. 1· (25 points) Complete the base ase cash flow projections for 10 years on the attached form. Label specific line items clearly and identify any assumptions you are making. 2. (5 points) Calculate the WACC for Zoe's business 3. (5 points) Determine an appropriate terminal value for the project. Explain your assumptions 4. (2 points) Determine the net investment and the base case net present value. Would you recommend that Zoe take on this project? Be complete in your explanation of your response 5. (8 points) What risk analysis would you perform before coming to a final decision about this investment? Discuss the specific assumptions in the case that are particularly risky or ones that are critical to the outcome of the analysis 6. (5 points) What specific modifications to the plan would you recommend that might increase the likelhood that the business would be a success? 7. Bonus: How much does she need to sell the business for after the 10 years to break even?Explanation / Answer
The cashf lows for the 10 years is as shown below:
b. WACC for ZOEs business
Thr total requirement is 340,000. For the loan of 200,000 the cost is 10% and on the remaining 140,000
WACC = 200/340 * 0.10 + 140/340*0.15 = 0.1206 = 12.06%
c. The terminal value of the project depends on the value of the land that is being sold. The value of the land at the end of 10 years is not given and hence we cannot accuretely determine the terminal value
d. The NPV of the project is negative as shown below:
The NPV is negative and the project is unprofitable. Hence Zoe should reduce her salary to make this a profitable venture.
Note: We have answered 4 sub-questions.Kindly repost remaininig for experts to answers
Year 0 1 2 3 4 5 6 7 8 9 10 Land -300000 Packing equipment -40000 Number of crates sold 200 220 242 266 292 321 353 388 400 400 Revnue per create 400 400 400 400 400 430 430 430 430 430 Total Revenue 80000 88000 96800 106400 116800 138030 151790 166840 172000 172000 Depreciation of Packing - St-line 8000 8000 8000 8000 8000 Zore Salary 50000 52500 55125 57881 60775 63814 67005 70355 73873 77567 Advertising expense 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 Profit before tax 12000 17500 23675 30519 38025 64216 74785 86485 88127 84433 Tax at 30% 3600 5250 7102.5 9155.7 11407.5 19264.8 22435.5 25945.5 26438.1 25329.9 Profit after tax 8400 12250 16572.5 21363.3 26617.5 44951.2 52349.5 60539.5 61688.9 59103.1 Add back depreciation 8000 8000 8000 8000 8000 0 0 0 0 0 Net Cash flow 16400 20250 24573 29363 34618 44951 52350 60540 61689 59103