FIN4424 Exam 2 Question 1 (Cases 10, 11, 11.2) Will focus on not fully depreciated asset, negative cost savings, Sunk Costs (do not included in cash flow analysis) Will need to compute NPV, IRR, Cash Flows, and MIRR and choose one. Accept or Reject. The focus is on the incremental cash flows from a project. Cash Flow = EBIT(1-Tax Rate) + Depreciation - Change in Fixed Assets – Change in Net Other Working Capital + After Tax Salvage Value EBIT = Sales – COGS – Labor Expense (if applicable) – Utility Expense (If Applicable) – Lease Expense (If Applicable) – Depreciation Depreciation: Fixed Asset Basis * MACRS Rate Change in Fixed Assets: Entered as positive number which is then subtracted out for cash flow calculations. Amount equipment costs. Net Other Working Capital: NOWC = Current Assets – Current Liabilities, or could be a percentage of revenues, or could be given. Use to calculate change from year to year. (Do NOT subtract interest expense or dividends when calculating cash flows.) Net Other Working Capital (Case 9) NOWC= Current Assets – Current Liabilities Conservative means you will finance for your need of Working Capital up front instead of year to year (aggressive). Change in Working Capital is used for Capital Budgeting. Aggressive: Minimal level of inventory. Minimizes costs. Highest Return but Riskiest. Uses short term financing to fund part of the Permanent assets. Conservative: Large inventory is maintained. Negative Cost Savings: Enter the amount in the expense category as a negative and when calculating the EBIT formula remember that a “minus minus” makes a positive so EBIT will increase. Externalities: A negative externality is positive so that when you subtract it you take it away from the cash flow and EBIT. A positive externality is negative that way it is added (like negative cost savings) to the EBIT and Cash Flow. Salvage Value: If sold before it is fully depreciated then the effect is on the salvage value: After Tax Salvage Value = Sales Price (Salvage Value) – Tax Rate*(Salvage – Purchase Price*% Depreciation left) Set-Up Years (0, 1, 2, 3…) Sales (Units Sold*Sale Price) (COGS) (Labor) (Utility) (Lease) (Other Expenses) Change in Fixed Assets % Depreciation (Depreciation Amount) EBIT EBIT(1-Tax Rate) Inventory A/R A/P Deferred Expenses (Liabilities) NOWC (Current Assets – Current Liabilities) Change in NOWC from year to year Choose Conservative or AggressiveFIN4424 Exam 2 MIRR Formula: Put all cash flows to the last period (their future values) and discounts them back. Example: 1. Enter positive CFs in CFLO: I = 10 (Cost of Capital); Solve for NPV = $358,029.581. 2. Use TVM keys: PV = -358,029.581 (Net Present Value Calculated in Step 1), N = 4, I = 10(Cost of Capital); PMT = 0; Solve for FV = 524,191. (TV of inflows) 3. Use TVM keys: N = 4; FV = 524,191; PV = -270,000; PMT= 0; Solve for I = 18.0 (MIRR). MIRR = 18.0%. Case 8 (Question 2) Given NPV, IRR, MIRR and Choose One Mutually Exclusive choose one Independent means you can have this and a mutually exclusive event If NPV and IRR conflict go to an alternative measure (Discounted Payback or the crossover rate) How to Calculate Crossover Rate (Question 3) 1. Find the Differences between both of the projects 2. Solve for the IRR (Where Net Present Value = Zero) 3. Make your decision based on cross over rate. Question 4 (Case 12): Comparable Companies Analysis 1. Find the Enterprise Value for each company: Enterprise Value = (Market Price of Shares*Shares Outstanding) + Debt + Minority Interest + Preferred Stock – Cash 2. Take the Enterprise Values of each company and dived by the EBIT or EBITDA and get an Average. EV/(EBIT or EBITDA) then average. 3. Take the EBIT of the Company you are trying to find a share price for and multiply by the average EV/(EBIT or EBITDA) for the other companies. This is the Enterprise Value. 4. Find the Market Value of Equity for the Company you are trying to find a share price for. MV of Equity = Enterprise Value (from Step 3) – Debt – Minority Interest – Preferred Stock + Cash 5. Price Per Share = MV of Equity (Step 4)/Shares Outstanding (Given) Order As Follows Horizontally: EBIT EBITDA Debt Minority Interest Preferred Cash Share Price Shares Outstanding Enterprise Value Enterprise Value/EBIT (Average These) Enterprise Value/EBITDA (Average