HUMBER COLLEGE

THE BUSINESS SCHOOL

FINANCIAL MANAGEMENT
FIN 2500- INDIVIDUAL PROJECT
GRADE VALUE: 7%
SUBMISSION REQUIREMENTS:
The project is due at the beginning of the class on November 23rd. No
exceptions are allowed.

Your response to the case MUST be in the form of a report.

This project must be completed in MS WORD. Handwritten work is
NOT acceptable.
The template is provided. All calculations must be shown
otherwise you will get a zero grade
The report format must include:
o Brief introduction to the case one paragraph.
o Purpose of the project one paragraph.
o Structure of your response brief layout of your response, it
could be in the form a chart or table as well.
o Question-wise response to the case. Please remember that your
response MUST be highly analytical. A simple restatement of
facts will be considered inadequate, and will result in failing
grade.
o Conclusion brief (probably a paragraph) as to why you accept
or reject the offer.
o Must follow the typical format of a report, such as headings, subheadings, bolding, small paragraphs etc. The report must be
compiled on a regular size paper in double space.
o Copying a segment or a complete portion from a website or from
another group will be considered academic plagiarism and would
result in zero grade. Copying material from the work of another
group will result in zero grade for both the groups.

Case Details:
You have been hired as Financial Analyst by Mckenzie Corporation. After getting initial training
about the business processes of the company, your manager has set up a meeting with you to
discuss the upcoming project that Companys CFO is interested in. Mckenzie Corporation is
planning to open a new branch Mississauga, Ontario. The opening of the new branch will cost
$15 Million. It will be a five-year project. The sales department has worked hard to forecast the
sales in units for the next five years. The sales forecast is as follows:
Year 1
1
2
3
4
5

Sales (Units)
70,000
90,000
110,000
120,000
85,000

The marketing and sales divisions of the corporation have prepared the additional
information:
Consider the following information:
A company is considering to undertake a major project of starting a new branch that will cost
$15 million. It is a five-year project. The sales and cost data are provided here:
Price per unit = $350
Variable cost per unit = $250
Fixed costs per year = $800,000
Depreciation/CCA per year = $40,000
Interest Expense per year = $10,000
Tax rate = 30%
Discount rate = 12%
Capital spending is 4% of sales every year.
Net working capital is 1.5% of sales every year.
Your manager is impressed with your credentials. He chose you for this project because you have
acquired a business degree from Humber College. In his meeting with you, he discusses this
project, shares the project financial information, and asks you to do the following things:
REQUIRED:
a. Use the template to calculate the free cash flow and net present value. Based on the results of
your financial data, would you recommend this project to the company? Why, Why not? Your
explanation must be analytical.

2. While you were completing the business degree at Humber College, you were taught that you
must undertake sensitivity analysis before submitting your final results. The sensitivity analysis
helps you to assess the risk attached to the project. The sales forecast and the financial
information have been revised as follows. Based on the revised information, recalculate cash
flow and the net present value:
New Sales Forecast
Year 1
Sales (Units)
1
70,000
2
90,000
3
110,000
4
120,000
5
85,000
The marketing and sales divisions of the corporation have revised the additional
information as follows:
The opening of the new branch will cost $10 Million. It is a five year project. The sales and cost
data are provided here:
Price per unit = $400
Variable cost per unit = $300
Fixed costs per year = $900,000
Depreciation/CCA per year = $45,000
Interest Expense = $15,000
Tax rate = 30%
Discount rate = 14%
Capital spending is 4% of sales every year.
Net working capital is 1.5% of sales every year.
REQUIRED:
a. Use the template to calculate the cash flow and net present value. Based on the results of your
financial data, would you recommend this project to the company? Why, Why not? Your
explanation must be analytical.
b. Compare the results of scenario 1 and 2, what kind of risk assessment can you make? Please
be specific.
c. If at the end of five years, Mckenzie corporation wants to sell this branch, what value would
you assign to the branch? Please provide complete calculations. Mckenzies balance sheet shows
a debt of $3,500,000 and 100,000 shares outstanding . The current market price per share is $30.

NPV/Business Valuation Template

DISCOUNT RATE
TAX RATE
Net Present value
SALES (UNITS)
PRICE PER UNIT
SALES ($$)
VARIABLE COST/UNIT
VARIABLE COSTS
FIXED COSTS
DEPRECIATION (-)
EBIT
INTEREST EXPENSE
EBT
LESS TAXES @
NET INCOME
DEPRECIATION (+)
Capital Investment
Working Capital
FREE CASH FLOW (FCF)
PV OF CASH INFLOWS

14%
30%
YEAR 1

14%
30%
YEAR 2

PV OF CASH INFLOWS
PV OF CASH
OUTFLOWS
NET PRESENT VALUE
TERMINAL VALUE
PRESENT VALUE OF
TERMINAL VALUE
TOTAL BUSINESS
VALUE
LESS BANK LOAN
SHAREHOLDER VALUE
MARKET PRICE PER
SHARE
No. of shares outstanding
Value of Equity (Offer)

14%
30%
YEAR 3

14%
30%
YEAR 4

14%
30%
YEAR 5

Formula for Terminal Value = Last Years Cash Flow Discount Rate
Total Business value of a corporation = Net Present Value + Present Value of
Terminal Value
Shareholder Value = Total Business Value of a corporation Loan or Debt
Outstanding
In order to accept/reject the offer:
Compare Shareholder value to the Value of Equity
If Value of Equity offered > Shareholder value, Accept the offer
If Value of Equity offered < Shareholder value, Reject the offer