Corporate finance

Quiz
Name Muhammad ARSLAN MUMTAZ
Sap ID: 70077842
Class: MBA (1.5 weekend)
Submitted to MISS Gul Rukh
Date: 23/April/2020
 Madison manufacturing

BASE CASE

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Initial investment
(350,000)
Net operating
(w.c)
125,000

Cost saving 190,000 190,000 190,000 190,000 190,000

Depreciation @33% @45% @15% @7%
(115,500) (157,500) (52,500) (24,500) (0)
Operating 74,500 32,500 137,500 165,500 190,000
income before
tax
Tax@40% 29,800 13,000 55,000 66,200 76,000
Operating 44,700 19,500 82,500 99,300 114,000
income after tax
Depreciation 115,000 157,500 52,500 24,500 0
Operating cash 160,000 177,000 135,000 123,800 114,000
flow
Return of 125,000
NOWC
Sale of machine 123,000
Tax on sale (49,200)
(40%)
Initial cash out CF1 CF2 CF3 CF4 CF5
flow 475,000 160,000 177,000 135,000 123,800 312,800
BEST CASE

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Initial investment
(350,000)
Net operating
(w.c)
120,000

Cost saving 247,000 247,000 247,000 247,000 247,000

Depreciation @33% @45% @15% @7%
(115,500) (157,500) (52,500) (24,500) (0)
Operating 131,500 89,500 194,500 222,500 247,000
income before
tax
Tax@40% (52,600) (35,800) (77,800) (89,000) (98,800)
Operating 78,900 53,700 116,700 133,500 148,200
income after tax
Depreciation 115,000 157,500 52,500 24,500 0
Operating cash 194,400 211,200 169,200 158,000 148,200
flow
Return of 120,000
NOWC
Sale of machine 128,000
Tax on sale (51,200)
(40%)
Initial cash out CF1 CF2 CF3 CF4 CF5
flow 470,000 194,000 211,200 169,200 158,000 345,000

WORST CASE

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Initial investment
(350,000)
Net operating
(w.c)
130,000

Cost saving 133,000 133,000 133,000 133,000 133,000

Depreciation @33% @45% @15% @7%
(115,500) (157,500) (52,500) (24,500) (0)
Operating 17,500 (24,500) 80,500 108,500 133,000
income before
tax
Tax@40% 7,000 (9,800) 32,200 43,400 53,200
Operating 10,500 (14,700) 48,300 65,100 79,800
 income after tax
Depreciation 115,000 157,500 52,500 24,500 0
Operating cash 126,000 142,800 100,800 89,600 79,800
flow
Return of 130,000
NOWC
Sale of machine 118,000
Tax on sale (47,200)
(40%)
Initial cash out CF1 CF2 CF3 CF4 CF5
flow 470,000 126,000 142,800 100,800 89,600 280,600

Q: Find a payback period, NPV, IRR, MRR

i. Payback
Initial investment $475,000
CF1 160,000
CF2 177,000
CF3 135,000
CF4 123,800
CF5 312,800
3+2800/123,800
PAYBACK PERIOD = 3.02 YEARS
ii. NPV
NPV=(CF0)+CF1/(1+WAAC)+ CF2/(1+WAAC)+ CF3/(1+WAAC)+ CF4/(1+WAAC)+
CF5/(1+WAAC)
NPV= (475,000)+140,526.31+136,195.75+91,121.15+73,299.53+162,458.51
NPV= (475,000)+603,601.25
NPV=$128,601.25

iii. IRR
IRR=r & NPV=0
IF r=18%
CF0 +CF1/(1+r)1 + CF2/(1+r)2 + CF3/(1+r)3 + CF4/(1+r)4 + CF5/(1+r)5
(475,000)=135,762.71+127,118.64+82,165.16+63,854.66+136,727.76
(475,000)≠ 545,628.93
IF r=20%
(475,000)=133,500+122,916.66+78,125+59,702.93+125,707.30
(475,000)≠ 519,951.89
iv. MIRR
0 1 2 3 4 5

(475,000) 160,200 177,000 135,000 123,800 312,800

Terminal value=FV1+FV2+FV3+FV4+FV5

TV=PV (1+r)n-m

TV=PV(1+r)5-1+ PV(1+r)5-2+ PV(1+r)5-3+ PV(1+r)5-4+ PV(1+r)5-5

 TV=1162,182.69

TV=PV (I+r)n

1162,182=475,000(1+r)5

1+r= (1,162,182/475,000)1/5

1+r= 1.19

r=1.19-1

r=19%

Qb: find NPV when cost saving decreases by 30%?

NPV=(CF0)+CF1/(1+WAAC)+ CF2/(1+WAAC)+ CF3/(1+WAAC)+ CF4/(1+WAAC)+ CF5/(1+WAAC)

NPV=(480,000)+110,526.31+109,879.96+68,037.12+53,050.39+145,734.84

NPV=(480,000)+487,228.62

NPV=$7,228.62

Find NPV when cost saving increases by 30%?

NPV=(CF0)+CF1/(1+WAAC)+ CF2/(1+WAAC)+ CF3/(1+WAAC)+ CF4/(1+WAAC)+

CF5/(1+WAAC)

NPV=(480,000)+170,526.31+162,511.54+114,205.18+93,548.68+179,182.18

NPV=(470,000)+719,973.84

NPV=$249,973.89

Qc: yes, I will recommend this project because its NPV is positive which is $128,601.25 and also the IRR
is greater than WAAC.

2: WAAC estimation

(a) Price =$30 P0

Wd=0.50
Ws =0.50
T=40%
Dividend = D1 =$1.20
DDM= D1/P0+g
=1.20/30+0.08
Ke= 12%
Kd=10%
WAAC=Wshs+ WdKd(1-T)
=0.5(0.12)+(0.5)(0.1)(1-0.4)
=0.6+0.03
WAAC=9%
Q3: market value of capital structure
FV=$100
Coupon rate =6%
PMT=0.06*$100 =60
N= 20 Years
I= 10%
P=659.46
Number bonds= 30000 bonds
Debt MV=30000*659.46
=19,783,800
MV of common equity=1,000,000
Common price of share = $60
=1,000,000*60
=60,000,000
Current liability (total payable =10,000,000)
Debt MV 19,783,800/89,783,800 =22%
Common stock MV 60,000,000/89,783,800 =67%
Number payable 10,000,000/89,783,800 =11%
100%
Total capital= $89,783,800