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Par Value of Preference Stock at t = 3
Value of Preferred Stock as part of the package $37 million
Par value of each stock $5
No of preferred stock to be issued at t=0 $37 million / $5 = 7.4 million
No of preferred stock at end of t = 3 (for first three years, par value of stock is growing at CAGR of 15%) 7.4 * 1.15^3 million
Par value of preference stock at t = 3 11,254,475 * $5 = $56,272,375

Market Value of Preference Stock at t = 0

Market value of preference stock at above par value as on t = 3 and capitalization rate of 17% and dividend rate of 15% p.a. of p
Market value of preference stock at t = 3 15% * $56,272,375 / 17% $49,652,095.59
Market value of preference stock at t = 0 $49,652,095.59 / (1.17^3) $31,001,306.18
 of 15%) 7.4 * 1.15^3 million 11.254475 million 11,254,475 shares

and dividend rate of 15% p.a. of par value

Year 1996 1997 1998 1999 2000 2001
Period 0 1 2 3 4 5
Sales 293.3 305.0 317.2 329.9 343.1 356.8
Growth 4% 4% 4% 4% 4%
COGS ($176.0) ($176.9) ($180.8) ($184.8) ($192.1) ($199.8)
% of Sales -60.0% -58.0% -57.0% -56.0% -56.0% -56.0%
Gross Margin 117.3 128.1 136.4 145.2 151.0 157.0
Depreciation ($7.0) ($7.0) ($7.0) ($7.0) ($7.0) ($7.0)
Other Cost ($87.0) ($83.0) ($81.0) ($84.5) ($88.2) ($92.0)
EBIT 23.3 38.1 48.4 53.7 55.8 58.0
Taxes @ 40% ($15.2) ($19.4) ($21.5) ($22.3) ($23.2)
After-Tax EBIT 22.9 29.0 32.2 33.5 34.8
Add: Depreciation 7.0 7.0 7.0 7.0 7.0
Less: Capex ($9.0) ($9.0) ($9.0) ($9.0) ($9.0)
Less: Increase in Working Capital ($3.0) ($2.4) ($2.5) ($2.6) ($2.7)
Free Cash Flows to Firm (FCFF) 17.86 24.61 27.66 28.82 30.06
Terminal Value (TV) 262.32
FCFF incl. TV 17.86 24.61 27.66 28.82 292.38
PV of unlevered FCFF @ 14.5% 15.41 18.31 17.76 15.96 139.70

Unlevered Value of Firm (Vu) 207.14

Value of Debt @ 30% of Vu 62.14

Year 1996 1997 1998 1999 2000 2001

Period 0 1 2 3 4 5
Sales 293.3 305.0 317.2 329.9 343.1 356.8
Growth 4.00% 4.00% 4.00% 4.00% 4.00%
COGS ($176.0) ($176.9) ($180.8) ($184.8) ($192.1) ($199.8)
% of Sales -60.0% -58.0% -57.0% -56.0% -56.0% -56.0%
Gross Margin 117.3 128.1 136.4 145.2 151.0 157.0
Depreciation ($7.0) ($7.0) ($7.0) ($7.0) ($7.0) ($7.0)
Other Cost ($87.0) ($83.0) ($81.0) ($84.5) ($88.2) ($92.0)
EBIT 23.3 38.1 48.4 53.7 55.8 58.0
Interest Cost ($22.1) ($22.1) ($22.1) ($22.1) ($22.1)
PBT 16.05 26.34 31.60 33.71 35.95
Taxes @ 40% ($6.4) ($10.5) ($12.6) ($13.5) ($14.4)
PAT 9.6 15.8 19.0 20.2 21.6
Preference Dividend - - - ($8.4) ($8.4)
Profit for common stock holders 9.63 15.81 18.96 11.78 13.13
Add: Depreciation 7.0 7.0 7.0 7.0 7.0
Less: Capex ($9.0) ($9.0) ($9.0) ($9.0) ($9.0)
Less: Increase in Working Capital ($3.0) ($2.4) ($2.5) ($2.6) ($2.7)
Free Cash Flows to Equity (FCFE) 4.62 11.37 14.42 15.58 16.82
Terminal Value (TV) 146.79
FCFF incl. TV 4.62 11.37 14.42 15.58 163.61
PV of FCFE at 15.9% 3.99 8.46 9.26 8.63 78.17

Solution
Market Value of Smithfield at t=0 $108.51
Market Value of Smithfield at t=5 $227.11 Assuming value at t=0 grows at CAGR of cost of equity or 15.92%
Market Value of Smithfield at t=5 163.61 Assuming no compounding effect and hence value is equal to FCFE in (

Sales Value of Firm Value

Enterprise Value at t = 5 $292.38
Less: Debt outstanding ($201.40)
Less: Preference Stock outstanding ($56.27)
Equity Value $34.71
Management Share @ 95% $32.97 As per professor comments, Investment Banker owns 5% ownership int
Investments made at t = 0 $35.00
Loss on Investment ($2.03)
Tax saving @ 30% on loss $0.61
Net inflow at t = 5 $33.58

Year 1996 1997 1998 1999 2000 2001

Period 0 1 2 3 4 5
Equity investment ($35)
Annual excess cash flows @ 95% $4.39 $10.80 $13.70 $14.81
Mangement Share in Equity Sale Value $33.58
Net cashflows ($35.00) $4.39 $10.80 $13.70 $14.81 $33.58
IRR 24.48%
Assumption 1996 1997 1998 1999 2000
Current Assets $98
Current Liabilities ($40)
Working Capital $58.0 $61.0 $63.4 $66.0 $68.6
as % of Sales 19.8%
Assumed % 20% 20% 20% 20%

Increase in working capital ($3.0) ($2.4) ($2.5) ($2.6)

Terminal Growth Rate in FCFF 4% Assumed the same growth as growth in sales

Market Return (Km) 17%

Risk-free rate (Kf) 9%
D/E 0.43
Tax Rate (tc) 40%

Comparables Sales Beta Debt Equity Total Capital

Anchor Drugs $255 0.85 $40 $120 $160
Babcock $520 1.20 $195 $150 $345
Average 1.03

Unlevered beta 0.69

Unlevered cost of equity* 14.50% As per CAPM: Kf + Beta * (Km - Kf)
Levered beta** 0.86
Levered cost of equity** 15.92%
* Also is the cost of capital for an unlevered firm. ** As per Smithfield capital structure

Pre-tax Cost of Debt Value Interest

Par value of debt @ 10% $133.20 $13.32
Par value of debt @ 13% $64.20 $8.35
Par Value of debt @ 10% $4.00 $0.40
Total $201.40 $22.1

Cost of Equity 15.92%

Par Value of Preference Stk at t=0 $37.00

Par Value of Preference Stk at t=3 $56.27
of cost of equity or 15.92%
hence value is equal to FCFE in (t=5 + Terminal Value)

nt Banker owns 5% ownership interest.

 2001

$71.4

20%

($2.7)

D/E
0.33
1.30
0.82
Year 1996 1997 1998 1999 2000 2001
Period 0 1 2 3 4 5
Sales 293.3 305.0 317.2 329.9 343.1 356.8
Growth 4% 4% 4% 4% 4%
COGS ($176.0) ($176.9) ($180.8) ($184.8) ($192.1) ($199.8)
% of Sales -60.0% -58.0% -57.0% -56.0% -56.0% -56.0%
Gross Margin 117.3 128.1 136.4 145.2 151.0 157.0
Depreciation ($7.0) ($7.0) ($7.0) ($7.0) ($7.0) ($7.0)
Other Cost ($87.0) ($83.0) ($81.0) ($84.5) ($88.2) ($92.0)
EBIT 23.3 38.1 48.4 53.7 55.8 58.0
Taxes @ 40% ($15.2) ($19.4) ($21.5) ($22.3) ($23.2)
After-Tax EBIT 22.9 29.0 32.2 33.5 34.8
Add: Depreciation 7.0 7.0 7.0 7.0 7.0
Less: Capex ($9.0) ($9.0) ($9.0) ($9.0) ($9.0)
Less: Increase in Working Capital ($3.0) ($2.4) ($2.5) ($2.6) ($2.7)
Free Cash Flows to Firm (FCFF) 17.86 24.61 27.66 28.82 30.06
Terminal Value (TV) 262.32
FCFF incl. TV 17.86 24.61 27.66 28.82 292.38
PV of unlevered FCFF @ 14.5% 15.41 18.31 17.76 15.96 139.70

Unlevered Value of Firm (Vu) 207.14

Value of Debt @ 30% of Vu 62.14

Year 1996 1997 1998 1999 2000 2001

Period 0 1 2 3 4 5
Sales 293.3 305.0 317.2 329.9 343.1 356.8
Growth 4.00% 4.00% 4.00% 4.00% 4.00%
COGS ($176.0) ($176.9) ($180.8) ($184.8) ($192.1) ($199.8)
% of Sales -60.0% -58.0% -57.0% -56.0% -56.0% -56.0%
Gross Margin 117.3 128.1 136.4 145.2 151.0 157.0
Depreciation ($7.0) ($7.0) ($7.0) ($7.0) ($7.0) ($7.0)
Other Cost ($87.0) ($83.0) ($81.0) ($84.5) ($88.2) ($92.0)
EBIT 23.3 38.1 48.4 53.7 55.8 58.0
Interest Cost ($22.1) ($22.1) ($22.1) ($22.1) ($22.1)
PBT 16.05 26.34 31.60 33.71 35.95
Taxes @ 40% ($6.4) ($10.5) ($12.6) ($13.5) ($14.4)
PAT 9.6 15.8 19.0 20.2 21.6
Preference Dividend - - - ($8.4) ($8.4)
Profit for common stock holders 9.63 15.81 18.96 11.78 13.13
Add: Depreciation 7.0 7.0 7.0 7.0 7.0
Less: Capex ($9.0) ($9.0) ($9.0) ($9.0) ($9.0)
Less: Increase in Working Capital ($3.0) ($2.4) ($2.5) ($2.6) ($2.7)
Free Cash Flows to Equity (FCFE) 4.62 11.37 14.42 15.58 16.82
Terminal Value (TV) 146.79
FCFF incl. TV 4.62 11.37 14.42 15.58 163.61
PV of FCFE at 15.9% 3.99 8.46 9.26 8.63 78.17

Solution
Market Value of Smithfield at t=0 $108.51
Market Value of Smithfield at t=5 $227.11 Assuming value at t=0 grows at CAGR of cost of equity or 15.92%
Market Value of Smithfield at t=5 163.61 Assuming no compounding effect and hence value is equal to FCFE in (

Sales Value of Firm Value

Enterprise Value at t = 5 $292.38
Less: Debt outstanding ($201.40)
Less: Preference Stock outstanding ($56.27)
Equity Value $34.71
Management Share @ 95% $32.97 As per professor comments, Investment Banker owns 5% ownership int
Investments made at t = 0 $35.00
Loss on Investment ($2.03)
Tax saving @ 30% on loss $0.61
Net inflow at t = 5 $33.58

Year 1996 1997 1998 1999 2000 2001

Period 0 1 2 3 4 5
Equity investment ($35)
Annual excess cash flows @ 95% $4.39 $10.80 $13.70 $14.81
Mangement Share in Equity Sale Value $33.58
Net cashflows ($35.00) $4.39 $10.80 $13.70 $14.81 $33.58
IRR 24.48%
NPV $9.86
Assumption 1996 1997 1998 1999 2000
Current Assets $98
Current Liabilities ($40)
Working Capital $58.0 $61.0 $63.4 $66.0 $68.6
as % of Sales 19.8%
Assumed % 20% 20% 20% 20%

Increase in working capital ($3.0) ($2.4) ($2.5) ($2.6)

Terminal Growth Rate in FCFF 4% Assumed the same growth as growth in sales

Market Return (Km) 17%

Risk-free rate (Kf) 9%
D/E 0.43
Tax Rate (tc) 40%

Comparables Sales Beta Debt Equity Total Capital

Anchor Drugs $255 0.85 $40 $120 $160
Babcock $520 1.20 $195 $150 $345
Average 1.03

Unlevered beta 0.69

Unlevered cost of equity* 14.50% As per CAPM: Kf + Beta * (Km - Kf)
Levered beta** 0.86
Levered cost of equity** 15.92%
* Also is the cost of capital for an unlevered firm. ** As per Smithfield capital structure

Pre-tax Cost of Debt Value Interest

Par value of debt @ 10% $133.20 $13.32
Par value of debt @ 13% $64.20 $8.35
Par Value of debt @ 10% $4.00 $0.40
Total $201.40 $22.1

Cost of Equity 15.92%

Par Value of Preference Stk at t=0 $37.00

Par Value of Preference Stk at t=3 $56.27
of cost of equity or 15.92%
hence value is equal to FCFE in (t=5 + Terminal Value)

nt Banker owns 5% ownership interest.

 2001

$71.4

20%

($2.7)

D/E
0.33
1.30
0.82
Year 1996 1997 1998 1999 2000 2001
Period 0 1 2 3 4 5
Sales 293.3 302.1 311.2 320.5 330.1 340.0
Growth 3% 3% 3% 3% 3%
COGS ($176.0) ($175.2) ($177.4) ($179.5) ($184.9) ($190.4)
% of Sales -60.0% -58.0% -57.0% -56.0% -56.0% -56.0%
Gross Margin 117.3 126.9 133.8 141.0 145.2 149.6
Depreciation ($7.0) ($7.0) ($7.0) ($7.0) ($7.0) ($7.0)
Other Cost ($87.0) ($83.0) ($81.0) ($84.5) ($88.2) ($92.0)
EBIT 23.3 36.9 45.8 49.5 50.0 50.6
Taxes @ 40% ($14.8) ($18.3) ($19.8) ($20.0) ($20.2)
After-Tax EBIT 22.1 27.5 29.7 30.0 30.4
Add: Depreciation 7.0 7.0 7.0 7.0 7.0
Less: Capex ($9.0) ($9.0) ($9.0) ($9.0) ($9.0)
Less: Increase in Working Capital ($2.4) ($1.8) ($1.9) ($1.9) ($2.0)
Free Cash Flows to Firm (FCFF) 17.71 23.67 25.84 26.11 26.38
Terminal Value (TV) 210.36
FCFF incl. TV 17.71 23.67 25.84 26.11 236.74
PV of unlevered FCFF @ 14.5% 15.28 17.61 16.59 14.46 113.11

Unlevered Value of Firm (Vu) 177.05

Value of Debt @ 30% of Vu 53.12

Year 1996 1997 1998 1999 2000 2001

Period 0 1 2 3 4 5
Sales 293.3 305.0 317.2 329.9 343.1 356.8
Growth 4.00% 4.00% 4.00% 4.00% 4.00%
COGS ($176.0) ($176.9) ($180.8) ($184.8) ($192.1) ($199.8)
% of Sales -60.0% -58.0% -57.0% -56.0% -56.0% -56.0%
Gross Margin 117.3 128.1 136.4 145.2 151.0 157.0
Depreciation ($7.0) ($7.0) ($7.0) ($7.0) ($7.0) ($7.0)
Other Cost ($87.0) ($83.0) ($81.0) ($84.5) ($88.2) ($92.0)
EBIT 23.3 38.1 48.4 53.7 55.8 58.0
Interest Cost ($22.1) ($22.1) ($22.1) ($22.1) ($22.1)
PBT 16.05 26.34 31.60 33.71 35.95
Taxes @ 40% ($6.4) ($10.5) ($12.6) ($13.5) ($14.4)
PAT 9.6 15.8 19.0 20.2 21.6
Preference Dividend - - - ($8.4) ($8.4)
Profit for common stock holders 9.63 15.81 18.96 11.78 13.13
Add: Depreciation 7.0 7.0 7.0 7.0 7.0
Less: Capex ($11.0) ($11.0) ($11.0) ($11.0) ($11.0)
Less: Increase in Working Capital ($2.4) ($1.8) ($1.9) ($1.9) ($2.0)
Free Cash Flows to Equity (FCFE) 3.21 9.99 13.09 14.30 15.59
Terminal Value (TV) 124.27
FCFF incl. TV 3.21 9.99 13.09 14.30 139.86
PV of FCFE at 15.9% 2.77 7.44 8.41 7.92 66.82

Solution
Market Value of Smithfield at t=0 $93.36
Market Value of Smithfield at t=5 $195.39 Assuming value at t=0 grows at CAGR of cost of equity or 15.92%
Market Value of Smithfield at t=5 139.86 Assuming no compounding effect and hence value is equal to FCFE in (

Sales Value of Firm Value

Enterprise Value at t = 5 $236.74
Less: Debt outstanding ($201.40)
Less: Preference Stock outstanding ($56.27)
Equity Value ($20.93)
Management Share @ 95% ($19.89) As per professor comments, Investment Banker owns 5% ownership int
Investments made at t = 0 $35.00
Loss on Investment ($54.89)
Tax saving @ 30% on loss $16.47
Net inflow at t = 5 ($3.42)

Year 1996 1997 1998 1999 2000 2001

Period 0 1 2 3 4 5
Equity investment ($35)
Annual excess cash flows @ 95% $3.05 $9.49 $12.44 $13.59
Mangement Share in Equity Sale Value ($3.42)
Net cashflows ($35.00) $3.05 $9.49 $12.44 $13.59 ($3.42)
IRR 0.15%
NPV ($11.43)
Assumption 1996 1997 1998 1999 2000
Current Assets $98
Current Liabilities ($40)
Working Capital $58.0 $60.4 $62.2 $64.1 $66.0
as % of Sales 19.8%
Assumed % 20% 20% 20% 20%

Increase in working capital ($2.4) ($1.8) ($1.9) ($1.9)

Terminal Growth Rate in FCFF 3% Assumed the same growth as growth in sales

Market Return (Km) 17%

Risk-free rate (Kf) 9%
D/E 0.43
Tax Rate (tc) 40%

Comparables Sales Beta Debt Equity Total Capital

Anchor Drugs $255 0.85 $40 $120 $160
Babcock $520 1.20 $195 $150 $345
Average 1.03

Unlevered beta 0.69

Unlevered cost of equity* 14.50% As per CAPM: Kf + Beta * (Km - Kf)
Levered beta** 0.86
Levered cost of equity** 15.92%
* Also is the cost of capital for an unlevered firm. ** As per Smithfield capital structure

Pre-tax Cost of Debt Value Interest

Par value of debt @ 10% $133.20 $13.32
Par value of debt @ 13% $64.20 $8.35
Par Value of debt @ 10% $4.00 $0.40
Total $201.40 $22.1

Cost of Equity 15.92%

Par Value of Preference Stk at t=0 $37.00

Par Value of Preference Stk at t=3 $56.27
of cost of equity or 15.92%
hence value is equal to FCFE in (t=5 + Terminal Value)

nt Banker owns 5% ownership interest.

 2001

$68.0

20%

($2.0)

D/E
0.33
1.30
0.82
Year 1996 1997 1998 1999 2000 2001
Period 0 1 2 3 4 5
Sales 293.3 308.0 323.4 339.5 356.5 374.3
Growth 5% 5% 5% 5% 5%
COGS ($176.0) ($178.6) ($184.3) ($190.1) ($199.6) ($209.6)
% of Sales -60.0% -58.0% -57.0% -56.0% -56.0% -56.0%
Gross Margin 117.3 129.3 139.0 149.4 156.9 164.7
Depreciation ($7.0) ($7.0) ($7.0) ($7.0) ($7.0) ($7.0)
Other Cost ($87.0) ($83.0) ($81.0) ($84.5) ($88.2) ($92.0)
EBIT 23.3 39.3 51.0 57.9 61.7 65.7
Taxes @ 40% ($15.7) ($20.4) ($23.2) ($24.7) ($26.3)
After-Tax EBIT 23.6 30.6 34.7 37.0 39.4
Add: Depreciation 7.0 7.0 7.0 7.0 7.0
Less: Capex ($9.0) ($9.0) ($9.0) ($9.0) ($9.0)
Less: Increase in Working Capital ($3.6) ($3.1) ($3.2) ($3.4) ($3.6)
Free Cash Flows to Firm (FCFF) 18.01 25.55 29.50 31.60 33.86
Terminal Value (TV) 325.61
FCFF incl. TV 18.01 25.55 29.50 31.60 359.47
PV of unlevered FCFF @ 14.5% 15.54 19.01 18.94 17.50 171.75

Unlevered Value of Firm (Vu) 242.75

Value of Debt @ 30% of Vu 72.82

Year 1996 1997 1998 1999 2000 2001

Period 0 1 2 3 4 5
Sales 293.3 305.0 317.2 329.9 343.1 356.8
Growth 4.00% 4.00% 4.00% 4.00% 4.00%
COGS ($176.0) ($176.9) ($180.8) ($184.8) ($192.1) ($199.8)
% of Sales -60.0% -58.0% -57.0% -56.0% -56.0% -56.0%
Gross Margin 117.3 128.1 136.4 145.2 151.0 157.0
Depreciation ($7.0) ($7.0) ($7.0) ($7.0) ($7.0) ($7.0)
Other Cost ($87.0) ($83.0) ($81.0) ($84.5) ($88.2) ($92.0)
EBIT 23.3 38.1 48.4 53.7 55.8 58.0
Interest Cost ($22.1) ($22.1) ($22.1) ($22.1) ($22.1)
PBT 16.05 26.34 31.60 33.71 35.95
Taxes @ 40% ($6.4) ($10.5) ($12.6) ($13.5) ($14.4)
PAT 9.6 15.8 19.0 20.2 21.6
Preference Dividend - - - ($8.4) ($8.4)
Profit for common stock holders 9.63 15.81 18.96 11.78 13.13
Add: Depreciation 7.0 7.0 7.0 7.0 7.0
Less: Capex ($7.0) ($7.0) ($7.0) ($7.0) ($7.0)
Less: Increase in Working Capital ($3.6) ($3.1) ($3.2) ($3.4) ($3.6)
Free Cash Flows to Equity (FCFE) 6.04 12.73 15.73 16.83 18.00
Terminal Value (TV) 173.12
FCFF incl. TV 6.04 12.73 15.73 16.83 191.12
PV of FCFE at 15.9% 5.21 9.47 10.10 9.32 91.32

Solution
Market Value of Smithfield at t=0 $125.41
Market Value of Smithfield at t=5 $262.48 Assuming value at t=0 grows at CAGR of cost of equity or 15.92%
Market Value of Smithfield at t=5 191.12 Assuming no compounding effect and hence value is equal to FCFE in (

Sales Value of Firm Value

Enterprise Value at t = 5 $359.47
Less: Debt outstanding ($201.40)
Less: Preference Stock outstanding ($56.27)
Equity Value $101.80
Management Share @ 95% $96.71 As per professor comments, Investment Banker owns 5% ownership int
Investments made at t = 0 $35.00
Loss on Investment $61.71
Tax saving @ 30% on loss ($18.51)
Net inflow at t = 5 $78.20

Year 1996 1997 1998 1999 2000 2001

Period 0 1 2 3 4 5
Equity investment ($35)
Annual excess cash flows @ 95% $5.73 $12.09 $14.94 $15.99
Mangement Share in Equity Sale Value $78.20
Net cashflows ($35.00) $5.73 $12.09 $14.94 $15.99 $78.20
IRR 39.33%
NPV $34.75
Assumption 1996 1997 1998 1999 2000
Current Assets $98
Current Liabilities ($40)
Working Capital $58.0 $61.6 $64.7 $67.9 $71.3
as % of Sales 19.8%
Assumed % 20% 20% 20% 20%

Increase in working capital ($3.6) ($3.1) ($3.2) ($3.4)

Terminal Growth Rate in FCFF 5% Assumed the same growth as growth in sales

Market Return (Km) 17%

Risk-free rate (Kf) 9%
D/E 0.43
Tax Rate (tc) 40%

Comparables Sales Beta Debt Equity Total Capital

Anchor Drugs $255 0.85 $40 $120 $160
Babcock $520 1.20 $195 $150 $345
Average 1.03

Unlevered beta 0.69

Unlevered cost of equity* 14.50% As per CAPM: Kf + Beta * (Km - Kf)
Levered beta** 0.86
Levered cost of equity** 15.92%
* Also is the cost of capital for an unlevered firm. ** As per Smithfield capital structure

Pre-tax Cost of Debt Value Interest

Par value of debt @ 10% $133.20 $13.32
Par value of debt @ 13% $64.20 $8.35
Par Value of debt @ 10% $4.00 $0.40
Total $201.40 $22.1

Cost of Equity 15.92%

Par Value of Preference Stk at t=0 $37.00

Par Value of Preference Stk at t=3 $56.27
of cost of equity or 15.92%
hence value is equal to FCFE in (t=5 + Terminal Value)

nt Banker owns 5% ownership interest.

 2001

$74.9

20%

($3.6)

D/E
0.33
1.30
0.82
Based on output shown it is clear that the current proposal under best case scenario has potential to generate an Equity IRR

This IRR is much higher than the cost of equity of 15.92% and hence generate an NPV of $9.86 million.

Hence the management group should proceed with this investment.

However, the only caveat which needs to be kept in mind in above assumption is that, the entire value of NPV is derived from t

Hence the entire recommendation rest on assumption on 4% annual perpetual growth which may or may not hold true.

The decline in this growth rate will make entire investment into a loss proposition which is reflected by 0.15% IRR under worst
to 3% and annual capex to $11 million

Similarly if we revised the growth assumptions upward to 5% and capex to $7 million, the IRR chages to 39.33% and NPV of $3
o generate an Equity IRR of 24.48% to Lewis, Ozaki, and Weisenberger.

on.

e of NPV is derived from the Terminal Value

may not hold true.

y 0.15% IRR under worst case scenario as a result of change in sales growth to 3%, terminal growth

to 39.33% and NPV of $34.75 million