Effat University

Project
SPRING 2014

DEPARTMENT: FINANCE
INSTRUCTOR NAME: Shatha Edrees
COURSE NAME: CORPORATE
FINANCE

COURSE
NUMBER: 340

SECTION: 1

NUMBER OF PAGES:2

NUMBER OF
QUESTIONS:1

Total
Grade:15

Question1:
Bolwton Co. is evaluating a project with the Following characteristics:
Initial Fixed Capital Investment Outlay is $2000, 000. (2 Million.)
The Project has an expected six-year life.
The Initial investment in net working capital is $200,000 and as per the schedule below for the rest of
the years:
Fixed Capital is depreciated as per the schedule below:
Sales are $1,200,000 in Year 1. They grow each year as per the schedule below:
Fixed operating expenses are as per schedule below.
Variable cash operating expenses are 40% of sales in Year 1, and 39% of sales in Year 2, and 38% in
Years 3-6.
Bolwtons marginal tax rate is 30 %.
Bolwtons will sell its fixed capital investments for $150,000 when the project terminates and
recapture its cumulative investment in net working capital. Income taxes will be paid on any gains.
The projects required rate of return is 12%
Schedule
Year
Growth in Sale
Variable Operating
Expenses
Depreciation Schedule
Fixed Operating
Expenses
NWC Investment

(200,000)

0%

25%

25%

10%

10%

10%

40%
30%

39%
35%

38%
20%

38%
10%

38%
5%

38%
0%

150,000
(50,000)

150,000
(63,000)

150,000
(31,000)

130,000
(34,000)

130,000
(38,000)

130,000

Question 1 : Present all the above information in a spread sheet table in excel. Determine whether this is a
profitable investment using NPV and IRR.
Question 2: If the Tax rate increases to 40% and the required rate of return increases to 14%, is the project
still profitable.
FIN340

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Effat University
Project
SPRING 2014

Questions 3: Conduct a Sensitivity analysis by assuming the initial investment cost of the project is only
200,000 and by using only Year 1 from the table 2 below.
The table exhibits a base case, you are required to calculate the effect on the NPV by changing each of the
below variables by Plus 10% for Optimistic and minus 10% for Pessimistic. You are requested to a table for
the optimistic scenario and a table for the pessimistic scenario, furthermore you need to complete Table 3, and
filling in Table 4 below.
Base CASE Cash Flows for Bolwton Investment

Table 2
Year

Fixed Capital Investment

(200,000.00)

NWC investment

(20,000.00)

(50,000.00)

Sales

1,200,000.00

Fixed cash expenses

150,000.00

Variable Cash expenses

480,000.00

Depreciation

60,000.00

Operating income before taxes

510,000.00

Taxes on operating income

153,000.00

Operating income after taxes

357,000.00

Add back: Depreciation

60,000.00

After tax operating cash flow

Salvage Value
Taxes on Salvage Value
Return of NWC

417,000.00

Total After Tax Cash Flow

(220,000.00)

367,000.00

12%
NPV (at r = 12 % )
IRR

FIN340

$96,141.58

66.8%

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Effat University
Project
SPRING 2014

Table 3
Base Value
Sales

1,200,000.00

Variable Costs
Required rate of Return

480,000.00
12%

Table 4

Optimistic Plus +10%

Pessimistic Minus 10%

Scenario of Project NPV to Changes in Variables

Project NPV

NPV

Base Case

Optimistic - Plus
+10%

Pessimistic Minus 10%

Guidelines:
Your work book should have one work sheet for question 1, and another worksheet for question 2, and a third
worksheet for question 3.
Use excel formulas were possible, do not insert a number within a formula, all numbers in formulas should be
referenced...
You should submit the Excel workbook and a word document.
Calculate the Projects Annual After Tax Operating Cash Flow.
By using the formula:
Cash Flow = (Sale - Costs - Depreciation) (1-Tax Rate) + Depreciation
And
Terminal Year after Tax non-operating Cash Flow:
TNOCF = Salvage t + NWCInv - Terminal (Salvage - BV)
Salvage = cash proceeds from sale of fixed capital on termination date.
BV = Book value of fixed capital on termination date.
NWCInv = Investment in net working capital

Do not forget to deduct negative investment outflows when calculating the final cash flows used in calculating NPV
and IRR.
FIN340

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