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3. Calculate the NPVt=0 of the Big strategy using the appropriate discount rate.
NPV =Total discounted cash flows ( DCF )initial investment
Cash
Year
Discounted rate
0
1
2
3
4
5
6
flow
= 7.9804%
-20000
-20000
4000
3704.3760
5000
4288.2504
6500
5162.7199
5000
3677.8184
4500
3065.4049
4000
2523.4250
NPVt=0
2421.9946
4. Using the appropriate discount rate, calculate the NPVt=1 of the expansion option.
NPVt=1
Year
Cash
Discounted rate
flow
0
1
2
3
4
5
6
= 7.9804%
0
-5000
1500
1500
1500
1000
1000
NPVt=1
0
-4630.4700
1286.4751
1191.3969
1103.3455
681.2011
630.8562
262.8049
5. Complete Table 3 fully, in accordance with the given assumptions, to show how the total after-tax cash
flows in year 0 to year 6 are derived.
Construction of the
after-tax cash flows for
Small without
expansion ($000)
Plant
Tax
Investment in working
capital
Capital cash flow
Revenue
t=0
-9000
0
t=1
0
0
t=2
0
0
-400
-16
-9400
0
-16
4000
t=3
0
0
t=4
0
0
t=5
0
0
t=6
1000
0
-16.64
-8.6528
-8.7072
450
-16.64
4160
-8.6528
4326.4
-8.7072
4412.928
0
4500
1450
4500
Variable cost
1600
1664
1730.56
Fixed cost
Depreciation
Profit before tax
0
0
0
200
1500
700
210
1500
786
220.5
1500
875.34
Tax (30%)
210
235.8
262.602
490
550.2
612.738
Depreciation
1500
1500
1500
1990
-9400
1974
2050.2 2112.738
1765.171
2
231.525
1500
916.2318
274.8695
1800
1800
243.10125
1500
956.89875
287.06962
255.256313
1500
944.743688
4
641.3622
5
669.82912
6
1500
2141.362
5
1500
2169.8291
3
2169.8291
3
2033.5
2104.08
3
2132.655
283.423106
661.320581
1500
2161.32058
3611.32058