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Assignment Dataset 1

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0 1 2 3 4

Projected Revenues $1,500,000 $1,800,000.0 $1,890,000.0 $1,984,500.0


Revenues growth rates 20% 5% 5%

Operating Expenses
Labour cost in year 1 $ 150,000 $ 165,000 $ 181,500 $ 199,650
Labour cost anuual growth rate 10%
Cost of books as % of revenues = 60% $900,000 $1,080,000 $1,134,000 $1,190,700
Non-cash working capital as % of revenues = 10% $150,000 $180,000 $189,000 $198,450
WC investment at beginning (B) or end (E) of year = B $150,000.0 $180,000.0 $189,000.0 $198,450.0

Marginal Tax Rate = 40.00%

Initial capital expenditures = $ 1,000,000


Salvage value for fixed assets at end of year 4 = $ 717,450
Depreciation Straight line
Riskfree Rate = 2.75%
Risk Premium = 5.50%
Unlevered Beta for internet retailers = 3.02
D/E Ratio for Bookscape = 21.41%
Tax Rate on Income = Marginal Tax Rate 40.00%
Levered Beta for Online Service = 3.41 Unlevered beta (1+ (1-tax rate) * (debt/equity)
Cost of Equity 21.49% (Re)

After-tax Cost of Debt = 2.43% Rd (1 - corporate tax rate)

Debt/Capital ratio = 17.63% D/C = D/E / (1 + D/E) = D/(D+E)


Cost of Capital for project = 18.13% WACC= ((D/(D+E))*Rd + ((E/(D+E))*Re

Cost of capital for company = 10.30% (V)

What is the discount rate for this project? Explain?


The interest rate to determine the present value of cash flows in a discounted cash flow, is the discounted rate. Often companies use the Weighted Cost of Capital (W
case.
se the Weighted Cost of Capital (WACC), which is the cost of capital for the project in this
Estimating Working Capital

0 1 2 3 4
Projected revenues $ 1,500,000 $ 1,800,000 $ 1,890,000 $ 1,984,500
Investment in Working Capital $150,000 $180,000 $189,000 $198,450 10% of revenue at beginning of each year
Change in Working Capital $30,000 $9,000 $9,450
Analyzing Bookscape Online Project

0 1 2 3

Revenues $ 1,500,000 $ 1,800,000 $ 1,890,000

Operating Expenses
Labor $150,000 $165,000 $181,500
Materials $900,000 $1,080,000 $1,134,000
Depreciation $250,000 $250,000 $250,000

Operating Income $200,000 $305,000 $324,500


Taxes $80,000 $122,000 $129,800
After-tax Operating Income $120,000 $183,000 $194,700
+ Depreciation $250,000 $250,000 $250,000
- Change in Working Capital $30,000 $9,000
- Cap ex $1,000,000
Cash flow after taxes -$1,000,000 $370,000 $403,000 $435,700
Present Value $313,214 $341,150 $368,831

IRR of Project 22.82%


(as sumExcel's
NPV of Project (using of PV NPV
of CFs) $ 1,401,625
formula) $ 1,401,625
Discount rate 18%

Payback period

Year CF Cumulated CF PV of CF
0
1 $ 370,000 $ 370,000 $ 313,214
2 $ 403,000 $ 773,000 $ 341,150
3 $ 435,700 $ 1,208,700 $ 368,831
4 $ 447,040 $ 1,655,740 $ 378,431

Payback period 3 years


Discounted Payback period -

Based on your answer in a) and b), would you accept or reject the project? Explain? Do you think the estimates made by
KiwiBook’s CFO are reasonable? If not, how would you want to change the estimates?
NPV refers to the current total value of a future stream of payments. If the net present value (NPV) of a project or
investment is positive, it means that the discounted present value of all future cash flows related to that project or
investment will be positive, and thus appealing. For the NPV, it can be seen that the value is positive therefore investment
for the project will be positive.

The goal of IRR is to determine the rate of discount that equalizes the present value of the sum of annual nominal cash
inflows to the initial net cash outlay for the investment. However, the IRR level of this project is only 22.28%, indicating a
low attractiveness.

Despite a positive cummulated cashflow and a payback perid of 3 years, i would not accept the project due to low levels o
IRR.
The estimates made by KiwiBooks are reasonable
for the project will be positive.

The goal of IRR is to determine the rate of discount that equalizes the present value of the sum of annual nominal cash
inflows to the initial net cash outlay for the investment. However, the IRR level of this project is only 22.28%, indicating a
low attractiveness.

Despite a positive cummulated cashflow and a payback perid of 3 years, i would not accept the project due to low levels o
IRR.
The estimates made by KiwiBooks are reasonable
One Way Sensitivity analysis
4
NPV
$ 1,984,500 $ 7,174,500 Discount rate $ 1,401,625
1%
2%
$199,650 3%
$1,190,700 4%
$250,000 5%
6%
$344,150 7%
$137,660 8%
$206,490 9%
$250,000 10%
$9,450 11%
$0 12%
$447,040 13%
$378,431 14%
15%
16%
17%
18%
19%
20%
21%
22%
Cumulated DCF 23%
24%
$ 313,214 25%
$ 654,364 26%
$ 1,023,195 27%
$ 1,401,625 28%
29%
30%
31%
32%
33%
lain? Do you think the estimates made by 34%
mates? 35%
36%
resent value (NPV) of a project or 37%
ash flows related to that project or 38%
the value is positive therefore investment 39%
40%
alue of the sum of annual nominal cash $ 1,639,347
f this project is only 22.28%, indicating a

not accept the project due to low levels of


alue of the sum of annual nominal cash
f this project is only 22.28%, indicating a

not accept the project due to low levels of

Two Way Sensitivity analysis: NPV, discount rate an


itivity analysis NPV Profile: draw the graph that shows NPV as a function of the discount rate

NPV Profile
$12

$10

$8

$6

$4

$2

$-
1% 2% 3% 4% 5% 6% 7% 8% 9% 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
% % % % % % % % % % % % % % % % % % % % % % % % % %

Interpret the NVP profile:


A one-way sensitivity analysis allows a reviewer to assess the impact of changes in a specific param
which parameters are the primary influencers of a model's results, especially between costs and e
rate; when the discount rate is adjusted to account for risk, the rate rises. Lower present values re
grow more rapidly over time as a result of the highest rate of earning.
itivity analysis: NPV, discount rate and projected revenues

$ 1,401,625 $ 750,000 $ 800,000 $ 850,000 $ 900,000 $ 950,000 $ 1,000,000


1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
Variation in discount rate

17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
27%
28%
29%
30%
31%
32%
33%
34%
35%
36%
37%
38%
39%
40%

Max NPV $ 1,639,346.53


What conclusions can be drawn from the Sensitivity Analysis?
Two-way sensitivity analysis is a technique used in economic evaluation to assess the robustness of the overall r
the same time (parameters). This is especially useful when there is a correlation between the two variables bein
sensitivity analyses may result in a misleading result. while the one way analysis only takes into account the disc
with discount rate as well as revenues. the max NPV identified is 1,639,346 million where discount rate is 1% an
ion of the discount rate

25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
% % % % % % % % % % % % % % % %

t of changes in a specific parameter on the model's conclusions. Sensitivity analysis can assist the reviewer in determining
especially between costs and expected outcomes. it can be seen from the table above, the NPV reduces with increased disocunt
rises. Lower present values result from higher discount rates. This is because a higher discount rate implies that money will
g.
Variation in projected revenues in year 1
$ 1,050,000 $ 1,100,000 $ 1,150,000 $ 1,200,000 $ 1,250,000 $ 1,300,000 $ 1,350,000
the robustness of the overall result when the values of two key input variables are varied at
etween the two variables being tested, as varying them independently in univariate
nly takes into account the discount rate, the two-way analysis takes into account the variance
n where discount rate is 1% and revenue is at 1,650,000.
determining
ncreased disocunt
at money will
$ 1,400,000 $ 1,450,000 $ 1,500,000 $ 1,550,000 $ 1,600,000 $ 1,650,000 $ 1,700,000
$ 1,750,000

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