Expert answer:Net income + cash flow and NPV for a company

  

Solved by verified expert:1. Wind Power Inc. (WPI) builds and operates wind farms that generate electric power suing
windmills. The firm has wind farms throughout the Southwest. In December 2017, the owner of
WPI, Steve Simonson, decided to invest $100,000 in a new production monitoring system. Steve
is an engineer by profession, but he is fully aware of the difference between the accounting profit
and economic profit. As a result he would like to utilize the Economic Value Added (EVA) concept
to determine whether to invest in this new piece of equipment? He has hired you to assist him in
determining the present value of EVA. His accountant has provided the following information
pertaining to income statement. The projected sales revenue information is contained in the
attached Excel file (FIN630_Final Exam Version_2018.xlsx): a. Cost of goods sold is 40% of revenue; Operating expense is 20% of revenue; Depreciation
is straight line to zero salvage value over a 5-year life; Interest expense is $1,600 per year
for the next 5 years; and Tax rate is 30%. b. WPI’s book value capital structure is as follows: 75.0% equity and 25% debt. WPI’s before
tax cost of debt is 6.4% and has a beta of 1.8. The risk free rate of interest is 3% and the
market risk premium (Rm-Rf) is 6%.
Based on the information provided above, you are asked to do the following: 1- Complete the income statements for 2018-2022. Examine the trend in net income (NI).
What is your assessment of financial suitability of this project? Although Steve is not a fan
of selecting projects based solely on accounting profitability, he is, however, willing to
hear your assessment of this project. What will you present to Steve? 2- Calculate the Weighted Average Cost of Capital (WACC) for WPI. Place your answer is cell
C4.
3- Calculate the Free Cash Flow to Firm (FCFF) for years 2017-2022. Place your answer in
cells C30-H30. As stated above, 2017 cash outflow is exclusively based on initial capital
investment and no additional capital was invested thereafter. The annual changes in net
working capital are given in the spreadsheet. 4- Find the Net Present Value (NPV) of this project based on FCFF. Place your answer in cell
C33. What is your recommendation? Is the NPV based recommendation different from
what you stated in response to question (i)? Explain. 5- Calculate EVA for the years 2018-2022. Find the present value of all future EVAs and
place the answer in cell C43. Does the project add economic value? What is your overall
recommendation regarding this project. Should WPI accept this project? Explain.
cash_flow_question_.xlsx

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Given
Tax Rate
Capital Expenditures in 2017
WACC
30.00%
($100,000) and none thereafter
Project Pro Forma Income Statements
2018
Revenues
Less: Cost of Goods Sold
Gross Profit
Less: Operating Expenses
Less: Depreciation Expense
Net Operating Income Before Taxes
Less: Interest Expense
Earnings before Taxes
Less: Taxes
Net Income
$
Year
2020
2019
100,000.00 $
105,000.00 $
2021
110,250.00 $
2022
115,762.50 $
121,550.63
Project Free Cash Flows
Year
2017
Net Operating Income Before Taxes
Less: Taxes
NOPAT
Plus: Depreciation
Less: CAPEX
Less: Change in NWC
Project Free Cash Flow to Firm
2018
$
$
2019

(100,000.00)
(5,000.00)
(105,000.00)
$
2020

(250.00)
$
2021

(262.50)
$
2022

(275.63)
$

(289.41)
6,077.53
What is the project’s expected NPV?
NPV
Economic Value Added from 2018-2022
2018
Invested Capital
NOPAT
Less: Capital Charge
EVA
PV of EVAs
$
105,000.00 $
2019
85,250.00 $
Year
2020
65,513.00 $
2021
45,788.00 $
2022
26,078.00

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