Calculate free cash flows and find internal rate of return

Assignment Help Corporate Finance

Reference no: EM13195227

Cupcake Corp. is considering an investment of $40 million in plant and machinery. This is expected to produce sales of $23 million in year 1, $26 million in year 2, and $30 million in year 3. Subsequent sales are expected to increase by 10% each year for the remaining 2 years. The plant and machinery will be scrapped after 5 years with a salvage value of $10 million. The property and machinery belong to the 3-year recovery period class for depreciation purposes (MACRS). Cost of goods sold (COGS) is expected to be $8 million in year 1, $14 million in year 2, and to increase at 9% each year for the remaining 3 years. Fixed operating expenses are $1,000,000 per year. Year-end net working capital (NWC) is given below. The corporate tax rate is 40%.

k = 000s	0	1	2	3	4	5
NWC	500k	700k	800k	800k	500k	0

a) Calculate the free cash flows for time 0 through time 5.

b) Calculate the net present value (NPV) for a 12% cost of capital.

c) Find the internal rate of return (IRR).

d) Calculate the sensitivity of the investment to a change in the cost of capital (it could be as low as 8% or as high as 16%).

e) Should Cupcake make the investment? Why or why not?

Reference no: EM13195227

Questions Cloud

Describe the importance of quadratic equations : Describe the importance of quadratic equations to a basketball player, diver, or even a sniper. Give an example of a real-world situation where you would apply quadratic equations.

What dimensions would yield the maximum area : A carpenter is building a rectangular room with a fixed perimeter of 224 ft. What dimensions would yield the maximum area? What is the maximum area?

What is the largest area you can enclose : If you have 280 meters of fencing and want to enclose a rectangular area up against a long, straight wall, what is the largest area you can enclose?

What are the page numbers : At one place in a text book, the procuct of the page numbers on facing pages is 930. What are the page numbers?

Calculate free cash flows and find internal rate of return : Calculate the free cash flows for time 0 through time 5 and calculate the net present value (NPV) for a 12% cost of capital and find the internal rate of return (IRR).

What is the return on the preferred stock : what is the return on the preferred stock? HINT: This is just like a bond, but the face value is 25. For the problem, you can assume the dividends are annual.

State amounts of reactant completely react to form products : For the reaction shown, calculate how many grams of each product form when the following amounts of reactant completely react to form products. Assume that there is more than enough of the other reactant.

Find the effective rate on the loan : Right after your 38th payment, you get a huge bonus and decide to pay off the loan. How much do you still owe and find the effective rate on the loan.

State how many grams of khp are needed to neutralize : How many grams of KHP are needed to neutralize 54.63 mL of a 0.1051 M NaOH solution?

User Account

All Pages