FINA 470 Lecture Notes - Lecture 12: How To Deal, Capital Control, Net Present Value

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burgundyweasel318

5 Mar 2016

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Look at wacc, npv, and apv wealth, so cash flows used are incremental cash flows. Change in company"s overall cash flows from new. Discounted present value of cash flows, project. less the cost. Must also consider costs other cash be accepted. Uses cash flows not profit, as cost is flows other than profit or loss, such as taking business away from other units. initial outlay where profits and loss are. Should conduct sensitivity analysis to not reported for years in depreciation charges. see how different situations will affect business. Can analyze projects assuming whole often paid before sold and customers project finance through equity and money was available. This gap has to be bridged, find money with no interest discounted at risk of operating cash flows. Need an idea value of project. of how much net working capital is. Next take into subtract cost of financing needed.

Related Questions

PowerCo, a medium-sized power company, generates and sells electricity throughout several states in the southeast United States. The company has been in business for more than 30 years and is the largest power generator in the region. The company believes that a significant increase in the demand for electricity over the next 10â12 years will cause it to be unable to meet the expected demand with its current generation capabilities.

PowerCoâs senior management believes that they must build a new generator to meet this increased demand and their Treasury department was tasked with developing the financial projections for building a new generator. Taking the expected revenues from the new facility, which were developed by the firm's economists, and the expected costs of building the new plant, which were provided by the firm's engineers, the Treasury department has developed financial projections to allow it to analyze the prospective investment in a new generating facility.

It is expected that building the new generator will take approximately 2 years and will remain functional for at least 10 years. While Treasury expects that the facility will continue to generate electricity for longer than 10 years, the department believes that financial projections for a period longer than 10 years are too uncertain and so has limited its estimates to 10 years of use.

The financial projections, given on an annual basis in after-tax dollars, are as follows (assume all cash flows occur at the end of the year):

1. The expected cash costs, in millions of dollars, of building the facility:

	Year	*Expected Costs*
	1	25
	2	28

2. The expected profits from the sale of electricity, in millions of dollars:

	Year	*Expected after-tax profits*
	3	6
	4	7
	5	8
	6	9
	7	9
	8	9
	9	9
	10	9
	11	9
	12	9

3. The firm believes that its opportunity cost of capital is 8 percent and so will use that rate to evaluate the project.

Answer questions analyzing the data presented above in detail.

PowerCo Analysis Question

1a. What is the present value of the expected costs? Show all calculations.

1b. What is the present value of the expected after-tax cash profits? Show all calculations.

1c. What is the expected net present value (the difference between the PVs of the inflows and outflows)? Show the calculations. What does this number represent? Be detailed in your responses.

1d. What are the risks inherent in deciding to build the facility? How would each of the risks affect the decision to build the facility? Be specific.

1e. Should PowerCo build the plant? Why or why not?

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FINA 470 Lecture Notes - Lecture 12: How To Deal, Capital Control, Net Present Value

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