Tesca Case Essay

Thus, final free cash flows for the project come out to be $-3.750 million, $0.889 million, $2,563 million, $5,719 million and $2,388 million for years 2011, 2012, 2013, 2014 and 2015 years respectively.

Financial Management: “The process for and the analysis of making financial decisions in the business context.” (Cornett, Adair, & Nofsinger, 2016, p. 5).

CitedBrigham, Eugene F. , and Phillip R. Daves. Intermediate Financial Management. 8th ed. Mason: Thomson South-Western, 2004.

First, we need to find the required rate of return (WACC) to calculate the discounted cash inflow so that we can evaluate the longwood woodyard project more accurately.

This solutions manual provides the answers to all the review questions and end-of-chapter problems in Financial Management: Principles and Practice, by Timothy Gallagher. The answers and the steps taken to obtain the answers are shown. Readers are reminded that in finance there is often more than one answer to a question or to a problem, depending on one‘s viewpoint and assumptions. One answer is

1. Two commonly used methods of financial analysis are payback and present value. Payback determines the length of time for an investment to return its original cost (1). Using the assumptions stated below the payback of the Jiminy Nick wind turbine with a cost of about $3.3 million would return the investment in about four years time. Net present value summarizes the initial cost of an investment, the estimated annual cash flows, and expected salvage value, taking into account the time value of money (1). A NPV calculation for the scenario SED is reviewing equals $7,697,286 minus the investment costs of $3,318,000 totaling $4,379,286.

13. Tuttle Enterprises is considering a project that has the following cash flow and WACC data. What is the project 's

Answer: When determining the incremental cash flows related to the project, we should not include interest expense, even if the project will be partly financed by debt. We will take the interest cost into consideration when we perform the net present value analysis on these cash flows. At that point, the required rate of return we will use will be a rate that will take into consideration the cost of both debt and equity financing, and therefore, the effect of interest costs (and the effect of the cost of equity) will be considered at that time. Usually, the WACC will be used as the required rate of return, as long as the project is an average-risk project for the company.

Brigham, Eugene F., and Joel F. Houston. Fundamentals of Financial Management., "Chapter 8 spreadsheet module".

In the revised income statement, projected net income after taxes would significantly increase from $3,963K to $4,651K in 2011, and from $3,818K to $4,716K in 2012. This is predominantly driven by the sales growth of $21.6 million in 2011 and $28 million in 2012. Without this project, net income would have otherwise peaked in 2011 and decline in subsequent years. Thus, this investment

1. Brigham, Eugene F. and Michael C. Ehrhardt. Financial Management Theory and Practice, 13th Edition, Thompson South-Western, ISBN-13# 978-14390-7809-9, ISBN-10#1-4390-7809-2

All of these calculated figures can then be used to calculate the WACC which is (17% x 3.47%) + (83% x 11.2%) = 9.87% WACC. This WACC percentage can then be used to value the investment and as a comparative in valuation methods. The full calculation and numerical values are shown in Appendix 1.

Scenario 1 which resembles the steady state has a nominal cash flow of 2.5 million. The NPV of scenario 1 is 118,245.21 with an IRR of 8.59%. In scenario 2 the expected cash flow is (2,500,000*1.3) with an NPV of 2,202,737.72 and IRR 16.44%. Scenario 3 has an expected cash flow of (2,500,000*0.85) with an NPV of -960,507.80 and IRR of 4.25%. Taking the three scenarios into account, an expected value of NPV that incorporates the probabilities of each scenario needs to be considered.

It is easy to understand and calculate, but it ignores cash. PB measures the number of years required so that the estimated returns can cover the initial outlay. It is also easy and simple to use, but it takes no account of cash flow after payback period. Both methods take no consideration of time value of money. To overcome those problems resulted from ARR and PB so as to make optimal decisions, the project appraisal process needs to consider the time value of money. Expected future cash flow of potential investments shall be discounted and added together to derive a lump sum of the present value using a given discount rate. Three types of discounted cash flow are NPV, IRR and PI. NPV is the difference between sum of present value and initial outlay for the proposed investment. A positive NPV indicates that the proposed investment is accepted and vice versa. NPV takes account of the time value of money and all relevant cash flows over the life of the project. However, it is difficult to understand and rely on to provide an available appropriate discount rate. IRR is the discount rate at which NPV is zero. If IRR is greater than the cost of capital, then the potential investment is recommendable. IRR is easy to understand and it excludes the drawbacks of ARR and PB that both ignore the time value of money. However, IRR often gives an unrealistic rate of return unless the calculated IRR is a reasonable rate for

² Eugene F. Brigham; Joel F. Houston; ' 'Fundamentals of Financial Management ' '; Fourth edition; P.554-559