Finance Ch 12 | Cash Flow Estimation and Risk Analysis all Self Study Qs

What are the three types of project risk?

1. Stand-alone risk is a sort of capital budgeting risk that describes the risk that an asset would face if it were the company's only asset and investors only owned one stock. It is determined or quantified by the variability of the item's projected return, and diversification is not taken into account. 2. Corporate (within-firm) risk refers to a type of risk in capital budgeting that considers the firm's diversity but not the stockholders' diversification. Because the project is just one asset in the firm's asset portfolio, some of its risk is minimized by the firm's diversification. The influence of a project on the firm's expected future returns determines it. 3. Market (beta) risk also refers to the type of risk in capital budgeting wherein the riskiness of the project as evaluated by a well-diversified stockholder who knows (a) that the project is only one of the firm's assets and (b) that the firm's stock is only one portion of his or her stock portfolio.

Provide an example of a "good" externality, that is, one that increases a project's true NPV

A good example is Apple's iPod, a profitable product, but once Apple invested in the iTunes music store, iPod sales soared.

Would a project's NPV for a typical firm be higher or lower if the firm used accelerated rather than straight-line depreciation?

Accelerated depreciation results in higher depreciation expenses in earlier years, contrasting with straight-line depreciation that evenly spreads depreciation over an asset's life. When a company employs accelerated depreciation, a project's NPV is generally higher. This is because accelerated depreciation leads to more substantial total cash flows during the project's life, aligning with the higher present value of cash received in earlier years. For a typical firm, using accelerated depreciation tends to yield a greater NPV, especially in the early years of a project. In calculating the NPV, the time value of money is mainly considered. Cash received in earlier years have a higher present value than the money received in later years. For a normal firm, the NPV of a project would be lower in the early years and increasing in the latter years. Hence, a faster project will have a greater NPV.

Is it always necessary to adjust projects' cash flows when different projects have unequal lives?

Accordingly, the unequal life issue never arises for independent projects, whereas it can happen when we compare mutually exclusive projects with significantly different lives. As a result, the issue arises only if and only if the projects will be repeated at the conclusion of their initial lives. Therefore, independent projects that will not be repeated do not require adjustment for unequal lives. In general, a project should not be abandoned because calculating the risk is not always possible. For any project, a standalone risk can be calculated, but within-firm and beta risks will have to be determined subjectively and judgmentally rather than quantitatively.

f. The CFO asks you to do a scenario analysis using these inputs: Part 1: Best case Probability = 25% Unit Sales = 4,800 VC% = 65% Base case Probability = 50% Unit Sales = 4,000 VC% = 70% Worst case Probability = 25% Unit Sales = 3,200 VC% = 75% Other variables are unchanged. What are the expected NPV, its standard deviation, and the coefficient of variation?

Base Case = 4,245 from Question e. Best Case: Y1 = 240K sales - 156k VC - 30k FC - 21,450 Dep = 32,550 EBIT - 13,020 (tax) = 19,530 NOI + 21,450 Dep = 40,980 OCF1 Y2 = 240K sales - 156k VC - 30k FC - 29,250 Dep = 24,750 EBIT - 9,900 (tax) = 14,850 NOI + 29,250 Dep = 44,100 OCF2 Y3 = 240K sales - 156k VC - 30k FC - 9,750 Dep = 44,250 EBIT - 17,700 (tax) = 26,550 NOI + 9,750 Dep = 36,300 OCF3 Terminal: 10k SV - 2,180 Tax on SV = 7,820 + 2k NOWC = 9,820 FCF 0 = -67,000 FCF 1 = 26,580 FCF 2 = 29,700 FCF 3 = 46,120 NPV = -67,000 + (26,580/ 1.11) + (29,700/ 1.11^2) + (46,120/ 1.11^3) = 39,434

Which type is theoretically the most relevant? Why?

Because **market (beta) risk is represented in stock prices, it is theoretically the most relevant type of the three capital budgeting risk. However, market (beta) risk is the most difficult to evaluate, owing to the lack of "market prices" that can be linked to stock market returns in new enterprises. The market risk of a project is determined by its impact on the firm's beta coefficient.

PROJECTS WITH UNEQUAL LIVES Wisconsin Dairy Inc. is considering two machines, W and WW. W costs $500,000 and will produce expected after-tax cash flows of $300,000 during the next 2 years. WW also costs $500,000, but it will produce after-tax cash flows of $165,000 during the next 4 years. Both projects have a 10% WACC. b. If the projects are mutually exclusive but are not repeatable, which project should the company accept?

Because the projects are mutually exclusive, only one project can be accepted. Because the projects are not repeatable, the NPVs calculated in part a can be used to answer this question. Machine WW has the higher NPV and should be chosen.

Your company must choose one of two mutually exclusive projects. Project A costs $2,000 today and has after-tax cash flows of $1,500 per year for 4 years. Project B costs $1,500 today and has after-tax cash flows of $1,750 per year for 2 years. The firm's WACC is 10%. What is the EAA of each project?

EAA = (r * NPV)/ (1-[1+r)^-n) EAA Project A = $869.06 EAA Project B = $885.71

Your company must choose one of two mutually exclusive projects. Project A costs $2,000 today and has after-tax cash flows of $1,500 per year for 4 years. Project B costs $1,500 today and has after-tax cash flows of $1,750 per year for 2 years. The firm's WACC is 10%. If the projects can be repeated, what is the extended NPV of the better project?

Extended NPV = $2,807.60 Y0 = -1500 Y1 = 1,750/1.10 Y2 = (1,750-1,500)/1.10^2 Y3 = 1,750/1.10^3 Y4 = 1,750/1.10^4 Since Project B has a higher NPV than A. The NPV of the better project is $2,807.60

In what ways is the setup for finding a project's cash flows similar to the projected income statements for a new single-product firm? In what ways would the two statements be different?

Financial statements include both a cash flow statement and an income statement. The cash flow statement shows where the company's money comes from and how it is spent over a set period. On the other hand, the income statement assesses a company's financial performance over some time. This includes calculating revenue and expenses and the company's profit or loss. In finding a project's cash flows and income statement for a new single firm, the similarity of both is that computation of the earnings before interest and taxes is calculated in the same way. All of the figures, from sales revenue to variable and fixed operating expenses, have been used in the same way to calculate earnings before interest and taxes. The difference between both is that in a project's cash flow, all the non-cash expenses, such as depreciation expenses, are added back to the operating profit after taxes to get the company's net operating cash flow. While in the income statement, since it uses the accrual method of accounting, all expenses, whether cash or non-cash, are recognized to calculate the company's profit and loss.

Explain the following terms: incremental cash flow, sunk cost, opportunity cost, externality, and cannibalization

Incremental cash flow - the cash flows that will be generated if and only if the company takes on a project. Sunk costs - an outlay of cash that has already been incurred and cannot be recovered regardless of whether the project is accepted or rejected. Opportunity cost - the potential benefit that a company that might have been gained if a different alternative had been chosen over the other alternative or option. Externality - an effect of the project that is not accounted for in its cash flow for the firm or the environment There are 3 categories of externalities, negative within-firm externalities, positive within-firm externalities, and environmental externalities Cannibalization - the result of a new project reducing cash flow that would otherwise exist for the firms. It occurs when the cash flows generated by an existing project and/or product are consumed by an investment in a new project and/or product.

What is Monte Carlo simulation? How does a simulation analysis differ from a regular scenario analysis?

Monte Carlo simulation is a risk analysis technique that necessitates computer simulations of probable future occurrences due to the vast number of scenarios that can't be handled without simulation software. It is used to calculate projected rates of return and risk indexes. It should also be mentioned that while Monte Carlo simulation is more complicated than scenario analysis, simulation software makes the process more manageable. It's also used to indicate the likelihood of various outcomes in a process that's difficult to predict due to random variables. It is concerned with continually repeating random samples to achieve specific outcomes or results. Monte Carlo simulation differs from scenario analysis due to the use of simulation software that allows the processing to be more manageable than scenario analysis. It is, therefore, a more sophisticated form of scenario analysis.

Why should companies use a project's free cash flows rather than accounting income when determining a project's NPV?

Net Present Value or NPV is one of the methods used in capital budgeting and business investment planning to determine the profitability of a proposed investment or project. It is equal to the present value of the project's free cash flow discounted at the cost of capital. Accounting income is the income calculated using the accrual accounting method. It is a method used to account the company's revenues and expenses throughout a reporting period. In general, a project's free cash flow is primarily used to calculate its NPV because analysts and other financial data users want to know if the project's return on cash investments is better than the return on cash invested in another project, whereas accounting income is determined by many variables such as revenue and expenses that have nothing to do with the project's cash flows.

Why does net operating working capital (NOWC) appear as both a negative and a positive number in Table 12.1

Net operating working capital refers to the difference between the company's current assets and current liabilities. In Table 12.1, there is a negative NOWC of $100,000 since at the beginning of the project, the project requires an increase of inventory by $175,000 and payable increase by $75,000. Meaning, if other working capital components held constant, the net change in NOWC is $100,000. Meanwhile, there is also a positive value of $100,000 in Table 12.1 because all terminal cash flows that are realized at the end of the project or when the project is completed is added to the company's cash flows. Let us take note that terminal cash flow are the net of tax cash flows at the end of project which refers to the amount of cash flows generated from disposing an asset and recovery of the NOWC. Cash invested in working capital at the start of the project is considered a cash outflow and is recorded as a negative figure, whereas invested cash returns as it is recovered is reported as a positive figure.

Your company must choose one of two mutually exclusive projects. Project A costs $2,000 today and has after-tax cash flows of $1,500 per year for 4 years. Project B costs $1,500 today and has after-tax cash flows of $1,750 per year for 2 years. The firm's WACC is 10%. If the projects cannot be repeated, what is the NPV of the better project?

Project A NPV = $2,754.80 Project B NPV = $1,537.19 Since Project A has a higher NPV than B. The NPV of the better project is $2,754.80

How could the analysis in Table 12.1 be modified to consider cannibalization, opportunity costs, and sunk costs?

Project S has no cannibalization effects, as shown in Table 12.1. However, if this project reduces sales and cash flows from another division of the company, the after-tax cannibalization effect, or externality, would be subtracted from operational cash flows. Project S reduces another division's after-tax cash flows by $100 each year = subtract $100 from each year OCF. If this is done, Project S's NPV will be harmful, and it will be rejected. But, if Project S, on the other hand, would result in increased cash flows in another division (a positive externality), then those after-tax inflows should be allocated to Project S. Opportunity cost: The $900 starting cost in Table 12.1 was based on the premise that the project would save money by utilizing some existing firm equipment, which would then be sold for $100 after taxes if the idea was rejected. The $100 then represents an opportunity cost that must be factored into the calculations. If the firm had assets that would be utilized for the project but would be sold if the proposal was not accepted, the after-tax value of those assets would be reflected as an opportunity cost. Sunk cost: The company invested $300 on a marketing research to evaluate the sales potential of Project S. Regardless of whether the project is accepted or rejected, the $300 cost will not be recovered and is considered as a sunk cost. It will not be considered in calculating the NPV since it is a cost that is already incurred in the past. If the firm had already incurred expenditures linked with this project that could not be recovered regardless of whether the project was accepted, those costs are considered sunk. In capital budgeting, the main focuses of the NPV calculation includes future or incremental cost that would affect the result of the project.

PROJECTS WITH UNEQUAL LIVES Both projects have a 10% WACC and cost $500,000 W will produce expected after-tax cash flows of $300,000 during the next 2 years. WW will produce after-tax cash flows of $165,000 during the next 4 years. c. Assume that the projects are mutually exclusive and can be repeated indefinitely. 1. Use the replacement chain method to determine the NPV of the project selected. 2. Use the equivalent annual annuity method to determine the annuity of the project selected.

Replacement Chain Analysis W: Y0 = -500k Y1 = 300k Y2 = 300k - 500k = -200k Y3 = 300k Y4 = 300k NPVw = -500k + (300k / 1.10) + (-200k/1.1^2) + (300k/1.1^3) + (300k / 1.1^3) + (300k / 1.1^4) NPVw = 37,736.49 WW: 23,027.80 (NPV remains the same because it is calculated over a 4-year life.) EAAA: NPV / {[1 - (1/1+i^n)]/i} W: 20,661.16 / {[1 - (1/1.1^2)]/10%} = 11,904.76 WW: 23,027.80 / {[1 - (1/1.1^4)]/10%} = 7,264.60 The EAA arrives at the same decision as the replacement chain method. Therefore, Machine W should be chosen if the projects are mutually exclusive and can be repeated indefinitely because EAAw > EAAww

If you were analyzing a replacement project and you suddenly learned that the old equipment could be sold for $1,000 rather than $100, would this new information make the replacement look better or worse

Replacement analysis is a capital budgeting procedure that analyses whether or not the existing assets should be replaced. Because the old equipment could be sold for a higher price than anticipated, the replacement would clearly appear better. The values of calculating the incremental cost in replacing the old to new equipment will be affected and it could give the company a more relevant information in its decision making to replace the existing asset.

What role do incremental cash flows play in a replacement analysis?

Replacement analysis: A capital budgeting process that determines whether the existing assets need to be replaced or not. Incremental cash flow: The possible increase or decrease in a company's cash flow will result only if the company accepted a new project and/or there is an investment in new assets such as buildings, property and equipment, machinery, and others. It's a critical component in a replacement analysis, since incremental cost occurs only if the the firm accepted the project. So in replacement analysis for project expansion, determination of the cash flow differentials between the new and old project would represent the incremental cash flows. Incremental cash flow analysis aims to forecast a company's future cash flow if it takes on a new project. It assists management in determining whether or not a project is worthwhile. Projects will be evaluated if they create a positive incremental cash flow, and rejected if negative cash flows are predicted.

Briefly describe the replacement chain (common life) and the EAA approaches to the unequal life problem.

Replacement chain method - comparing projects with unequal lives using the assumption that each project can be repeated as many times as necessary to reach a common life. The NPVs over this life are then compared, and the project with the higher NPV over the common life is chosen. Equivalent Annual Annuity (EAA) Method - a method of calculating the expected annual payments provided by a project if it is an annuity. When comparing projects with unequal lives, choose the highest equivalent annual annuity (EAA). Within-firm and beta risks in projects can be difficult to quantify. Most projects have positive correlations with the firm's other assets and the stock market. Since stand-alone risk is correlated with within-firm and market risks, focusing just on stand-alone risks does not result in significant losses.

Is it easier to measure the stand-alone, within-firm, or beta risk for projects such as a new delivery truck or a Home Depot warehouse?

Risk analysis will only be very challenging if it is done in a project such as creating a new product line. In such scenario, the company may be able to get beta's for pure-play companies in the area. > A pure-play company refers to a company that focuses solely on one product or service which tends to cater a niche market and have simple cash flows and revenues. In analyzing the risk, the average beta of pure-play companies are obtained to calculate the weighted average cost of capital. Although pure-play strategy make sense in specific situations, it is rarely used. It cannot be used in analyzing the project risk for acquiring new delivery truck or building a home depot warehouse.

What is a scenario analysis? What is it designed to show, and how does it differ from a sensitivity analysis?

Scenario analysis is a risk analysis technique that compares the worst and best financial scenarios to the most likely, or base-case scenario. It allows you to adjust multiple variables at once and integrates the likelihood of changes in the main variables. Following the ideas of "what if" analysis, or sensitivity analysis, scenario analysis is a method for estimating changes in the value of a portfolio based on the occurrence of various scenarios. It determines how different values of an independent variable impact a dependent variable under specific circumstances. We can use these assessments to assess the level of risk associated with a particular investment concerning a variety of hypothetical events, ranging from highly likely to highly improbable. Then, based on the study results, an investor can determine whether the level of risk involved is within his comfort zone. The distinction between the two approaches is that sensitivity analysis analyzes the impact of changing only one variable at a time. Scenario analysis, on the other hand, evaluates the impact of changing all of the input variables at the same time.

Explain briefly how a sensitivity analysis is done and what the analysis is designed to show.

Sensitivity analysis - calculates the percentage change in NPV that arises from a given percentage change in input, with all other variables held constant. Each variable is increased or lowered from its expected value, while the other variables remain at their baseline values. The NPV is then calculated with the new input, with the set of NPVs is displayed to show how sensitive each variable is to changes in NPV. Based on certain assumptions, sensitivity analysis determines how different independent variables impact a particular dependent variable. Using sensitivity analysis, one can examine how various sources of uncertainty contribute to the overall model's uncertainty.

In Table 12.2, we assumed that output would not change if the old machine was replaced. Suppose output would actually double. How would this change be dealt with in the framework of Table 12.2?

The key component in determining how would the change in output be dealt with in the framework of Table 12.2 is to find the incremental cash flows of the old machine using the initial output and find also the cash flow of the new machine using the doubled output to determine the difference in the cash flows. Also consider the additional cost to purchase the new machine and also the salvage value of disposing the old machine. By doing that, we can now determine the cash flows with or without the replacement. These will be then the incremental cash flows that will be used to the find the replacement net present value (NPV). This would result in an increase in sales revenues in Part II. If this resulted in an increase in working capital, that figure would be reported as an initial cash outlay, with recovery at the end of the project's life. These adjustments would be reflected in the differential cash flows.

g. The firm's project CVs generally range from 1.0 to 1.5. A 3% risk premium is added to the WACC if the initial CV exceeds 1.5, and the WACC is reduced by 0.5% if the CV is 0.75 or less. Then a revised NPV is calculated. 1. What WACC should be used for this project when project risk has been properly considered? 2. What are the revised values for the NPV, standard deviation, and coefficient of variation? 3. Would you recommend that the project be accepted? Why or why not?

The project's CV = 4.0, which is significantly larger than the firm's typical project CV. So, the WACC for this project should be adjusted upward, 11% + 3% = 14%. Best Case: -67,000 + (40,980/1.14) + (44,100/1.14^2) + (46,120/1.14^3) = $34,011 Base Case: -67,000 + (26,580/1.14) + (29,700/1.14^2) + (31,720/1.14^3) = $579 Worst Case: -67,000 + (14,580/1.14) + (17,700/1.14^2) + (19,720/1.14^3) = -27,281 Expected NPV = 1,972 Variance NPV = [0.25 (34,011-1,972)^2] + [0.50(579-1972)^2] + [0.25(-27,281-1,972)^2] = 256,624,380 + 970,255 + 213,934,502 = 471,529,137 Std Dev. = 471,529,137^1/2 = 21,714.72 or 21,715 CV NPV = 21,714.72/1,972 = 11.0115 The expected NPV of the project is still positive, so the project would still be accepted, but it is a risky project.

PROJECTS WITH UNEQUAL LIVES Wisconsin Dairy Inc. is considering two machines, W and WW. W costs $500,000 and will produce expected after-tax cash flows of $300,000 during the next 2 years. WW also costs $500,000, but it will produce after-tax cash flows of $165,000 during the next 4 years. Both projects have a 10% WACC. a. If the projects are independent and not repeatable, which project or projects should the company accept?

W: NPV = -500k + (300K/1.1) + (300K / 1.1^2) = 20,661.16 WW: NPV = -500K + (165k/1.1) + (165k/1.1^2) + (165k/1.1^3) + (165k/1.1^4) = 23,027.80 Because the projects are independent and both have positive NPVs, both projects should be accepted.

What is one classification scheme that firms often use to obtain risk-adjusted costs of capital?

Weighted Average Cost of Capital (WACC) is a calculation of a company's overall cost of capital, which includes common stock, preferred stock, bonds, loans, and other forms of debt. It is the minimum rate of return that a firm must generate in order to satisfy its owners, investors, creditors, and other capital suppliers, as well as to fund its assets and operations. Normally, the weighted-average cost of capital is used in calculating the specific risk-adjusted cost of capital for average-risk projects. Since projects can also be classified as low or high-risk, the risk factor must then be considered. Risk-adjusted cost of capital on the other hand refers to a risk in a capital budgeting wherein it refers to the cost of capital suitable for a certain project, given its riskiness of the said project. This means, that the larger the risk, the higher the cost of capital.

If a firm cannot measure a potential project's risk with precision, should it abandon the project? Explain your answer

When a company must determine whether to accept or reject a project, the risk factor is the most significant component to consider throughout the project's implementation. Risk is inherent in any company's project plan, and it must be appropriately assessed in order to make a sound or good decision on whether to pursue or abandon a project. If a firm cannot measure the project's risk with precision, it is not also a good idea to just abandon the project without considering other factors or aspects that may affect the project evaluation and risk analysis. Experienced managers can conduct evaluations and assessments particularly those related to risk and incorporate them into the capital budgeting process. However, subjective judgement is still required in the decision-making process.

f. The CFO asks you to do a scenario analysis using these inputs: Best case Probability = 25% Unit Sales = 4,800 VC% = 65% Base case Probability = 50% Unit Sales = 4,000 VC% = 70% Part 2: Worst case Probability = 25% Unit Sales = 3,200 VC% = 75% Other variables are unchanged. What are the expected NPV, its standard deviation, and the coefficient of variation?

Worst Case: Y1 = 160K sales - 120k VC - 30k FC - 21,450 Dep = -11,450 EBIT - -4,580 (tax) = -6,870 NOI + 21,450 Dep = 14,580 OCF1 Y2 = 160K sales - 120k VC - 30k FC - 29,250 Dep = -19,250 EBIT - -7,700 (tax) = 11,550 NOI + 29,250 Dep = 17,700 OCF2 Y3 = 160K sales - 120k VC - 30k FC - 9,750 Dep = 250 EBIT - 100 (tax) = 150 NOI + 9,750 Dep = 9,900 OCF3 Terminal: 10k SV - 2,180 Tax on SV = 7,820 + 2k NOWC = 9,820 FCF 0 = -67,000 FCF 1 = 14,580 FCF 2 = 17,700 FCF 3 = 19,720 NPV = -67,000 + (14,580 / 1.11) + (17,700/ 1.11^2) + (19,720/ 1.11^3) = -25,080 Expected NPV = 39,434 + 4,245 + -25,080 = 5,711 Variance NPV = [0.25(39,434-5,711]^2 + [0.50(4245-5,711]^2 + [0.25(-25080-5,711]^2 = 284,310,182 + 1,074,578 + 237,021,420 = 522,406,180 Std Dev. = 522,406,180^1/2 = 22,856 CV NPV = 22,856 / 5,711 = 4

e. Management is uncertain about the exact unit sales. What would the project's NPV be if unit sales turned out to be 20% below forecast, but other inputs were as forecasted? Would this change the decision?

Y1 = 160K sales - 112k VC - 30k FC - 21,450 Dep = -3,450 EBIT - -1,380 (tax) = -2,070 NOI + 21,450 Dep = 19,380 OCF1 Y2 = 160K sales - 112k VC - 30k FC - 29,250 Dep = -11,250 EBIT - -4,500 (tax) = 6,750 NOI + 29,250 Dep = 22,500 OCF2 Y3 = 160K sales - 112k VC - 30k FC - 9,750 Dep = 8,250 EBIT - 3,300 (tax) = 4,950 NOI + 9,750 Dep = 14,700 OCF3 Terminal: 10k SV - 2,180 Tax on SV = 7,820 + 2k NOWC = 9,820 FCF 0 = -67,000 FCF 1 = 19,380 FCF 2 = 22,500 FCF 3 = 24,520 d. NPV = 4,245 -67,000 + (19,380 / 1.11) + (22,500 / 1.11^2) + (24,520 / 1.11^3) = -13,350 Because the NPV is negative, the project should not be accepted. If unit sales were 20% below the forecasted level, the project would no longer be accepted

PROJECTS WITH UNEQUAL LIVES Wisconsin Dairy Inc. is considering two machines, W and WW. W costs $500,000 and will produce expected after-tax cash flows of $300,000 during the next 2 years. WW also costs $500,000, but it will produce after-tax cash flows of $165,000 during the next 4 years. Both projects have a 10% WACC. d. Could a replacement chain analysis be modified for use where the project's cash flows are different each time it is repeated? Explain.

Yes. If the two projects can be repeated indefinitely over time but the cash flows are expected to change, the replacement chain analysis can be used. The analysis would be similar to what was done in part c(1) except that the repeated cash flows would not be identical to the original cash flows.

a. What is the required investment, that is, the Year 0 project cash flow? b. What are the annual depreciation charges? c. What are the project's annual cash flows? d. If the project is of average risk, what is its NPV? Should it be accepted?

a. -67,000 Equipment & Installation = -65,000 NOWC = -2,000 b. Year 1 = 65,000 * 33% = 21,450 Year 2 = 65,000 * 45% = 29,250 Year 3 = 65,000 * 15% = 9,750 Remaining book value of the equipment at the end of the project's life is 65,000 * 7% = 4,550. c. Y1 = 200K sales - 140k VC - 30k FC - 21,450 Dep = 8,550 EBIT - 3,420 (tax) = 5,130 NOI + 21,450 Dep = 26,580 OCF1 Y2 = 200K sales - 140k VC - 30k FC - 29,250 Dep = 750 EBIT - 300 (tax) = 450 NOI + 29,250 Dep = 29,700 OCF2 Y3 = 200K sales - 140k VC - 30k FC - 9,750 Dep = 2,250 EBIT - 8,100 (tax) = 12,150 NOI + 9,750 Dep = 21,900 OCF3 Terminal: 10k SV - 2,180 Tax on SV = 7,820 + 2k NOWC = 9,820 FCF 0 = -67,000 FCF 1 = 26,580 FCF 2 = 29,700 FCF 3 = 31,720 d. NPV = 4,245 -67,000 + (26,580 / 1.11) + (29,700 / 1.11^2) + (31,720 / 1.11^3) = 4,245