Fundamentals of Corporate Finance 2nd edition berk (solved) PDF

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Fundamentals of Corporate Finance Berk, Jonathan, DeMarzo, Peter, Harford, Jarrad (Question and answer) Solved...

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QUESTION:

Assume that in the original Ityesi example in Table 23.2, all sales actually occur in the United States and are projected to be $60 million per year for four years. Keeping other costs the same, calculate the NPV of the investment opportunity. ANSWER:

Plan: Compute the free cash flows of the project and calculate their net present value.

Execute: The solution to this problem is in the following Excel spreadsheet: 0 Sales in UK Cost of Sales Gross Profit Operating Expenses Depreciation EBIT Less: Taxes Plus: Depreciation Less: Capital Expenditures FCF (£ millions) Forward Exchange Rate FCF ($ millions) Sales in the U.S. CF ($ millions) WACC NPV ($ millions)

–4.167 –4.167 1.667 –15 –17.500 1.6000 –28.000 –28.000 6.80% 42.6749

1 0 –15.625 –15.625 –5.625 –3.75 –25 –5 3.75 –26.250 1.5551 –40.822 60 19.178

2 0

3 0 –15.625 –15.625 –5.625 –3.75 –25 –5 3.75

–15.625 –15.625 –5.625 –3.75 –25 –5 3.75

4 0 –15.625 –15.625 –5.625 –3.75 –25 –5 3.75

–26.250 1.5115 –39.678 60 20.322

–26.250 1.4692 –38.565 60 21.435

–26.250 1.4280 –37.484 60 22.516

Evaluate: The net present value is positive indicating that the project is acceptable.

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