First identify or calculate the capital spending, the operating cash flow, the change in net working capital, and finally the free cash flow to the firm of the project. Free Cash Flows are cash flows available to the firm after stakeholders have been paid (interest and dividends). It is these free cash flows that you find that are discounted at the weighted average cost of capital to calculate the net present value and the internal rate of return.
You will assess whether to make the investment or not. Use your accept-reject rules for the net present value and the internal rate of return.
Redbird, Inc. is considering an addition to its current operations. The figures are below.
Cost of the new project $3,000,000
Installation costs $100,000
Estimated unit sales in year 1 40,000
Estimated unit sales in year 2 65,000
Estimated unit sales in year 3 35,000
Estimated sales price in year 1 $200
Estimated sales price in year 2 $200
Estimated sales price in year 3 $150
Variable cost per unit $130
Annual fixed cost $40,000
Initial working capital needed $60,000
Additional Working capital needed 5 % of sales
Depreciation method 5 years straight-line method, no salvage value
Redbird’s tax rate 40%
Redbird’s cost of capital 15%
1. Calculate Operating Cash Flow, change in Net Working Capital, and calculate Free Cash Flow. Show your calculations in a Word document or an Excel spreadsheet.
2. Determine the NPV and IRR of the project. Show your calculations in a Word document or an Excel spreadsheet.
3. Assess the project. Be sure to state the basis upon which you made your option choices. You should prepare a one-page executive summary of your findings, with 3–5 pages of supporting analysis.
4. You must submit your backup in Excel or other supporting documentation showing how answers were reached.
Answer is executive summary in word file and calculation in excel.