Calculate NPV/Find the Unknown, business and finance homework help
Question 1
A utility company that currently provides electricity to residents using coal-fired power plants has WACC of 9%. The company’s new CEO is looking into getting into a new project where the company is going to collect highly radioactive material from asteroid in space and will use that material to generate electricity. This is expected to reduce the cost of producing electricity. The initial investment in the project is $640 million. A newly hired Nova graduate has done the following analysis. His analysis contains multiple errors. Identify the errors, correct them, Calculate true NPV assuming that NI forecasts for the years are OK and that there are no relevant cash flows beyond 2022. Recommend a course of action. (Hint: make appropriate assumptions if required.)
|
2018 |
2019 |
2020 |
2021 |
2022 |
|
|
EBITDA |
300 |
325 |
360 |
380 |
380 |
|
Depreciation |
55 |
55 |
55 |
55 |
55 |
|
EBIT |
245 |
270 |
305 |
325 |
325 |
|
Interest |
45 |
45 |
45 |
45 |
45 |
|
EBT |
200 |
225 |
260 |
280 |
280 |
|
Tax |
80 |
90 |
104 |
112 |
112 |
|
NI |
120 |
135 |
156 |
168 |
168 |
|
Cash Flows (NI + Dep) |
175 |
190 |
211 |
223 |
223 |
|
NPV calculation at beginning of 2015 |
|||||
|
Discount rate |
9% |
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|
t |
CF |
||||
|
1 |
0 |
||||
|
2 |
0 |
||||
|
3 |
0 |
||||
|
4 |
175 |
||||
|
5 |
190 |
||||
|
6 |
211 |
||||
|
7 |
223 |
||||
|
8 |
223 |
||||
|
PV of FCF |
$607.18 |
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|
NPV = |
($32.82) |
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|
Recommendation |
Reject |
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|
(numbers in millions) |
Question 2
|
Given the following information find the unknown and explain the logic in words. |
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|
spot rate |
180-day forward |
1-yr forward |
|
|
Yuan per USD |
4.95 |
5.12 |
5.26 |
|
USD per Euro |
? |
1.32 |
1.3 |
|
Rupee per USD |
57.44 |
59.15 |
59.85 |
|
Interest rates |
|||
|
USA |
0.02 |
||
|
Europe |
0.01 |
||
|
India |
0.08 |
||
|
China |
0.09 |
Question 3
Ringon Simpat JV is a joint venture headquartered in Kuala Lumpur between Ringon Pharma and Simpat Research, both US based companies. Each of the two companies own 50% shares in the company. Both the companies are global pharmaceutical companies selling drugs all over the world including Malaysia. Malaya pharma is a startup pharmaceutical company in Kuala Lampur. Given their small size Malaya does not have access to labs and testing facilities. The management of Ringon Simpat JV, all of whom are Malaysians, agree to provide research facilities for Malaya to develop and test new drugs. They also promise to provide any necessary technical know-how to Malaya, as and when needed, so that they can help their country develop and manufacture drugs locally at a lower cost. Assuming that Malaya is actually paying fair rent to JV for use of research facilities do you find any problem in this arrangement? Answer using appropriate financial terminology.
