Corporate Finance of Hanson Private, Inc - Case Study Example

EVALUATION OF THE PROPOSED EXPANSION PROJECT As experts in the investment projects evaluation and advice, we are pleased for the chance you gave us to evaluate an investment expansion that Hanson Private, Inc. is contemplating to undertake. We will issue a report that focuses on the incremental cash flows and expected free cash flows, reasonability of Vice President Robert Gates’ assumptions, an explanation of how the WACC of the industry firms was determined, recommendation on the project, and finally the benefits that Hanson Private, Inc. stands to enjoy from using debt capital to finance this project. 1- INCREMENTAL CASH FLOW In approaching this task, only the incremental cash flows of the project were considered. Several steps were involved in establishing the free cash flows from this project. To begin with, this report computed the expected incremental incomes from the sale of the planned output that Hanson Private, Inc. anticipates producing over the ten-year period. As forecasted, these incremental incomes will be $84,960.00, $93,881.00, $103,124.00, $112,700.00, $122,618.00, $132,887.00, $135,545.00, $138,256.00, $141,021.00, and $143,841.00, in 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017 and 2018. The next step entailed the determination of the variable costs. These are those costs that are expected to vary directly with the changes in the level of output from the new production equipment. This report considered all production costs that include the material costs, labour costs, manufacturing overheads and maintenance costs as the variable costs. However, the material costs were not expressly given. Therefore, to establish the material costs, this report relied on the forecasted relationship between the incremental revenue and the material costs. This relationship started at 0.94 in 2009 and continued to increase by one percent every subsequent year to 0.95, 0.96, 0.97, 0.98, 0.99, 1.00, 1.01, 1.02 and 1.03. From this relationship, this report found that the material costs will be $45,120.00 in 2009, $49,400.00 in 2010, $53,760.00.00 in 2011, $58,200.00 in 2012, $62,720.00 in 2013, $67,320.00 in 2014, $68,000.00 in 2015, $68,680.00 in 2016, $69,360.00 in 2017 and $70,040.00 in 2018. Since the labour costs, maintenance expenses and manufacturing overheads were given as forecasted, this report added them together to and found that the total forecasted variable costs to be $69,610.00, $75,659.30, $82,808.40, $89,847.60, $97,478.80, $104,989.50, $106,955.60, $108,963.50, $111,016.60, and 113,118.20 in 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively as illustrated in Appendix I. When these costs were subtracted from the incremental revenues, the contribution was established and will be $15,350.00, $18,221.70, $20,315.60, $22,852.40, $25,139.20, $27,897.50, $28,589.40, $29,292.50, $30,004.40, and $30,722.80 in 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, and 2018 respectively as shown in Appendix III. To support the increased sales, the selling and administration expenses are also expected to increase. The forecasting basis used was 7.8% of the yearly incremental cash flows. This report determined that the selling and administration expenses will thus be $6,626.88, $7,322.72, $8,043.67, $8,790.60, $9,564.20, $10,365.19, $10,572.51, $10,783.97, $10,999.64 and $11,219.60 in 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively. This report then deducted from them from the contribution to get earnings before interest, tax, depreciation and amortisation of $8,723.12, $10,898.98, $12,271.93, $14,061.80, $15,575.00, $17,532.31, $18,016.89, $18,508.53, $19,004.76, and $19,503.20 in in 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively as indicated in Appendix III. In the determination of the depreciation, this report considered the useful life of each equipment and the cost of each allocated to these years. As indicated in Appendix II the depreciation will be $500.00, $2,000.00, and 1,500.00 for the facility expansion, manufacturing equipment and packaging equipment respectively making a total depreciation of $4,000.00 each year. After subtracting the depreciation from earnings before interest, tax, depreciation and amortisation, earnings before interest and tax of $4,723.12, $6,898.98, $8,271.93, $, $10,061.80, $11,575.00, $13,532.31, $14,016.89, $14,508.53, $15,004.76 and $15,503.20 were established in 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively as illustrated in Appendix III. Based on the forecasted rate of the debt cost of 7.75%, this report also computed the interest charge that Hanson Private Label, Inc. will be required to pay for the additional debt borrowed to finance the expansion project. This report determined that Hanson Private Label, Inc. will be paying an interest expense of $4,479.50 each year for the forecasted ten years. When charged from the earnings before interest and tax, this report established earnings before tax of $243.62, $2,419.48, $3,792.43, $5,582.30, $7,095.50, $9,052.81, $9,537.39, $10,029.03, $10,525.26 and $11,023.70 in 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively as shown in Appendix III. Given that Hanson Private Label, Inc. is subject to a tax rate of 40%, a tax of 40% of these earnings before tax was computed and was $97.45, $967.79, $1,516.97, $2,232.92, $2,838.20, $3,621.13, $3,814.96, $4,011.61, $4,210.10, and $4,409.48 in 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively. Then, the accounting profits established after the tax were $146.17, $1,451.69, $2,275.46, $3,349.38, $4,257.30, $5,431.69, $5,722.43, $6,017.42, $6,315.16 and $6,614.22 in the years 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively as indicated in Appendix III. Since it is known that depreciation is a non-cash item, this report added it back and net cash flows of $4,146.17, $5,451.69, $6,275.46, $7,349.38, $8,257.30, $9,431.69, $9,722.43, $10,017.42, $10,315.16 and $10,614.22 in the year 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively were established as indicated in Appendix III. This report also realised that besides the investment in the capital assets, Hanson Private Label, Inc. will require some working capital. This will be in addition to the initial working capital, where a net working capital will be required each of the forecasted years but in varying amounts. This report determined the net working capital by subtracting current liabilities from the current assets of an entity. To establish the amount of debts that will be required, this report used the Executive Vice President’s forecasts current assets items, which were the accounts receivable and the inventory while accounts payable was the itemised current liability item. This report used the ratios given, and they were: the day’s sales outstanding would be 47.6x, days sales inventory would be 37.6x, and days payable outstanding would be 34.2x. Since days sales outstanding is computed by dividing annual credit sales by the number of debtors, this report established that the accounts receivable for each of the forecasted periods by dividing the forecasted annual sales by the expected days sales outstanding. The accounts receivable were thus established to be $11,233.60, $12,413.15, $13,635.28, $14,901.44, $16,212.82, $17,570.61, $, $17,922.06, $18,280.52, $18,646.11 and $19,018.98 in the year 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, and 2018 respectively as shown in Appendix V. Since inventory turnover is determined by dividing cost of sales by the inventory amount, this report divided the forecasted cost of sales by the inventory turnover and the inventory amount will be $7,270.38, $7,902.19, $8,648.88, $9,384.08, $10,181.12, $10,965.57, $11,170.92, $11,380.63, $11,595.07, and $11,814.57 in the year 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively as illustrated in Appendix V. In the computation of the expected accounts payable, this report assumed that Hanson Private Label, Inc. will be acquiring the items constituting the its cost of sales on credit and it therefore divided the cost of sales by the accounts payable turnover to get $6,612.95, $7,187.63, $7,866.80, $8,535.52, $9,260.49, $9,974.00, $10,160.78, $10,351.53, $10,546,58, and $10,746,23 in the year 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively as shown in Appendix V. Further computations involved adding the computed amount of accounts receivable and the inventory and then subtracting the amount of accounts payable to get the net working capital. The established net working capital will be $11,891.03, $13,127.71, $14,417.36, $15,750.01, $17,133.46, $18,562.18, $18,932.20, $19,309.62, $19,694.60, and $20,087.32 in 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively. This report went further to establish the annual changes in the required working capital after the initial needed working capital in 2009 of $12,817.00. These increments will be $310.71, $1,289.65, $1,332.64, $1,383.45, $1,428.72, $370.02, $377.42, $384.98 and $392.72 in 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively as shown in Appendix V. After subtracting the changes in the net working capital, this report established fee cash flows of ($8,670.83), $5,140.97, $4,985.81, $6,016.74, $6,873.85, $8,002.96, $9,352.42, $9,640.00, $9,930.17, $30,308.82 in the year 2008, 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively as illustrated in Appendix III. 2- The Reasonability of Robert Gates’ Assumptions Since investment in some assets such as the Treasury Bills is risk free rate because the government does not forfeit to pay the interest expense on them, the Gates assumption that the risk free rate will be 3.75% would hold on the 10-Year Treasury bills. However, this report argues that the market risk premium may not be reasonable because it is subject to change as the market returns changes. It will, therefore, increase in the market returns increase and decrease if the market returns decrease. The market returns are thus not static and are subject to changes given the volatility of an economy. The assumption of the tax is of 40% is reasonable because, from experience, Hanson Private, Inc. has been paying income tax of 40% on its earnings after interest but before tax. Robert Gates assumed had based his assumption on the fact that the relevant tax authority would not revise the corporate tax rate during the projected life of the expansion project. The assumption that EBITDA multiple will be 7x does not seem reasonable because a view from Hanson Private, Inc.’s past performance shows that its EBITDA has been above 10% other than in the year 2005 when it was 7.7%, which is still above 7x. as shown below, this report established that from the projected performance, Hanson Private Label, Inc. will have an EBITDA of 10.27%, 11.61%, 11.90%, 12.48%, 12.70%, 13.19%, 13.29%, 13.39%, 13.48%, and 13.56% in the year 2009, 2010, 2011, 2012, 2013, 2014, 20015, 2016, 2017, and 2018 respectively. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Revenue 84,960.00 93,881.00 103,124.00 112,700.00 122,618.00 132,887.00 135,545.00 138,256.00 141,021.00 143,841.00 EBITDA 8,723.12 10,898.98 12,271.93 14,061.80 15,575.00 17,532.31 18,016.89 18,508.53 19,004.76 19,503.20 EBITDA computed multiple 10.27% 11.61% 11.90% 12.48% 12.70% 13.19% 13.29% 13.39% 13.48% 13.56% The assumption that the debt beta will be zero is reasonable if this report takes that Robert Gate based his assumption on believe that Hanson Private Label, Inc. will not default and will be promptly paying the interest on the borrowed debt capital. Robert Gates could have assumed that there would be no volatility in the interest rate, and therefore Hanson Private Label, Inc. would be paying a fixed amount of interest and at the same rate. The economic conditions under this assumption will not be expected to vary, an assumption that does not always hold. Since the future is inherently uncertain, the economic performance might be challenging and make Hanson Private Label, Inc. face difficulties paying the interest due, which is itself a risk. Additionally, the lender might be forced to adjust the cost of this debt to reflect the general changes in interest rates. 3- Determination of WACC To determine the WACC in the comparable company analysis section, the weighted average cost of capital of each source of financing making up the firm’s capital structure was used. In determining the Weighted Average Cost of Capital as presented in Exhibit 7: Cost of Capital Analysis, the debt to value ratio, debt to equity ratio, cost of equity, as well as the cost of debt of these firms, were first established since they financed their operations using both debt and equity capital. The typical Weighted Average Cost of Capital equation was used, WACC = (E/V) *Re + D/ V*Rd (1-TC); where Re and Rd are the respective cost of equity and debt capital respectively. The E and D denote the market value of equity and debt capital respectively. The E/V denotes the proportion of financing that is from equity capital while D/V denotes the proportion of financing that is debt. V denotes the total value of the firm and was arrived at by adding the equity financing (E) and debt financing (D). The TC denotes the corporate tax and was factored in because of the effect of the tax shield from the interest charge on the debt. This report established that, in the computation of the WACC in the Exhibit 7, the proportion of financing from equity was subjected to several manipulations. In the first instance, the V was substituted by E+D since V= E+D, from the first WACC equation, and WACC equation changed to E/ (E+D) *Re + D/ V*Rd (1-TC). This part was further manipulated and by getting its inverse, the WACC equation becomes 1/ {(E+D) /E} *Re + D/ V*Rd (1-TC). After further substitutions, the WACC equation becomes WACC= 1/(1+D/E)* rE + D/ V rD (1-TC). It is through this final equation that the WACCs in the Exhibit 7 were then established. In the first instance, the debt to value and debt to equity were 0.00%, the cost of equity was 9.67%, and the debt cost was 7.75% while the 1-Tc was o0.6. When substituted in the equation above, the first WACC was found to be 9.67% as shown below. WACC 1 = To establish the other WACCs, the same process was followed where the respective debt/ value, debt equity, the cost of debt and the cost of equity were accordingly substituted in the WACC equation using the figure given below. Debt / Value Debt / Equity Asset Beta Equity Beta Cost of Equity Cost of Debt WACC 1 0.00% 0.00% 1.18 1.18 9.67% 7.75% 9.67% 2 5% 5.30% 1.18 1.22 9.86% 7.75% 9.60% 3 10% 11.10% 1.18 1.26 10.07% 7.75% 9.53% 4 15% 17.60% 1.18 1.31 10.30% 7.75% 9.45% 5 20% 25% 1.18 1.36 10.56% 7.75% 9.38% 6 25% 33.30% 1.18 1.42 10.86% 7.75% 9.31% The WACCs were computed as shown below. WACC 1 Formula =1 / (1 + D / E) * Re + D / V * Rd (1 - TC) 1/ (1+0.0%)* 9.67%+0.0%*7.75 %*( 1-40%) = 9.67% WACC 2 Formula = 1/(1+D/E) *Re+ D/V*Rd ( 1-TC)  1/(1+5.3%)* 9.86%+5.0%*7.75%*(1-40%) = 9.60% WACC 3 Formula 1/(1+D/E) *Re+ D/V*Rd ( 1-TC)  1/(1+11.1%)* 10.07%+10.0%*7.75%*(1-40%) = 9.53% WACC 4 Formula 1/(1+D/E) *Re+ D/V*Rd ( 1-TC) 1/(1+17.6%)* 10.30%+15.0%*7.75%*(1-40%) = 9.46% WACC 5 Formula  1/ (1+D/E) *Re+ D/V*Rd (1-TC) 1/ (1+25%)* 10.56%+20.0%*7.75 %*( 1-40%) = 9.38% WACC 6 Formula  1/ (1+D/E) *Re+ D/V*Rd (1-TC) 1/ (1+33.3%)* 10.86%+25%*7.75 %*( 1-40%) = 9.31% In selecting the WACC to be used in the evaluation of Hanson Private Label, Inc., this report chose 9.31%. This decision was made because Hanson Private Label, Inc. will have cheaper financing at this rate and might then seek other cheaper sources. 4- Recommendation on the project After the evaluation of the proposed expansion project, this report recommends that Hanson Private Label, Inc. drops it. The essence of undertaking such a project depends on its ability to create value for the owners. Using the net present value approach to investment project evaluation, the results showed that Hanson Private Label, Inc. will have a net present value of ($4,856.67) as shown in Appendix IV. Using the chosen WACC of 9.31%, all the expected future cash flows that the expansion project would generate were discounted. As shown in Appendix IV, the total present values of the free cash flows were established to be $40,143.33. To determine the net present value, the initial capital outlay of $45,000 was subtracted from the $40, 143.33 to get ($4,856.67). This gave an outright decision that Tucker Hansson should drop this project since it is not viable. When evaluating the expansion project using the net present value approach, this report relied on some assumptions. First, this report assumed that there will be no due cash flows to imply that all cash flows will be occurring at the end of each period. The second assumption is that all generated cash flows will immediately be reinvested to make more returns. 5. Benefits that Hanson Private Label, Inc. is likely to enjoy for using debt capital to finance this expansion project The use of debt financing is common in a companys capital structure since it helps to lower the total financing costs. The use of debt by Hanson Private Label, Inc. to finance this project stands to give it numerous benefits. First and foremost, Hanson Private Label, Inc. will enjoy some reductions in finance because, compared to equity financing, the debt requires lower investment cost. In addition, the debt enjoys low issue cost since it does not have issue costs. Additionally, Hanson Private Label, Inc. will benefit from the tax benefits since the interest expense that it will be paying to the lender, is a tax deductible expense. It will be charging this interest expense against its earnings because of the tax shield. The effect of this tax shield will make lower the 7.75% cost of debt to 4.65% and is obtained as follows (7.75%* (1-40%)). This leads to tax savings that further add to lowering the cost of debt financing, which other sources of funding lack. From the calculation done by this report, Hanson Private Label, Inc. will enjoy a tax shield of $1,791,800 each year and which aid in increasing the cash flows since they make more money to be retained by the company. The use of debt will also ensure that there is no dilution of Hanson Private Label, Inc.‘s control because the debt does not affect the ownership of the company. In the case of equity financing, the control over the operations of Hanson Private Label, Inc. would dilute proportionately. Additionally, in case of profit sharing, the existing owners will enjoy it alone because the profit sharing ratio of the current owners will remain intact as the lender will not be a party to the profits realised after receiving the interest on debt. This is true because if equity financing were used, more shareholders would be available to share the profits generated. Another source of benefit for Hanson Private Label, Inc. is the created financial leverage. This debt will be a boost when added to its current financial base financing its operations and guide it to making extra profits. The additional profits will be good news for the current owners because their returns on investment will have increased. However, for these extra profits to be enjoyed, Hanson Private Label, Inc. must operate efficiently and effectively without having its financial soundness threatened by the use of debt in times of economic downturns. Last but not lease, Hanson Private Label, Inc.’s prudence in financial management will greatly be enhanced because of the burden that debt imposes in terms of its repayment as well as the payment of the accrued interest. The management of Hanson Private Label, Inc. will be pressurised to generate enough returns so as to reward all the involved stakeholders. The management will ensure that cash flows are well managed and maximised to value creation to ensure that Hanson Private Label, Inc. is not faced with liquidity and insolvency challenges. Appendices Appendix I Cost of sales   2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Material costs 45,120.00 49,400.00 53,760.00 58,200.00 62,720.00 67,320.00 68,000.00 68,680.00 69,360.00 70,040.00 Total labour cost 18,640.00 20,233.30 22,842.40 25,254.60 28,174.80 30,888.50 31,969.60 33,088.50 34,246.60 35,445.20 Manufacturing overheads 3,600.00 3,708.00 3,819.00 3,934.00 4,052.00 4,173.00 4,299.00 4,428.00 4,560.00 4,697.00 Maintenance expense 2,250.00 2,318.00 2,387.00 2,459.00 2,532.00 2,608.00 2,687.00 2,767.00 2,850.00 2,936.00 Total direct costs 69,610.00 75,659.30 82,808.40 89,847.60 97,478.80 104,989.50 106,955.60 108,963.50 111,016.60 113,118.20 Appendix II Computation of depreciation                         2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Facility expansion 500.00 500.00 500.00 500.00 500.00 500.00 500.00 500.00 500.00 500.00 Manufacturing equipment 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 Packaging equipment 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 Depreciation 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 Appendix III Cash Flows, Net cash flows and free cash flows 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Revenue - 84,960.00 93,881.00 103,124.00 112,700.00 122,618.00 132,887.00 135,545.00 138,256.00 141,021.00 143,841.00 Less: Cost of Goods Sold - 69,610.00 75,659.30 82,808.40 89,847.60 97,478.80 104,989.50 106,955.60 108,963.50 111,016.60 113,118.20 Gross Profit - 15,350.00 18,221.70 20,315.60 22,852.40 25,139.20 27,897.50 28,589.40 29,292.50 30,004.40 30,722.80 Less: Selling, General & Administrative - 6,626.88 7,322.72 8,043.67 8,790.60 9,564.20 10,365.19 10,572.51 10,783.97 10,999.64 11,219.60 EBITDA - 8,723.12 10,898.98 12,271.93 14,061.80 15,575.00 17,532.31 18,016.89 18,508.53 19,004.76 19,503.20 Less: Depreciation - 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 EBIT - 4,723.12 6,898.98 8,271.93 10,061.80 11,575.00 13,532.31 14,016.89 14,508.53 15,004.76 15,503.20 Less: Interest Expense - 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 EBT (Earning before tax) - 243.62 2,419.48 3,792.43 5,582.30 7,095.50 9,052.81 9,537.39 10,029.03 10,525.26 11,023.70 Less: Tax (40%) - 97.45 967.79 1,516.97 2,232.92 2,838.20 3,621.13 3,814.96 4,011.61 4,210.10 4,409.48 Net income after tax - 146.17 1,451.69 2,275.46 3,349.38 4,257.30 5,431.69 5,722.43 6,017.42 6,315.16 6,614.22 Add back depreciation - 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 Net cash flows - 4,146.17 5,451.69 6,275.46 7,349.38 8,257.30 9,431.69 9,722.43 10,017.42 10,315.16 10,614.22 CAPEX (45,000.00) - - - - - - - - - Additional NWC (12,817.00) - - - - - - - - - Less increase in NWC - - (310.71) (1,289.65) (1,332.64) (1,383.45) (1,428.72) (370.02) (377.42) (384.98) 19,694.60 Free cash flows (45,000.00) (8,670.83) 5,140.97 4,985.81 6,016.74 6,873.85 8,002.96 9,352.42 9,640.00 9,930.17 30,308.82 Appendix IV Cash flows, present values, and the net present values 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Revenue - 84,960.00 93,881.00 103,124.00 112,700.00 122,618.00 132,887.00 135,545.00 138,256.00 141,021.00 143,841.00 Less: Cost of Goods Sold - 69,610.00 75,659.30 82,808.40 89,847.60 97,478.80 104,989.50 106,955.60 108,963.50 111,016.60 113,118.20 Gross Profit - 15,350.00 18,221.70 20,315.60 22,852.40 25,139.20 27,897.50 28,589.40 29,292.50 30,004.40 30,722.80 Less: Selling, General & Administrative - 6,626.88 7,322.72 8,043.67 8,790.60 9,564.20 10,365.19 10,572.51 10,783.97 10,999.64 11,219.60 EBITDA - 8,723.12 10,898.98 12,271.93 14,061.80 15,575.00 17,532.31 18,016.89 18,508.53 19,004.76 19,503.20 Less: Depreciation - 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 EBIT - 4,723.12 6,898.98 8,271.93 10,061.80 11,575.00 13,532.31 14,016.89 14,508.53 15,004.76 15,503.20 Less: Interest Expense - 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 4,479.50 EBT (Earning before tax) - 243.62 2,419.48 3,792.43 5,582.30 7,095.50 9,052.81 9,537.39 10,029.03 10,525.26 11,023.70 Less: Tax (40%) - 97.45 967.79 1,516.97 2,232.92 2,838.20 3,621.13 3,814.96 4,011.61 4,210.10 4,409.48 Net income after tax - 146.17 1,451.69 2,275.46 3,349.38 4,257.30 5,431.69 5,722.43 6,017.42 6,315.16 6,614.22 Add back depreciation - 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 4,000.00 Net cash flows - 4,146.17 5,451.69 6,275.46 7,349.38 8,257.30 9,431.69 9,722.43 10,017.42 10,315.16 10,614.22 CAPEX (45,000.00) - - - - - - - - - Additional NWC (12,817.00) - - - - - - - - - Less increase in NWC - - (310.71) (1,289.65) (1,332.64) (1,383.45) (1,428.72) (370.02) (377.42) (384.98) 19,694.60 Free cash flows (45,000.00) (8,670.83) 5,140.97 4,985.81 6,016.74 6,873.85 8,002.96 9,352.42 9,640.00 9,930.17 30,308.82 Discounting factor {1/(1+r)^n) 1.0000 0.9148 0.8369 0.7656 0.7004 0.6408 0.5862 0.5363 0.4906 0.4488 0.4106 Discounted cash flows (Cash flows*DF) (45,000.00) (7,932.33) 4,302.55 3,817.30 4,214.26 4,404.54 4,691.28 5,015.39 4,729.31 4,456.74 12,444.29 Cumulated PV = 40,143.33 NPV = Sum PVs - Initial capital investment NPV = $40,143.33 - $45,000 NPV = (4,856.67) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018   2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 REVENUE 84,960 93,881 103,124 112,700 122,618 132,887 135,545 138,256 141,021 143,841                       Cost of Sales 69,610 75,659 82,808 89,848 97,479 104,990 106,956 108,964 111,017 113,118                       Days sales outstanding 47.6 47.6 47.6 47.6 47.6 47.6 47.6 47.6 47.6 47.6                       Receivable = (revenue * receivable days)/360 days 11,233.60 12,413.15 13,635.28 14,901.44 16,212.82 17,570.61 17,922.06 18,280.52 18,646.11 19,018.98                                             Days sales inventory 37.6 37.6 37.6 37.6 37.6 37.6 37.6 37.6 37.6 37.6                       Inventory = (cost of goods sold*inventory days)/360 days 7,270.38 7,902.19 8,648.88 9,384.08 10,181.12 10,965.57 11,170.92 11,380.63 11,595.07 11,814.57                                             Days payable outstanding 34.2 34.2 34.2 34.2 34.2 34.2 34.2 34.2 34.2 34.2                       Payable= (cost of goods sold * payable days) /360 days 6,612.95 7,187.63 7,866.80 8,535.52 9,260.49 9,974.00 10,160.78 10,351.53 10,546.58 10,746.23                                             Working capital 11,891.03 13,127.71 14,417.36 15,750.01 17,133.46 18,562.18 18,932.20 19,309.62 19,694.60 20,087.32 Net working capital Needed 12,817.00 310.71 1,289.65 1,332.64 1,383.45 1,428.72 370.02 377.42 384.98 392.72 Read More