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Part 1: Read the following information

A Corporation is about to make an investment. Among many potential projects, there is one very profitable. Before the company makes decision, you are asked to evaluate the project with the following information.

1. The initial investment is $2,150,000 which must be made at the beginning of the year (Year 0). Year 0 is the same as the beginning of Year 1.

2. The project will last for four years (Year 1, 2, 3, and 4).

3. The project will generate the free cash flows (FCF) of $665,000 annually for four years.

We assume that the FCF will be generated at the end of each year. 4. The cost of capital (a.k.a. discount rate) is 9% per annum.

• The project must be financed. So, the company will raise $2,150,000 by borrowing from investors.

• Therefore, you need to make interest payments to the investors, which is 9% of the amount of debt

  ($2,150,000).

• $2,150,000, which is the debt, is the capital that your company can use for the investment and 9% is

  the interest cost. This is why we can call the discount rate as the cost of capital. We will talk more

  about the cost of capital in Chapter 11 and 13.

• All cash flows will occur at the end of the year except the initial investment ($2,150,000).

P1-Q1: Using the above information, find the NPV (Net Present Value).

• Fill the boxes (yellow boxes) by using the following formula to compute the PV and NPV.

• For our case study,

• rate is 9% or 0.09

• nper is

o 1 if we compute the present value at the beginning of year 1 of the FCF generated at the end of year 1

o 2 if we compute the present value at the beginning of year 1 of the FCF generated at the end of year 2

o 3 if we compute the present value at the beginning of year 1 of the FCF generated at the end of year 3

o 4 if we compute the present value at the beginning of year 1 of the FCF generated at the end of year 4

• pmt is 0

• fv is 665,000 (which we have at the end of each year)

• type is 0 because all cash flows (FCFs) will occur at the end of year

  • P1-Q2: Do we accept the project based on your NPV?

Requirements (1 point):

1. Use the Excel template (Case_Study_2_Format uploaded on Blackboard) => Spreadsheet: Part 1

2. Answer the above question.

Initial investment:	$2,150,000.00		Do not change the format!
Number of years:	4
Annual FCF:	$665,000.00
Cost of capital:	9.00%
P1-Q1:
Year	0	1	2	3	4
Initial investment
FCF
Present value
Net Present Value
Note: You can use either the equation provided in the instruction or the Excel function (PV or NPV). Additionally, if you know how to use the Fnancial Caluclator, you can use it to find the correct answers. The Case Study lecture videos and Case Study Example videos show how to use the equation or Excel function. The information is given in the instruction.
Note: P1-Q1's total score is 4 points. And, there are 11 cells you must fill up with the correct value. The rubric for grade is posted on the Blackboard and is available under "Check Grades."
P1-Q2:
Do we accetp the project?		Yes or No

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