All Questions Must Be Completed In One Excel Document

Question

All Questions must Be Completed In one Excel Document All questions must be completed in one Excel document. Redbird Capital Budgeting Project 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. 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: $1,700,000 - Installation costs: $100,000 - Estimated unit sales in Year 1: 10,000 - Estimated unit sales in Year 2: 10,000 - Estimated unit sales in Year 3: 10,000 - 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 - Depreciation method: 3-year straight-line, no salvage value - Tax rate: 40% - Cost of capital: 10% Calculate the Operating Cash Flow and Free Cash Flow. Show your calculations in an Excel spreadsheet. Determine the NPV and IRR of the project. Show your calculations in a Word document or an Excel spreadsheet. ---

Dr. Jack HW Helper · Accepted Answer

Introduction Capital budgeting is a critical process for firms to evaluate potential investment projects and ensure efficient allocation of resources. The primary tools employed in this process include the calculation of key financial metrics such as Operating Cash Flow (OCF), Free Cash Flow (FCF), Net Present Value (NPV), and Internal Rate of Return (IRR). This paper demonstrates how to evaluate a specific project for Redbird, Inc., by calculating these metrics based on provided data, ultimately determining whether the project should be undertaken. The detailed calculations and subsequent investment decision adhere to fundamental financial principles, incorporating the company's cost of capital and tax implications. Calculating Operating Cash Flow and Free Cash Flow The initial step involves calculating the Operating Cash Flow (OCF), which reflects the cash generated from the project's operations before financing activities. It considers revenues, costs, taxes, and non-cash expenses such as depreciation. The formula is: $$ OCF = (EBIT + Depreciation) \times (1 - Tax Rate) + Depreciation $$ Where EBIT (Earnings Before Interest and Taxes) is: $$ EBIT = (Sales \times Quantity) - (Variable Cost \times Quantity) - Fixed Costs - Depreciation $$ Given the data: - Year 1 sales: 10,000 units × $200 = $2,000,000 - Year 2 sales: 10,000 units × $200 = $2,000,000 - Year 3 sales: 10,000 units × $150 = $1,500,000 Variable costs: - Year 1: 10,000 × $130 = $1,300,000 - Year 2: Same as Year 1 - Year 3: Same as Year 1, but sales price drops, so revenue adjusts accordingly. Fixed costs are constant at $40,000 annually. Depreciation: - Total capital expenditure: $1,700,000 (project cost) + $100,000 (installation) = $1,800,000 - Depreciation per year: $1,800,000 / 3 = $600,000 The change in net working capital (NWC) is $60,000 initially and is recovered at project end. After calculating EBIT, taxes (40%), and adding back depreciation, we determine the OCF for each year. Free Cash Flow (

All Questions Must Be Completed In One Excel Document

All Questions must Be Completed In one Excel Document

Paper For Above instruction

Introduction

Calculating Operating Cash Flow and Free Cash Flow

Calculating NPV and IRR

Results and Decision

Conclusion

References