DISCOUNTED CASH FLOW VALUATION | Lecture 27 | FSA | Syeda Arooj Naz

FSA , Syeda Arooj Naz , PRACTICE QUESTION , DISCOUNTED CASH FLOW , VALUATION , XYZ , firm , has to choose between , possible projects , the details of each project , follows: Assume a discount rate of 8% and Calculate DCF for all the three projects and based on DCF result suggest the most profitable project and explain the reason for selection. Capital Cost $000 Project A 300 Project B 500 Project C 450 Net Cash Inflow ($000) Project A Project B Project C Year 1 75 100 50 Year 2 125 200 75 Year 3 125 300 250 Year 4 100 300 300 Year 5 75 150 200 Project A Initial Investment is 300 ($000) DCF= CF 1 + CF 2 + CF 3 + CF 4 + CF 5 (1+r) 1 (1+r) 2 (1+r) 3 (1+r) 4 (1+r) 5 DCF= 75 + 125 + 125 + 100 + 75 (1+0.08) 1 (1+0.08) 2 (1+0.08) 3 (1+0.08) 4 (1+0.08) 5 DCF= 75 + 125 + 125 + 100 + 75 (1.08) (1.1664) (1.2597) (1.3604) (1.4693) DCF=69.444+107.167+99.229+73.507+51.044 DCF=400.391 Project A Initial Investment is 300 ($000) Project A DCF is 400.391($000) Net return on Project A = 400.391 – 300 Net return on Project A = 100.391 ($000) Project B Initial Investment is 500 ($000) DCF= CF 1 + CF 2 + CF 3 + CF 4 + CF 5 (1+r) 1 (1+r) 2 (1+r) 3 (1+r) 4 (1+r) 5 DCF= 100 + 200 + 300 + 300 + 150 (1+0.08) 1 (1+0.08) 2 (1+0.08) 3 (1+0.08) 4 (1+0.08) 5 DCF= 100 + 200 + 300 + 300 + 150 (1.08) (1.1664) (1.2597) (1.3604) (1.4693) DCF=92.592+171.467+238.151+220.523+102.089 DCF=824.822 Project B Initial Investment is 500 ($000) Project B DCF is 824.822($000) Net return on Project B = 824.822 – 500 Net return on Project B = 324.822 ($000) Project C Initial Investment is 450 ($000) DCF= CF 1 + CF 2 + CF 3 + CF 4 + CF 5 (1+r) 1 (1+r) 2 (1+r) 3 (1+r) 4 (1+r) 5 DCF= 50 + 75 + 250 + 300 + 200 (1+0.08) 1 (1+0.08) 2 (1+0.08) 3 (1+0.08) 4 (1+0.08) 5 DCF= 50 + 75 + 250 + 300 + 200 (1.08) (1.1664) (1.2597) (1.3604) (1.4693) DCF=46.296+64.300+198.459+220.523+136.119 DCF=665.697 Project C Initial Investment is 450 ($000) Project C DCF is 665.697($000) Net return on Project C = 665.697 – 450 Net return on Project C = 215.697 ($000) Initial Investment ($000) DCF ($000) Net return on project ($000) Percentage return on Investment Project A 300 400.391 100.391 100.391/300=0.3346 or 33.4% Project B 500 824.822 324.822 324.822/500=0.6496 or 64.9% Project C 450 665.697 215.697 215.697/450=0.4793 or 47.93% After calculating DCF for three project, we got positive net return on all the three projects, to choose one project out of three is dependent on the Percentage return on Investment, in this scenario Project A gives 33.4 %, Project B gives 64.9 % and Project C gives 47.9 % return on investment, it is suggested that XYZ should choose project B with 64.9 % return because it is highest among all. ANY QUESTION OR QUERIES?