Valuing Capital Investment Projects Hbs
CASE 2:
VALUING CAPITAL INVESTMENT PROJECTS
CORPORATE FINANCE
GROUP Y
Growth Enterprises, Inc
When valuing any project, the free cash flows must be determined in order to be able to successfully implement any method of capital budgeting. Growth Enterprises is currently considering four projects. Each has an equal required initial investment of $10,000,000 which is followed by a set of cash flows different for each project. Depreciation figures for each project were calculated on a straight-line basis. For project A, we used a one year depreciation since we were only given the first year revenue, two years for project B and three years for projects C and D. The required taxes for each project were determining by calculating their EBIT with the given 40% tax rate. For a detailed view of the determination of cash flows please refer to exhibit 1. The payback period was calculated by determining how long it took each project to recover its initial required investment. The formula we used to determine the payback period looked as follows:
The first project (A) had a payback period of exactly one year since both the FCF and required initial investment were $10,000,000. Project B,’s payback period was 1.33 years, since it recovers part of the investment in the first year and the rest in the following year. Project C recovered its investment after the second year, specifically providing a payback period of 2.1 years. Finally project D’s investment was recovered in the first year given the first year FCF of $10,000,200, making the payback period equal would be in 1 year. (Refer to exhibit 2) After calculating the FCF for all the projects, we got the IRR’s for each project. We got an IRR of 0% for project A, 32% for project B, 34% for project C, and 43% for project D. Similarly we got the NPV for each project using a WACC of 10% and 35%. Using the 10% WACC we got an NPV of -$1,229,980 for project A, and $3,016,880 for project B, and $5,281,910 for
VALUING CAPITAL INVESTMENT PROJECTS
CORPORATE FINANCE
GROUP Y
Growth Enterprises, Inc
When valuing any project, the free cash flows must be determined in order to be able to successfully implement any method of capital budgeting. Growth Enterprises is currently considering four projects. Each has an equal required initial investment of $10,000,000 which is followed by a set of cash flows different for each project. Depreciation figures for each project were calculated on a straight-line basis. For project A, we used a one year depreciation since we were only given the first year revenue, two years for project B and three years for projects C and D. The required taxes for each project were determining by calculating their EBIT with the given 40% tax rate. For a detailed view of the determination of cash flows please refer to exhibit 1. The payback period was calculated by determining how long it took each project to recover its initial required investment. The formula we used to determine the payback period looked as follows:
The first project (A) had a payback period of exactly one year since both the FCF and required initial investment were $10,000,000. Project B,’s payback period was 1.33 years, since it recovers part of the investment in the first year and the rest in the following year. Project C recovered its investment after the second year, specifically providing a payback period of 2.1 years. Finally project D’s investment was recovered in the first year given the first year FCF of $10,000,200, making the payback period equal would be in 1 year. (Refer to exhibit 2) After calculating the FCF for all the projects, we got the IRR’s for each project. We got an IRR of 0% for project A, 32% for project B, 34% for project C, and 43% for project D. Similarly we got the NPV for each project using a WACC of 10% and 35%. Using the 10% WACC we got an NPV of -$1,229,980 for project A, and $3,016,880 for project B, and $5,281,910 for