Question

Rayner Aeronautics is considering a $ 12.5 million investment that has an estimated project free cash flow (FCF) of $ 2 million in its first year of operations. The project has a five-year life, and Rayner requires a return of 18% in order to justify making the investment.
a. What rate of growth in project FCF for years 2 through 5 is required for the project to break even ( i. e., have an NPV = 0)?
b. Construct a simulation model for the investment opportunity to estimate the ­expected values of the project FCF for years 1 through 5. The first year’s cash flow is normally distributed with an expected value of $ 2 million and a standard deviation of $ 1 million. The rate of growth in project FCF for years 2 through 5 follows a triangular distribution with the following parameter estimates:
c. What are the expected NPV and IRR for the project, based on your simulation analysis from part b?


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  • CreatedNovember 13, 2015
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