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?

Transcribed Image Text:

Year Most Likely Growth Rate (ML) Minimun Growth Rute Muximum Growth Rate 240% Hof ML 2 times ML 3Actl growth rate for the actual growth rate 2 times the actual growth for the previous yearrate for the previous year 4 Actual growth rate the actual growth 2 times the actual growth for the previous year atefor the previous year rate for the previous year 5 Actual growth rate for the actual growth rate 2times the actual growth for the previous year rt or the previous year the previcus year the previous year