The company is now considering developing a new product for customers in their Telstra Consumer and Small
Fantastic news! We've Found the answer you've been seeking!
Question:
The company has recently completed a $500,000 two-year market study to judge the likely popularity of the new product. Based on the results of the study, they have estimated that the product is expected to have a life of five years. First-year revenues for the new product are expected to be 8% of TLS's total revenue for the most recent reporting period for which data is available. The new product's revenues are expected to grow at 15% for the second year then 10% for the third and 5% annually for the final two years of the expected life of the project. Assume that the project's profitability will be similar to TLS's existing projects in the latest reporting period. As a result, operating costs can be estimated by using the latest EBITDA/Sales profit margin.
TLS's accounting information can be obtained from Eikon.
(a) Estimate the investment outlay of the project.
(b) Estimate the annual after-tax operating cash flow.
(c) Estimate the terminal-year net cash flow.
(d) Calculate the NPV of the project. Your team decides to use the Telstra's WACC computed in Part 1 as the required rate of return for the project. Which implicit assumptions do you need to make for this use?
(e) Advise if the project should be undertaken.
Related Book For
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Posted Date: