1. You are evaluating several potential projects for a firm, which is entirely owned by your 95-year-old grandfather. Assume that the discount rate is 10%.

Project 1 has a cost of $148.5 one year from now, and will generate $39.93 at year 3 and

$146.41 at year 4.

(a) Draw a timeline for this project.

(b) What is the Internal Rate of Return (IRR)

(c) What is the NPV of Project 1? Following the NPV rule, do you accept this project?

Project 2 has a cost of $40 today and will generate $12 every year over the next 5 years (starting year

What is the NPV of Project 2? Following the NPV rule, do you accept this project?

Project 3 has a cost of $40 today and will generate $5 every year in perpetuity (starting year 1)

What is the NPV of Project 3? Following the NPV rule, do you accept this project?

If you have to choose only one project between Project 2 and 3, which one would you choose?

You realize that your grandfather wants to spend his entire wealth before he becomes 100 years old. This is because he assumes there is little chance that will still be alive, 5 or more years from today. In this regard, he thinks that it is reasonable for his firm to choose Project 2 over Project 3 because Project 2 has more cash flows within 5 years. Do you agree with your grandfather? Explain why.

What is the internal rate of return (IRR) on Project 3?

Based on the IRR rule, do you accept Project 3?

Does the IRR rule give you the same result as project 3?

Now you are considering Project 4. Projects 3 and 4 are mutually exclusive.

	Time 0	Time 1	IRR	NPV
Project 4	-$1	$1.5	???	???

Your grandfather believes that the project with a higher IRR should always be chosen. Given this, which project will your grandfather choose between Projects 3 and 4? Is this the correct decision? Explain why.

2. As a financial analyst, you need to estimate the stock price of a private company, James Corp., using the DCF model. Assume that it is the end of 2017. You are given the income statement and balance sheet for 2017 as well as projections for the next five years. (Your forecast period is 5 years). You already calculated the FCFs from 2019 to 2022.

	2018 (or Year 1)	2019 (or Year 2)	2020 (or Year 3)	2021 (or Year 4)	2022 (or Year 5)
FCF	??	$30.25	$13.31	$0	$18

Balance Sheet
	2017 2018
ASSETS
Cash and equivalents 10 25
Marketable securities 80 90
Accounts receivable 1250 1200
Inventories 1420 1600
Net property and equipment 5600 5850
LIABILITIES
Accounts payable 30 100
Accrued expenses 70 119

Income Statement
2017 2018
Sales	5000	5800
Cost of goods sold	4000	4050
SG&A expense	1100	1200
Depreciation	110	130
Interest expense	60	120

You need to calculate the FCF for 2018 and complete the DCF analysis. The relevant information for the analysis is provided here:

• The corporate tax rate is 30%.
• After 2022, you expect that the FCF grows at 1% in perpetuity.
• The appropriate discount rate is 10%.
• The market value of the firm's total debt is $200.
• There are 40 shares outstanding.

What is EBIT in 2018? What is NOPLAT in 2018?

What is CAPEX in 2018?

What is NWC in 2017? What is NWC in 2018?

What is the FCF in 2018?

What is the terminal value (i.e. the PV (as of 2022) for all FCFs after 2022)?

What is James Corp.'s enterprise value today?

Complete James Corp.'s market value balance sheet for 2017:

Market Value Balance Sheet
Excess cash & non-operating assets $	Debt	$
Operating Assets $	Equity	$
Asset Value $	Debt + Equity	$

What is the market value of James Corp.'s equity? What is the stock price per share?