Consider the original case of when you were planning to buy the company. You would be able to utilise all the company resources after acquiring the company. So, you ask your team to evaluate the company and the possible changes that can be done to increase sales. After a week, your team present you with these suggestions and assumptions that will be used for valuing the company.

• 1. As a conservative survey, the researchers have only assumed a growth scenario for the next 4 years. From year 5 onwards, the values remain constant
• 2. Revamping the machinery to increase the output would result in a 10% reduction in production cost, along with a 5% reduction in administrative costs. This would cost Rs 2000 Lakhs which will be depreciated over 4 years
• 3. This revamp would help in increasing the revenue by 10% each year for the next 4 years and then it becomes a constant
• 4. The downside to the revamp would be an increase in the time it takes for the product to be ready. Although it does take only a few extra minutes, the quantity of the product translates to a roughly 5% increase in the working operating capital
• 5. The cost of goods and tax rate would be a constant percentage of the sales revenue
• 6. The discount rate has been assumed to be 10%.

Utilise these assumptions to calculate:

• The free cash flows for the Years 0-5 
• The terminal value

Answer rating: 100% (QA)

SOLUTION To calculate the free cash flows for Years 05 and the terminal value we need the following information Initial investment Sales revenue Production cost Administrative cost Depreciation expens... View the full answer