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Part 3. Perform risk analyses for the project. (20 marks) Your team has identified several key aspects for the project. The following table shows the base-case assumptions, together with the best case and worst case. Parameter Initial Worst Case Best case Assumption First-year sales (as a 7% 4% 10% percentage of the total revenues in the latest reporting period Revenue growth rate 15% for the Constant after the Constant after the second year, 10% first year at a rate first year at a rate for the third, and of 0% of 15% 5% annually for the final two years Project's EBITDA/Sales Similar to +5% to the initial -5% to the initial profit margin existing projects assumption assumption Net Working Capital $25,000,000 $35,000,000 $15,000,000 Corporate Financial Management (BAFI3257) S1 2021 Page 4 of 9 Beta The estimated The upper bound The lower bound beta of 95% of the 95% confidence confidence interval interval (a) Perform break-even analysis with respect to the first-year sales parameter. (b) Perform sensitivity analysis for each parameter. Evaluate which parameter is the most important to the project.A2A Pt2: NPV for the New Product Project of TLS TC&SB Contacted Claudia Ho for Qs. Data Calculations Year Initial net working capital (NWC) 25,000,000 NWC annual growth rate (Yr 1- Yr 4) 5% NWC requirement $25,000,000 $26,250,000 $27,562,500 $28,940,625 $30,387,656 Investment in NWC $25,000,00 $1,250,000 $1,312,500 $1,378,125 $1,447,031 TLS's PPE FY2020 21,499,000,000 Yro capital expenditure: 10% of TLS's PPE FY2020 10% Capital expenditure growth rate for Yr2-Yr4 (Base: Yr1) NA NA 5% 1% 1% Yr1 capital expenditure: 10% of Yr0 109 Capital expenditure (CE1-CE5) incurred at Yro-Yr4 $2,149,900,000 $214,990,000 $225,739,500 $227,996,895 $230,276,864 Yr2-4 capital expenditure: growth rate (Base: Yr1) See 'Calculations' Annual dep of CE1-CE5 first incurred (=Each CE/10yrs) $214,990,000 $21,499,00 $22,573,950 $22,799,690 $23,027,686 Accumulated annual dep at Yr1-Yr5 $214,990,000 $236,489,00 $259,062,950 $281,862,640 $304,890,326 Eco life of PPE (yr): S/L Dep method 10 Accumulated dep tax shield (=Accmulated annual dep*Tax rate) $64,497,000 $70,946,700 $77,718,885 $84,558,792 $91,467,098 Tax rate 30% Revenue growth rate for Yr2-Yr5 NA 15% 10% 5% 5% ** TLS's total revenue FY2020 23,710,000,000 Revenue at Yr1-Yr5 $1,659,700,000 $1,908,655,000 $2,099,520,500 $2,204,496,525 $2,314,721,351 Yr1 revenue: 7% of TLS's total revenue FY2020 7% Yr2-Yr5 revenue: growth rate (Base: Yr1) See 'Calculations Book value=(Initial book value - Accumulated annaul dep) CE1 (=CE1-(Annual dep of CE1*5yrs)) $1,074,950,000 *** Total Revenue 23,710,000,00 CE2 (=CE2-(Annual dep of CE2*4yrs) $128,994,000 *** Normalized EBITDA 7,503,000,000 CE3 (=CE3-(Annual dep of CE3*3yrs) $158,017,650 **** EBITDA % Margin (=Normalized EBITDA/Total Revenue) 31.64% CE4 (=CE4-(Annual dep of CE4* 2yrs) $182,397,516 CE5 (=CE5-(Annual dep of CE5*1yr)) $207,249,178 Combined salvage value at Yr 5 1,000,000,000 Combined book value at Yr5 $1,751,608,344 Market study: sunk cost is not included in NPV cal. Loss on sales (=Combined salvage value- Combined book value) $751,608,344 The firm's WACC (from part 1) 3.725% Tax savings due to loss on sales $225,482,503 Note Incremental Cash Flow Analysis for the New Product Project of TLS TC&SB * Statement of Financial Position, Telstra Corporation Limited annual report 2020, pp.83 Year o ** Income Statement, Telstra Corporation Limited annual report 2020, pp.81 *** TLS.AX Income Statement FY2020, Eikon, viewed 8 May 2021 Investment outlay **** TLS.AX Ratio Overview FY2020, Eikon, viewed 8 May 2021 Capital expenditures $2,149,900,000 -$214,990,000 -$225,739,500 $227,996,895 $230,276,864 Investment in NWC -$25,000,000 -$1,250,000 -$1,312,50 -$1,378,125 -$1,447,031 (Part 2 a) Total $2,174,900,000 -$216,240,000 -$227,052,000 -$229,375,020 -$231,723,895 Operating cash flows Revenue $1,659,700,000 $1,908,655,000 $2,099,520,500 $2,204,496,525 $2,314,721,351 Op costs=Revenue*(1-EBITDA margin) $1,134,570,920 $1,304,756,558 $1,435,232,214 $1,506,993,824 $1,582,343,516 Earnings before tax and dep $525,129,080 $603,898,442 $664,288,286 $697,502,701 $732,377,836 Tax $157,538,724 $181,169,533 $199,286,486 $209,250,810 $219,713,351 Earnings after tax before dep $367,590,356 422,728,909 $465,001,800 488,251,890 $512,664,485 Dep Tax shield $64,497,000 $70,946,70 $77,718,88 $84,558,792 $91,467,098 (Part 2 b) After-tax operating cash flow $432,087,356 $493,675,609 $542,720,685 $572,810,682 $604,131,583 Terminal-year non-operating cash flows Combined salvage value $1,000,000,000 Tax savings due to loss on sales $225,482,503 Return of NWC $30,387,656 (Part 2 c) Total $1,255,870,159 After-tax net cash flows $2,174,900,000 $215,847,356 $266,623,609 $313,345,665 $341,086,787 $1,860,001,742 (Part 2 d) NPV $405,586,924 Cross-checked the NPV calculation C1 C2 C3 CA C5 NPV = -Co + 7 (1 + RWACC)1 (1 + RWACC)2 (1 + RWACC)3 (1 + RWACC)4 (1 + RWACC)5 Yro -$2,174,900,000 Yr1: CF1/(1+WACC)^1 $208,095,050 Yr2: CF2/(1+WACC)^2 $247,815,598 Yr3: CF3/(1+WACC)^3 $280,781,664 Yr4: CF4/(1+WACC)^4 $294,662,566 Yr5: CF5/(1+WACC)^5 $1,549,132,046 NPV: Sum of Yro-Yr5 $405,586,924