Part 2: Read the following information

In Part 1, you computed the NPV to decide if the project is acceptable or not. Now, instead of looking at the NPV, you want to find out how much of FCF ($650,000 per year) is paid to the capital suppliers. To do so, it is recommended to see the distribution of free cash flows.

Please use the following information to complete the Part2 - Q1:

Year 1: The capital supplied by investors is considered as a long-term debt. You need to make interest payment to the investors or creditors. The company should use the FCF to arrange this payment. After making the interest payment, the net free cash flow (FCF after interest payment) will be used to pay off the principal, which is $2,150,000. (This is actually depending on the company's decision. But, as far as you know, your company wants to pay off all debts ASAP using FCF.) Excess wealth is the amount of cash on hand after paying everything.

Year 2: The principal will be changed because your company paid a certain amount of money in year 1. This change will affect the interest payment that your company must make in year 2. Again, the change in the interest payment in year 2 will affect FCF after the interest payment and payment to principal.

Year 3: Similar to year 2.

Year 4: Similar to year 3 except for one thing. After making the interest payment, the company will have a large amount of cash on hand, which is more than enough to pay off the final principal.

Please use the following information to complete the Part2 - Q2:

At the beginning, it is assumed that the project will generate $650,000 annually for four years. What if the project fails to do so? Now, things are changed, and the project is not expected to generate $650,000 annually. Based on your own research and analysis, the project is expected to provide the following cash flows stream. You are required to find out the distribution of free cash flows generated by the project as you did in P2-Q1. Use the following information to complete P2-Q2. (Note: Any unpaid interest obligation must be fully paid in the next period with the interest on the amount of unpaid interest.)

o Year 1: $100,000

o Year 2: $300,000

o Year 3: $1,000,000

o Year 4: $1,200,000

Please use the following information to complete the Part2 - Q3:

Now, you are asked not to worry about the distribution of free cash flows.

Find NPV using the annual cash flow information provided in Part2 - Q2:

o Year 1: $100,000

o Year 2: $300,000

o Year 3: $1,000,000

o Year 4: $1,200,000