Project Risk Analysis Break even Sensitivity The TitMar Motor Company is considering the production of a new personal transportation vehicle (PTV). The PTV would compete directly with the innovative new Segway. The PTV will utilize a three-wheel platform capable of carrying one rider for up to six hours per battery charge thanks to a new battery system developed by TitMar. TitMar's PTV will sell for substantially less than the Segway but will offer equivalent features. The pro forma financials for the proposed PTV project, including the forecasts and assumptions that underlie them, are set out in Exhibit P3-7.1. Note that revenue is calculated as follows: price per unit  market share (%)  market size and units sold = revenues/price per unit. The project offers an expected NPV of $9,526,209 and an IRR of 39.82%. Given TitMar's stated hurdle rate of 18%, the project looks like a winner. Even though the project looks very good based on management's estimates, it is risky and can turn from a positive NPV investment to a negative one with relatively modest changes in the key value drivers. Develop a spreadsheet model of the project valuation. 

6-12 Forecasting Pro Forma Financial Statements Create a pro forma income statement and balance sheet for Webb Enterprises (see Problem 6-7), where revenues are expected to grow by 20% in 2016. Make the following assumptions in making your forecast of the firm's balance sheet for 2016:

The income statement expenses are a constant percentage of revenues except for interest, which remains equal in dollar amount to the 2015 level, and taxes, which equal 40% of earnings before taxes.

The cash and marketable securities balance remains equal to $500, and the remaining current asset accounts increase in proportion to revenues for 2015.

Net property, plant, and equipment increase in proportion to the increase in revenues and depreciation expenses for 2016 is $2,000.

Accounts payable increases in proportion to firm revenues.

Owners' equity increases by the amount of firm net income for 2011 (no cash dividends are paid).

Long-term debt remains unchanged, and short-term debt changes in an amount that balances the balance sheet.

6-13 Forecasting Firm FCF Using your pro forma financial statements from Problem 6-12, estimate the firm's FCF for 2016.

6-14 Enterprise Value An analyst at the Starr Corp. has estimated that the firm's future cash flows for the next five years will equal $80 million per year.

If the cost of capital for Starr is 12%, what is the value of Starr Corp.'s planning period cash flows spanning the next five years?

It is extremely difficult to estimate cash flows in the distant future, so it is standard practice to lump all the firm's cash flows for years beyond a planning period of, say, five years into something called a terminal value. If companies in Starr's industry are currently selling for five times their annual cash flow, what would you estimate the terminal value of Starr to be in year 5?

Apply the same discount rate to the terminal value as to the planning period cash flows, and estimate the enterprise value of Starr today.