Project Net Present Value and Volatility using Simulation.

Year 1 sales is uniformly distributed betw

$2000 and $4000. Thereafter, sales are forecasted to grow exponentially at a rate that is normally distri
with a mean 4 percent and a standard deviation of 2 percent a year. Incremental variable costs are expe
to be 50 percent of incremental revenues. Incremental working capital required in each year is expected
$900 in year 0. Thereafter, net working capital is expected to be 30 percent of incremental revenues in t
following year. Incremental fixed cash cost are expected to be $60 in year 1 and growing by $5 each ye
thereafter. This three-year project requires an immediate investment of $600 in plant and equipment. Pl
and equipment are to be depreciated over 6 years on a straight-line basis to zero value. At the end of
project the equipment can be sold for $100. The tax rate is 40% and the required return is 10%.
Calculate the Net Present Value (NPV) of the project at a wacc of 10%.
Calculate the project volatility.
Copyright by Domingo Castelo Joaquin 2005, dcjoaqu@ilstu.edu

Year 0

Year 1

Sales growth rate

Variable Costs as % of Sales

Sales
Variable Cost
Fixed Cash cost
Depreciation
Earnings Before Interest and Taxes
Tax
Net Operating Profit After Taxes
Depreciation
Investment in Net Working Capital
Investment in Fixed Assets
Free Cash Flow (CF)

50%

900
600
(1,500)

Present Value of Remaining CFs, PV(CFs)

LN(PV1+CF1)

$3,131

Cost of Capital
Net Present Value

10.00%
$1,631

Projected Net Working Capital Level

Investment in Net Working Capital

3,000
1,500
60
100
1,340
536
804
100
37

900
900

867
$

2,576
8.14

937
37

Historical Cost of Fixed Assets

Accumulated Depreciation
Ending Book Value

600
600

600
100
500

Salvage Value
Ending Book Value
Capital Gains
Capital Gains Tax

Salvage Value
Captial Gains Tax
Net Proceeds from Sale of Fixed Assets
Year 0

Notation:
PV = Present value of remaining cash flows as of the end of year 0.
NPV = Net present value.
PV1 = Present value of remaining cash flows as of the end of year 1.
CF1 = Free cash flow in year 1.
LN(PV1+CF1) = Natural logarithm of (PV1+CF1).

Year 1

1 sales is uniformly distributed between

tially at a rate that is normally distributed
Incremental variable costs are expected
al required in each year is expected to be
percent of incremental revenues in the
n year 1 and growing by $5 each year
of $600 in plant and equipment. Plant
e basis to zero value. At the end of the
the required return is 10%.

of 10%.

Year 2

Year 3

4%
50%

4%
50%

3,122
1,561
65
100
1,396
558
838
100
38
900

3,250
1,625
70
100
1,455
582
873
100
(975)
(180)
2,128

975
38

(975)

600
200
400

600
300
300

100
300
(200)
(80)

100
-80
180
Year 2

Year 3

Project Net Present Value and Volatility using Simulation. Year 1 sales is uniformly distributed betw
$2000 and $4000. Thereafter, sales are forecasted to grow exponentially at a rate that is normally distri
with a mean 4 percent and a standard deviation of 2 percent a year. Incremental variable costs are expe
to be 50 percent of incremental revenues. Incremental working capital required in each year is expected
$900 in year 0. Thereafter, net working capital is expected to be 30 percent of incremental revenues in t
following year. Incremental fixed cash cost are expected to be $60 in year 1 and growing by $5 each ye
thereafter. This three-year project requires an immediate investment of $600 in plant and equipment. Pl
and equipment are to be depreciated over 6 years on a straight-line basis to zero value. At the end of
project the equipment can be sold for $100. The tax rate is 40% and the required return is 10%.
Calculate the Net Present Value (NPV) of the project at a wacc of 10%.
Calculate the project volatility.
Copyright by Domingo Castelo Joaquin 2005, dcjoaqu@ilstu.edu

Year 0
Sales growth rate
Variable Costs as % of Sales

Sales
Variable Cost
Fixed Cash cost
Depreciation
Earnings Before Interest and Taxes
Tax
Net Operating Profit After Taxes
Depreciation
Investment in Net Working Capital
Investment in Fixed Assets
Free Cash Flow (CF)

50%

900
600
(1,500)

Present Value of Remaining CFs, PV(CFs)

LN(PV1+CF1)

#ADDIN?

Cost of Capital
Net Present Value

10.00%
#ADDIN?

Projected Net Working Capital Level

Investment in Net Working Capital

Year 1

900
900

#ADDIN?
#ADDIN?
60
100
#ADDIN?
#ADDIN?
#ADDIN?
100
#ADDIN?
#ADDIN?
#ADDIN?
#ADDIN?

#ADDIN?
#ADDIN?

Historical Cost of Fixed Assets

Accumulated Depreciation
Ending Book Value

600
600

600
100
500

Salvage Value
Ending Book Value
Capital Gains
Capital Gains Tax

Salvage Value
Captial Gains Tax
Net Proceeds from Sale of Fixed Assets
Year 0

Notation:
PV = Present value of remaining cash flows as of the end of year 0.
NPV = Net present value.
PV1 = Present value of remaining cash flows as of the end of year 1.
CF1 = Free cash flow in year 1.
LN(PV1+CF1) = Natural logarithm of (PV1+CF1).

Year 1

1 sales is uniformly distributed between

tially at a rate that is normally distributed
Incremental variable costs are expected
al required in each year is expected to be
percent of incremental revenues in the
n year 1 and growing by $5 each year
of $600 in plant and equipment. Plant
e basis to zero value. At the end of the
the required return is 10%.

of 10%.

Year 2

Year 3

#ADDIN?
50%

#ADDIN?
50%

#ADDIN?
#ADDIN?
65
100
#ADDIN?
#ADDIN?
#ADDIN?
100
#ADDIN?
#ADDIN?

#ADDIN?
#ADDIN?
70
100
#ADDIN?
#ADDIN?
#ADDIN?
100
#ADDIN?
(180)
#ADDIN?

#ADDIN?
#ADDIN?

#ADDIN?

600
200
400

600
300
300

100
300
(200)
(80)

100
-80
180
Year 2

Year 3